by Jennifer Lea Reed
There’s a big difference between retirement income and decumulation, and planners who can effectively explain that difference will have much more productive conversations with their clients, said Moshe Milevsky, finance professor and author of “The 7 Most Important Equations for Retirement.”
In a session at the Investments & Wealth Institute’s annual forum in Tampa, Fla., last week, Milevsky emphasized that since the financial risks are different in these two scenarios, the language needs to be as well.
“Some of you might have been using this language interchangeably. I think these are two very different concepts,” he said. “Someone that’s interested in retirement income is someone who wants their wealth over time to roughly look like [a straight line forward]. ‘I want to generate income from my portfolio, but I don’t want my wealth to decline. I just need to generate more income because I’m in retirement and I’m not working.’ Decumulation is a process where your wealth is declining over time, and there is a risk that at some point there won’t be enough. That’s the event we want to make sure doesn’t happen.
“So who is your client?” he continued. “A decumulator or a retirement incomer? Once you get a sense of which group they’re in, you can have effective conversations.”
Milevsky’s presentation was pegged to his book, but with a twist. His book highlighted the work of seven historical scholars whose equations shaped the world of retirement planning as financial planners know it today, including Solomon Heubner, Benjamin Gompertz and Leonardo Fibonacci. But more important than the equations themselves are the conversations they should inspire, he said.
For example, Heubner’s promotion of insurance that surgically targets specific risks should lead to a conversation about a client’s highest risk scenarios, and then an understanding that an optimal retirement for either a decumulator or a retirement incomer leverages insurance premiums to cover those risks.
“Certainties you budget for,” Milevsky said. “Uncertainties you insure.”
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