Conquer the Efficient Frontier for Income Planning

The goal of Income Alpha is to give your clients flexibility and liquidity in retirement because they don’t have to rely on their investment portfolio to live. It allows clients to maintain momentum, no matter what happens.

Increased probability of success and minimum risk. That’s the dream — for advisors and clients.

You may have heard it referred to as the efficient frontier or achieving Alpha. A portfolio is considered efficient when it’s optimized to produce the most efficient and sustainable income for a given amount of risk.

And that’s perfect for clients who are building and accumulating assets. But as clients enter retirement, there’s an efficient frontier for creating protected income too — and it works the same way.

It requires moving a few assets around, making sure you’re maximizing Social Security and changing the way you think about income planning. But it doesn’t require any additional assets from the client. We call it the Income Alpha strategy.

Put Existing Assets to Work

Simply put, without finding more assets, Income Alpha can provide one of three outcomes for your client:

  • Increase retirement income
  • Find assets to address more retirement risk
  • Leave a legacy for their heirs

Let’s pause there for a minute.

What client wouldn’t like to do more with their existing assets? Using them more efficiently can address some pain points that their retirement plan hasn’t covered yet, such as longevity risk and long-term care (LTC) planning or leaving a greater legacy to their children or a favorite charity. Or, for some clients, it would be nice to have a little higher income to enjoy retirement more fully. 

As we dive deeper into the different outcomes, think of the clients that would benefit from each outcome. Write them down.

Increase Retirement Income

When it comes to retirement income, little tweaks make a big difference.

There’s a lot of buzz about consumers knowing their number for retirement or how much they have accumulated. Of course, that’s important. But how a client uses income from their assets is equally important.

As a financial planner, there are levers you can pull to create income more efficiently. For example, the longer a client defers taking Social Security benefits, the bigger those benefits are.

Studies show most people limit spending in retirement because they are afraid of running out of money. Guarantee the foundation is covered, so they can enjoy more.

If you have clients looking to retire in the next five years, have you determined how much protected income they will need? If not, start by looking at the different scenarios. Once you find the gaps, you’re ready to start filling them in.

With Income Alpha, we can help determine what to move, what to add and what to change. How many of your clients would like to increase their income without sacrificing additional assets?

Cover More Risk

One of the biggest pain points your clients have is covering risks.

If you haven’t brought up LTC planning, it may be because the premiums are perceived to be high. Your clients might be worried they will derail the entire income plan. Or you may be concerned about taking assets that you currently manage and moving them off your books.

By repositioning some assets into protected income, we can show you how to cover LTC risk without sacrificing income.

It doesn’t have to be one or the other. The goal of Income Alpha is to give your clients flexibility and liquidity in retirement because they don’t have to rely on their investment portfolio to live. It allows clients to maintain momentum, no matter what happens.

Do you have any clients that might be interested in a strategy that allows them to do both — keep their income and plan for LTC?

Leave a Legacy

Monte Carlo simulations are one of the most common tools for retirement planning. But when you run it out to age 95 for a couple, the Monte Carlo math typically leaves you with $1. True, you got the job done. Your clients didn’t run out of money. But they didn’t have any left over either.

It’s great for income planning but not so great for clients who want to leave a legacy.

With Income Alpha, we can turn that $1 into more than $500,000 left over, all without sacrificing income.

There are numerous applications, but one common solution is using a second-to-die life insurance policy.

Who wouldn’t want to leave something behind?

It All Comes Down to Income

It may sound a little too good to be true. How can you offer this additional income or protection without asking for more assets? But it’s not magic — it’s using the tools you have available to you. The secret is to use what you have more efficiently.

When we run the Monte Carlo simulations, we find that repositioning about 20% of the client’s overall assets into a guaranteed income stream allows us to hit the client’s goal — whether it’s increased income, risk planning or the desire to leave a legacy.

That guaranteed income stream could be taking advantage of an existing pension, Social Security or income from a defined benefit plan. Or, in many situations, it could be adding an annuity. It may be a deferred annuity, immediate annuity or a QLAC, a qualified longevity annuity contract — something to increase guaranteed income to the optimal level and increase your client’s probability of success. 

It is worth dedicating 20% to guaranteed income to use the other 80% for even more of what they want.

Not only will you take the worry of income off the table, but you’ll also allow their other assets to work harder because it doesn’t have to be held into reserve for income.

And, because some annuities include coverage for LTC, you can even plan for multiple risks at the same time. You are truly able to create more value without asking for more assets.

Don’t stop here, though. Really think about it for a minute and let it sink in. Send us one client that would like to increase income, cover risk or leave a legacy. Your Palladium Group team of experts can run you a scenario and show you how it works. And if you still have questions, our retirement income consultants are ready to help.

Maximum client return. Minimum client risk. Transform your business. That’s the dream.

*This material is for financial professional and educational use only. Not to be reproduced or shown to clients.

**Probability of success is determined by the probability of having at least $1 left in the portfolio upon death, tested through 5,000 Monte Carlo market simulations.