I just acquired the RICP© designation from the American College of Financial Services. I spent over 100 hours studying and listening to online lectures to better help my clients with the most expensive purchase of their lives: retirement.
I knew I needed some more formal training when I first read a white paper by Wade Pfau called Making Sense Out of Variable Spending Strategies for Retirees. The paper analyzes ten, yes ten, popular variable spending strategies for retirees. I thought I was keeping up to date with the latest retirement research and was embarrassed that I hadn’t even heard of some of the strategies that made his list. How could I provide the best possible advice if I wasn’t even aware of some of the distribution strategies?
I sent the paper to several of my colleagues and it became clear that my knowledge gap was not unique. You see, the whole financial planning industry has grown up catering to the Baby Boomers and most had been accumulating assets for retirement. It is now estimated that 10,000 Americans are reaching retirement age every day for the next 16 years. These people are going to need some advice because managing a portfolio and distribution plan for a retirement that could last over 30 years is a difficult task.
For starters, nobody knows how long you are going to live or what the stock market is going to do for the next 30 years. It is almost unbelievable that the iPhone, Twitter, Uber, and Airbnb are all less than ten years old. What will the future hold? Where will tax brackets be? What will your water bill be in 2032? All we can do is make educated guesses and adapt as circumstances change. Here is what I learned.
Retirement Income Process, Strategies, and Solutions
The RICP© curriculum is broken up into three courses. The first course covers several of the retirement distribution strategies in the paper I referenced. They spent a lot of time on three popular strategies. The first one was the buckets strategy popularized in the book The Buckets of Money Retirement Solution by Raymond Lucia. This strategy is mostly a behavioral tool to help clients emotionally cope with losses in stocks. You create 3-5 different buckets that start with cash/ultra safe bonds and end with volatile stocks. It can help retirees hold stocks when they know that they aren’t going to touch the risky buckets for seven plus years.
The second major strategy covered was called flooring. This is where you help a client with their retirement budget to determine what their basic expenses are like food, utilities, property tax, etc. The client may receive $4,000 per month from Social Security and have $6,000 per month in non-discretionary expenses. The planner could help create a bond ladder or use an annuity to guarantee that the client gets another $2,000 per month so that their basic expenses are covered. The rest of their money can be invested in mutual funds/ETFs that fluctuate with the markets to provide for their discretionary expenses like travel and major gifts to family.
The third group of strategies can be classified as decision rule methods. This is where the popular 4% “rule” developed by William Bengen falls. The course discussed these strategies in detail and even had Jonathan Guyton of the Guyton-Klinger’s Decision Rules as a guest lecturer. These strategies look to determine a safe amount you can withdraw from a portfolio each year.
Sources of Retirement Income
In the second course, we covered several investment strategies for retirees. I found the information about annuities to be very helpful and they pointed me to a lot of research that explains how mortality credits are like buying insurance in case you live longer than expected. I am much more comfortable recommending a deferred income annuity as part of a flooring strategy for retirement income. The course really hammered home that the longer you live, the more risky your retirement is because your portfolio needs to last longer and you are more likely need long term care.
This course also spent a lot of time explaining the intricacies of Medicare and Social Security. Unfortunately Congress changed some of the rules right after my test. Lastly, I really liked how they emphasized that your retirement date does not necessarily need to coincide with the date you qualify to receive Medicare, begin taking a pension, or start to receive Social Security benefits. Spending down your investments before Social Security benefits begin is essentially buying a larger guaranteed annuity that goes up with the cost of living that you can’t outlive (Social Security).
Managing the Retirement Income Plan
The last course focused a lot on long term care planning and really got me thinking about declining mental and physical capacity. You may have 30 years of retirement before you die, but you may only have 15 years of disability-free retirement. I learned a lot about continuing care retirement communities, reverse mortgages, and tax strategies for retirees.
This course focused a lot on how the last five years of working and the first five years of retirement are so important to a retiree. It came up with several solutions for the sequence of returns risk. I will write an entire article on this very underappreciated risk in the future.
Was the RICP© designation Worth the Time?
Although a lot of the material covered statistics about retirees or discussed strategies that I will never implement, I am glad I invested the time and money in this designation. Some of the professors were better than others and the technology used to deliver the content can be improved.
One of the surprising benefits of going through the material was that I realized that I already knew 80% of what was covered. This helped my confidence because when I started studying, I felt like there was an infinite amount of information that I didn’t know about. Social Security rules, health insurance, annuity riders, long term care insurance, reverse mortgages, and tax laws have changed a lot during my career. It was a good idea for me to learn what gaps I had and get this designation. With so many things changing, it can be difficult to stay up to date on the latest and best practices. I still have plenty to learn and am committed to offering the best advice I can provide.