Retirement Investor

Retirement Income Planning: What ROI Means (Or Should Mean) To Retirees


No retiree wants to discover that his or her retirement income is at risk. Last month I explained why most retirees should have a plan for monthly income that protects against risks that can diminish one’s capacity to generate sufficient income. Using an example of 10 financially identical retirees, I showed how remarkably different financial outcomes are possible based solely upon minor differences in the timing of retirement. I showed how timing Risk, especially, warrants your careful attention. 

Today, I will explain why retirees should view the popular term “ROI” differently than younger investors, and why understanding its meaning in a different context is important to financial success in retirement.

Most investors, including retired investors, logically associate ROI with return-on-investment. This makes sense. When investing, we’re typically concerned with “returns” above all else. The higher the rate of return we can earn on our investments the better. Financial advisers design investment portfolios that seek to maximize returns consistent with the investor’s tolerance for risk. Younger investors typically strive for the highest possible ROI because they have time on their side. Their objective is to accumulate the greatest amount of money possible. 

As investors approach retirement, their investment focus often changes to a more conservative approach. This is the time when many people shift a portion of their investments in equities to bonds and cash. This makes sense as it helps to limit the potential damage resulting from investment losses should equities turn downward just prior to the investor moving into retirement. However, when the time comes for the retiree to begin the distribution of his or her savings in order to generate monthly income, another mindset is called for. 

“Distribution Time” is When ROI Takes on a New Definition

Here’s a quick thought experiment: Picture yourself as a recent retiree. While you can’t know how long you’ll live in retirement, you’re both in good health and mindful of the possibility that your retirement may endure for decades. Considering that you are no longer earning a salary from work, you recognize that to cover your monthly living expenses you will be relying upon your retirement savings to produce income. Imagine that at this juncture you are approached by a financial adviser who poses these two questions: Are you interested in an investment strategy that seeks to produce the highest return-on-investment (ROI)? Or would you prefer a strategy that seeks to produce the highest reliability of income (ROI)? Although this is the first time you’ve been asked these particular questions, you’re probably going to tell the financial adviser that your top priority is achieving the highest reliability of income. In this regard, you are typical of the majority of retirees who respond this way when asked about which objective is most important to them. 

The problem is that too few financial advisers frame the issue in this manner with the result that many retirees are never asked to choose between what amounts to mutually exclusive investment objectives. It’s simply not possible to construct investment portfolios that simultaneously seek to deliver on both definitions of “ROI.” Retirees, therefore, must clearly communicate their properties to their financial advisers. 

If you are a retiree whose objective is the highest reliability of income, let me suggest a simple framework that will help you select a financial adviser whose expertise and focus aligns with your preference. During your first meeting with the financial adviser, ask these three simple questions:

  1. Is the focus of your practice working with retirees who face the need to convert their savings into monthly retirement income?
  2. Do you favor constructing investment portfolios that seek the greatest investment accumulation, or the highest reliability of income? 
  3. How do you set up a retiree’s portfolio to deliver monthly income? 

How the adviser answers these three questions will give you a great starting point for selecting the adviser who will work most successfully with you in retirement. Question one must be answered, “yes.” Retirement income planning is a distinct practice specialty, and not all financial advisers have the necessary expertise to properly guide you.

Question two must be answered, “reliability of income.” A significant segment of the financial adviser population continues to prioritize investment accumulation above all else when working with both younger and older clients. Most retirees will be best served when working with an adviser who specializes in constructing portfolios that seek reliable monthly income. 

When evaluating the financial adviser’s answer to question three, what you do not want to hear is any answer that indicates the use of a “systematic” or “regular withdrawal” approach. Rather, you’ll want to look for answers that describe investing strategies that blend both safe and at-risk investments, the inclusion of annuities and an overall focus on mitigating risks. 

Recalling that no retiree stops needing income, this is the best way to help ensure that your retirement income will continue for life.

David Macchia

David Macchia is Founder of Wealth2k, Inc. He is an author and entrepreneur focused on retirement security. David is the developer of the widely used retirement income solution The Income for Life Model® as well as the recently introduced Women And Income™, the first retirement income solution developed for women investors.

  • 1

Leave a Comment

Your email address will not be published. Required fields are marked *