A SMART WAY to multiply the payoff from your DC plan business is turning retired participants into clients by talking about what’s on their minds – cutting the risk of outliving their assets.

That conversation can be quite effective if you base it around a simple yet innovative two-part withdrawal strategy we call “Harvester.”

Harvester is based on the idea that how money is taken is just as important as how much money is needed to maintain a desired retirement lifestyle.  It’s also as important as the choice of investment vehicle.

The process starts by answering the question “What’s the money for?” with a distinction between “needs” and “wants.”  Needs are must-haves like food, clothing, medical care, taxes, and any other genuinely essential expenditure.  Wants are everything else and include luxuries or items that can be deferred indefinitely.

Needs will be paid for with systematic fixed-dollar withdrawals.  Wants, though, will be taken as a fixed percentage of the total portfolio value at the time of withdrawal. 

The primary benefit of Harvester is increased odds of being able to afford a long retirement.  In up markets, the “needs” withdrawals shrink as a share of total assets, even as the “wants” withdrawal rises with the portfolio value.  Far more important, in down markets, your clients will have the money they need to meet fixed obligations while automatically scaling back discretionary spending. 

This discussion positions you as an advisor who can deliver a unique and intuitively appealing solution, and it also educates potential clients by dispelling common fallacies that can drive bad investment decisions.

Foremost is the tendency for a retiree to confuse certainty with safety.  Though many retirees perceive treasury bills, CDs and the like as seemingly “safe,” given the long term effects of inflation, the real risk is not having enough growth to last through retirement.  Another fallacy is assuming average returns are typical, which of course they are not, and therefore cannot be relied upon year-in and year-out. 

The research we’ve done at Seligman indicates that a prudent mix that can support the Harvester withdrawal strategy is 55% equity, 35% fixed income and 10% equity REITs.  This equity portion of this allocation, which we call the Seligman Core Model, includes 35% domestic large-caps, 10% international large-caps and 10% mid-caps.  The fixed-income portion includes investment grade and corporate bonds and TIPs. 

The combination of the Seligman Core Model and the two-part Harvester withdrawal strategy may be the best way to provide the invaluable advice – and reap bonus rewards from the time and effort you’ve spent building your retirement business.

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