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Show Clients What They Need: Assets Are Nice, But Income Pays the Bills

by Eric Daugherty

e-Business teams have a huge opportunity to drive improvements in content that clients see. Specifically, when it comes to thinking about retirement, firms do not yet make it easy for clients or advisors to make sense of how their holdings translate into retirement income.

I do not really care about my financial assets - I only care about what they can buy. Asset management firms thus far are not progressive enough in helping investors like me make the connection between assets and future income. In December, this article pointed to a logical starting point - a Senate bill called the Lifetime Income Disclosure Act, which would mandate (for 401(k)s) a calculation of annuity income, similar to what the Social Security Administration does with its annual statements. This would be great, but is only a start.

Most of us have up to three buckets of assets from which we will draw in retirement - and each of the three buckets will have different tax treatment:

1. Pre-tax income; 401(k)s, non-qualified plans, defined benefit plans, for example.
2. Post-tax assets; Roth IRAs and other vehicles on which we have already paid tax.
3. Combination assets; Traditional IRAs and taxable accounts, in which we have some tax basis.

For example, say a couple has $2 million in assets. Sounds great - but is this enough for them to retire and enjoy the standard of living they want? It depends, and requires converting the assets into prospective income streams.

Here's where asset management firms can help. Firms holding these assets have all the information necessary (except the taxpayers' tax rate, which could be asked or assumed) to convert assets into an income stream. Here is how it would work:

This end result (in the Brady's case, $63,420 of annual income) is what investors care about. This is the money they will need for vacations, health care costs, utilities, and food. But most investors will not understand the analysis above, nor will they get it right on their own. They need help - this language of pre- and post-tax assets and annuity streams is foreign to many, and firms should help investors translate this into what matters to them - income. e-Business teams should be thinking about presenting content like post-tax retirement income streams. Even more than slick videos and market commentary will, giving investors content they need will foster loyalty.