Building Confidence: How to Guide Clients Through Retirement

Retirement is something clients naturally look forward to, imagining time spent with grandchildren, traveling the world, or finally finishing their novel. But the reality is that the five years before and after retirement—known as the “retirement red zone”—are among the most critical for their financial future.

During this period, even small mistakes or market downturns can have an outsized impact on a client’s long-term savings. With less time to recover from losses and new income needs emerging, careful planning and disciplined decision-making become essential to maintaining financial security and peace of mind.

Pivotal Points to Keep on Your Radar

This is when your guidance matters most, as their portfolios must balance growth with protection. Here are a few key focus areas:

Understand the peak balance. “Peak balance” refers to the highest value or maximum dollar amount that a retirement account reaches before clients make withdrawals. Calculating a realistic, sustainable retirement spending plan is unique to each client and their specific needs and is contingent on understanding their peak balance to do so.

Improper allocation of these funds can deplete an account in the early withdrawal years, causing stress, anxiety, and a difficult financial recovery. A good place to start with calculations is the “25 Times Rule,” a general guide that suggests clients should aim to have 25 times their annual expenses saved.

Shift from accumulation to decumulation. Once clients start relying on retirement income instead of earned income from employment, they experience “income transition,” which can be a challenging idea. This involves changing their income source from accumulation—the process of saving up for retirement over many years—to decumulation, when those savings are strategically used and no longer replenished by regular income.

Successful decumulation requires a thoughtfully crafted withdrawal strategy to ensure clients don’t run out of funds or get penalized with taxes. Popular strategies include the 4% withdrawal rule (meaning 4% of retirement savings are drawn in the first year, then adjusting annually to account for inflation) and the bucket strategy, which consists of a short-term and long-term “bucket” of funds.

Beware of sequence-of-returns risk. Retirement funds can be depleted early on due to uncontrollable factors like market downturns or an economic slump, creating an unfavorable “sequence-of-returns” risk. This puts client accounts at risk of negative withdrawal—or overdrawing funds—during early retirement, jeopardizing the longevity of their decumulated income. When the value of retirement accounts goes down under these circumstances, there can be permanent damage to retirement funds, derailing long-term sustainability.

Tips to combat sequence-of-return risk include encouraging clients to work as long as they possibly can, or even working part-time. It’s also advisable to maintain a diversified portfolio—assessing and rebalancing as needed—and implementing a bucket strategy, which breaks down retirement into short-term, medium-term, and long-term time frames.

Steer Clients in the Right Direction

Avoid common pitfalls.

While no two clients are alike when it comes to retirement goals, there are common pitfalls to keep top-of-mind when creating a custom plan. Some of them include:

• Retiring too early (or without a plan.) No plan can be just as harmful as a bad plan. Retiring too early runs the risk of depleting funds before a client’s death.
• Failing to rebalance or diversify investments. A common issue is not having a robust enough portfolio to fall back on. Having a greater variety of investments reduces risk, provides income flexibility, and helps optimize tax outcomes throughout retirement.
• Overreliance on market performance. A classic example of putting all of one’s financial eggs in one basket, relying on performance alone will increase the risk of running out of money.
• Underestimating health care and longevity. Unexpected health issues and increasing medical costs can often catch clients off guard and eat into their savings quickly. Using an irrevocable Medicaid trust can help facilitate long-term care benefits while preserving their financial security.
• Emotional decision-making in volatile markets. Money is personal and often influences emotions, especially in times of uncertainty or stress. Educating yourself and clients about the common behavioral biases behind financial decisions can help provide peace of mind and sustain funds. For example, understanding “recency bias” can help clients recognize that just because an event is recent—like a downturned market—it doesn’t give it more weight than past events.

Help them see the bigger picture.

What does a “happy retirement” look like for your individual client? Encourage them to imagine an ideal day of their retirement. Facilitate a conversation with them about what they imagine, with as many specifics as possible.

Guiding clients through this conversation is the first step to alignment, and it helps you anticipate some of the sticking points that may be challenging as their retirement transition continues. Scenario modeling can be a helpful tool for everyone, allowing you to map out what retirement could look like in case several hypothetical situations happen, including:

• Retiring at age 62 versus 67
• A mock-up of what their financials could look like with market volatility
• How rising health care expenses and inflation may impact their accounts
• Supplemental income options (social security, investments, tax-deferred accounts, etc.) and coordinating withdrawals from each
• Factoring in housing expenses and changes
• What happens to a couple if one or both of them outlive their savings

If you and your clients are concerned after exploring these scenarios, consider adjusting their investment strategy as needed. In addition to explaining their guaranteed income solutions, such as annuities and pensions, you can also shift from growth-focused to balanced/risk-managed portfolios.

Set Sail for Serenity

Preparing clients for retirement goes beyond the numbers. Guiding them through the retirement red zone years requires patience, empathy, and reassurance that you will be available for them during this vulnerable time. With a combination of strategic retirement planning and compassionate communication, you can be an integral part of helping your clients retire confidently.

Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.