Rethinking Investment Strategies For VL And VAs After Retirement

Rethinking Investment Strategies For VL And VAs After Retirement

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Well, your client has finally done it. She has walked through the door marked “Retirement” and is now ready to enjoy the hard-earned fruits of many years of labor.

Assume for a moment that she had previously purchased a variable annuity or variable universal life contract with a long-term focus on retirement needs. One of the decisions that must be made is how to allocate the assets in the contract for the golden years. Should you recommend that she maintain her exposure to equities? Should you recommend moving everything into bond accounts or the fixed account option in the contract?

Now that she is no longer working, it may seem that the asset-allocation stakes have gone up–after all, your clients investment horizon is shorter now than it was during the pre-retirement years, and her thoughts are turning from “accumulation” to “conservation.” Also, the recent persistent weakness in the equities markets may have taken a psychological toll; severe market volatility may have tempted your client to migrate into “safer” investments, such as bond funds.

This situation presents an excellent opportunity to review some basic tenets of investing with your clients who have retired or are approaching retirement. The fundamentals that have served them well for the past 20, 30, or 40 years are still valid. Portfolio diversification can still help soften market declines. Staying fully invested can sometimes take extraordinary discipline, but it sure beats trying to time the market successfully.

Systematic investing may be more difficult to achieve during retirement years, and while it can neither assure a profit nor protect against losses in declining markets, it is still a good way to take advantage of market volatility by buying more units when unit prices are down.

Perhaps most important of all, this may be a good time to remind your clients that the greatest threat to their financial health over the long term may not be market risk, but rather inflation risk. A 65-year-old client is quite likely to live another 20 years or even more. For a couple aged 65, the odds that at least one will live to age 85 are even higher. Even a modest 3% percent to 4% percent rate of inflation over that time frame can cut the purchasing power of a fixed income by half.

Historically, investments in equities have outpaced inflation by a significantly greater amount than have fixed income investments; consequently, stocks have been the asset class of choice for those concerned with maintaining purchasing power over time.

Beginning most recently in the first quarter of 2000 and continuing today, the stock market has consistently provided us with reminders that volatility, or market risk, is the price one pays to mitigate the risk of inflation. The stomach-churning losses in many sectors of the financial markets during the last 18 months have seriously tested investors ability to withstand short-term volatility and thus stay invested for the long haul. This has been a particularly trying period for older investors who have less time to overcome market losses.

Nonetheless, you would do well to remind your clients that even though inflation doesnt grab the headlines that market fluctuations do, it remains an insidious threat to their long-term financial well-being. Their main focus during this time of market uncertainty should be to stay the course and resist the urge to bail out of the markets.

There is a long-standing industry rule of thumb that calls for having the percentage of your overall portfolio that is invested in stocks be equal to 100 minus your current age. Using this formula, our 65-year-old retiree should have 35% of his or her portfolio in stocks, the balance in bonds and cash. The “100 minus your age” guideline may not be entirely appropriate; it may be somewhat conservative for many investors, but it is a good place to start.