Market Plunges Have Retirees Running Scared

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As equity markets continue to stagger, many retirees fear their dream of a secure retirement is going up in smoke, according to feedback being received by advisors in the field.

“Everybodys getting calls because people are worried,” says Hartman Axley, an advisor with Allmerica Financial, Denver, Colo.

“Some are concerned that its going to get worse,” says Richard English, a planner from Arlington, Texas. “The general comments are getting to the point where, to use their words, Its time to stop the bleeding.”

Some retirees have even begun making financial decisions based on what they hear on CNBC, something that can sabotage your lifetime retirement plan, according to Cheryl Johnson, an advisor with American Express Financial Advisors, Rochester, N.Y.

“I had a call from a client who said she heard on the news that she should sell all her mutual funds,” says Johnson.

“This client, who had a very low equity position because shes just gone into retirement, is not going to use those stock dollars for 20 to 25 years. She panicked.

“These blanket statements are confusing people, and if you dont have somebody who knows your situation, they cant tell you what to do,” Johnson says.

English explains that a lot of his retired clients are retreating from the equities market–reallocating their assets to more conservative accounts. “One client wants me to analyze his variable annuity. He knows the values are down, but hes willing to sell those right now and park it in a government fund or a bond fund. He feels like he wants to catch the elevator on the way back up,” says English.

“Im seeing some people who thought their risk tolerance was higher than what it actually turned out to be. They seem to be changing their new allocations into more secure positions, building up more of a bond or fixed portfolio,” says Johnson.

“I see other people who have relatively conservative portfolios and they understand that this is a great time to be buying stocks and mutual funds, and theyre doing that,” she says.

One factor that has contributed to the retreat from equities is the unrealistic expectations investors set for themselves during the 1990s, says Johnson.

“Expectations are out of whack,” she says. “I talk to people who thought it was realistic to assume that they could earn 25% on their retirement portfolio every year. And its not.

“During the 90s, people were used to putting their money in the market on Monday and by Friday they had more. Thats over,” Johnson says. “I think the majority of those people have come to the realization that its not as easy as they thought.”

Even seasoned investors who recognize there are going to be ups and downs, still get nervous when things go down, says Axley. “The less seasoned somebody is the more nervous they get when things go down.”

But planners agree that recent retirees and those nearing retirement who have done some planning should not be overly concerned with the recent downturn. “The people we work with have done their planning ahead of time sufficiently, so they have a mix of assets. They arent dependent on liquidating the assets that have gone down drastically,” says Axley.

“In liquidating those assets it really locks in loss. Our advice is clearly that the market will come back,” he says.

“There are a lot of funds out there that people are selling that are good funds, theyre still well managed,” says English. “Unless they have to sell them, if theyve got good well managed funds with competent managers, I dont recommend doing that,” he says.

“It goes back to why the investments are there–to outpace inflation, to give you longevity on your money,” adds Johnson. “Granted, were not seeing it today, but there was never any inferred promise” that gains would occur every year. Rather, she says, you have to look at it long-term, “in a rolling 10-year period.”

Johnson notes that retirees should revisit their goals and analyze why they chose certain investments in the first place. “If those are still good reasons, they should sit tight,” she says.

Axley explains that as a trusted advisor, its important to make sure your clients dont get swept away with all the hype going on at any given time.

But many investors did get swept away with the hype of the 90s bull market. And now with the hype associated with a massive downturn in the market, some are concerned that perhaps they should postpone their retirement.

“I think that at this point people are looking at it [the market] and think its going to have a long-term impact on their ability to retire. Depending on how far out they are, I think that remains to be seen,” Johnson says.

“If retirees have diversified their assets and investments, they have some fixed assets they can go to that are not adversely impacted by the market. The assets we are taking money out of are more in the fixed area than in the growth area. And in the growth area are the assets that are designed for use later on in the retirement years,” Axley says.

For those retirees who have limited fixed assets to draw upon, Axley helps them identify fixed assets in their portfolio they may not have realized they had, such as cash values of life insurance. “Well use some of those dollars to get us over the hump of the devaluation of their retirement portfolio, but theres always a limit to how much you can do,” he says.

“Some people are tightening their belts, theyre trying not to spend as much,” says English. “Some of them who have good understanding of the market are even putting more in on a dollar cost average basis,” he says.

Johnson adds that some of her clients who have retired are also looking at their expenses, trying to cut back to save a little more to compensate for the market drop.

“Theres always a few things you can do, you can save more money, you can work a little longer and live on a little less,” she says.

In order to look at the market going forward, many planners are looking back at the past. “What were going through right now, some people think is new,” says English. “But its not new. Not new at all. Go back through the Dow for 100 years and youll see theres nothing new.”

Johnson compares these turbulent times to those people experienced in the 1970s. “We found an article from the 70s that had the same comments you see today, and when you read it youd think it was today.

“This seems like the worst thing weve ever seen right now and for many of us it is pretty substantial. But looking back at history weve always had bumps in the road, theyve just changed over time. They never look as bad when you look back at them,” Johnson says.

“Theyre much more terrifying when youre right in the middle of them. And this too will eventually pass, we just dont know when,” she adds.

“Weve seen phenomenal growth over the past 50 years, even at the bottom of the downturn we see now, its still phenomenal growth,” adds Axley.

“Past performance is indicative of the future, but past performance has had ups and downs. We seem to forget about the fact that there were downs.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 5, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.