Talking To Seniors About The Financial Squeeze

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Planners, agents, reps, financial advisors, brokers–all are reporting that older clients, in the 55 to 70 age group, are feeling financially squeezed.

Equity investments are down, sometimes by as much as 30% to 40% compared to three years ago, and interest rates are down, too, hovering around 1% on certificates of deposit, for instance.

What is the advisor to say to such clients? What strategies should they consider?

The answer varies dramatically by client, says Ted Schumacher, principal of Schumacher & Associates, Gaithersburg, Md.

For instance, he tells of one client who came to him after being retired for six months. The man, in his late 60s, had $170,000 in a 401(k), a small CD, a pension, Social Security and a wife who was still working. This client had already adjusted his lifestyle in response to not working.

“This man simply could not afford to have that $170,000 go down in value,” says Schumacher. “He needed that money for income.”

As a result, Schumacher says, “we put the money in a fixed annuity with the best interest rates we could find, guaranteed for eight years.”

For people with greater assets and different risk tolerance, Schumacher says a different strategy might have resulted. Still, the process of working with the older client would have been the same: evaluate age, goals, risk tolerance and assets.

In todays economy, the issue of risk tolerance is particularly acute, he adds. “A lot of older clients have internalized the economic problems in the stock market and the interest rate climate, and so they are very worried,” he explains. They are still hoping for a recovery, but theyve essentially gone into a “protect” mode.

“Sure, you can tell people that this is a good time to invest because the market is down,” Schumacher says. “But a lot of older people today just dont have the stomach to jump in right now unless they are still working.”

Yes, the bear market and the low interest rates have made for a double whammy, agrees Norbert Mindel of Schaumburg, Ill. He is executive vice president in the GE Independent Accountants Network, a CPA network owned by GE Financial.

Complicating matters, he says, is the fact that the majority of people do not understand what a sustainable withdrawal rate from their portfolio should be.

A few years back, people who had, say, $1 million in assets expected they would experience a 15% growth rate, and they would take out 7% or 8% a year, Mindel recalls. But now, many people have lost 30% to 40% of their portfolio value due to the bear market, so they may be able to take out only 4% a year.

“The solutions arent very pretty,” Mindel says.

This is especially so since many people do not know the amount of money they actually need to live, he says. The advisor should go ahead and ask, “what does it cost you to live?” Mindel suggests. But be prepared for people saying they dont know, citing higher numbers than actual or offering guesses.

For this reason, Mindel suggests “getting the good facts” is the first thing the advisor should do when working with a senior who is feeling the squeeze.

Next, since clients in the 55-70 age range are in, or nearing, retirement, he recommends focusing on cash flow, not creating net worth. The cash flow can be a combination of, say, Social Security, pension benefits and immediate annuities.

As for the rest of the clients assets, put the money into a balanced investment portfolio as an inflation hedge, he suggests.

That last idea wont work with everybody, he notes. Some clients are so wounded from the market downturn that they say they will not go back into the market until it gets better, Mindel says. As a result, some are out “chasing yields” on corporate and municipal bonds that go out 10 and 20 years, he adds.

In such cases, he says he recommends staying shorter term on the bonds. And he may suggest an alternative portfolio that allows the client to live with the least amount of risk but that still keeps some market exposure.

Some of the financial issues older people are facing today are related more to retirement concerns than to economic concerns, contends Lee D. Pennington, a partner at Pennington, Bass & Associates in Houston and a principal with IFG Securities, a broker-dealer owned by ING.

In any economy, he says, older people tend to worry about running out of money, not wanting to be dependent on their children and dealing with their health. “Even the happiest clients worry about these things once they pass age 55 or so. They always have the underlying fear.”

But tough economies do make those issues more pronounced, Pennington says.

To address the fear, he says he often starts by discussing how “anyone can live on a reduced income, but that you cant live on no income.”

His goal is to help the client focus on knowing where the money will come from for the first two to three years–a money market account and/or CD, for example. That helps reduce worry about fluctuations in the market, he says.

Then, he focuses on finding a way to ensure the rest of the clients money will last for his or her lifetime, so the client does not have to become dependent on the children.

Occasionally, clients will object to using assets for income because they want to leave something to the children, Pennington notes. “The mamas are especially concerned about this.”

In those cases, he says, he talks with clients about how the most important legacy they can leave is not to be dependent on their children–so the adult children wont have to take from their own families to support their parents.

As for senior health worries, Pennington says he urges clients to give serious thought to purchasing a long term care policy. “Unless someone has over $3 million in assets, we recommend they do this.”

Understanding the clients goals is key, maintains Evan Levine, a financial planner at MML Investors, New York. To uncover those goals, “you need to ask the right questions. Dont start out by telling the clients anything.

“Start out by asking: When would you like to retire or semi-retire? What do you want to do then? Where do you want to live? What is your vision for retirement?”

Next, Levine says, determine if the goals are realistic from a financial standpoint. “You can guide the client in this,” he says, adding that this may be essential since some clients are fuzzy about goals. Some have never even thought about what they will do in retirement.

Once the discussion settles on a retirement age and a target retirement income, Levine says the planner can deal more specifically with meeting needs, wants and vision.

Often, says Levine, the planning goes in stages–from working full time to semi-retirement to retirement–for 20-30 years or more. Many older clients want to keep working, if they are still vibrant and healthy, he explains, and others really cannot afford to stop working. For that reason, he no longer automatically presents age 65 as the retirement age.

Levine believes the financial squeeze some older people feel results from having no financial plan. Without a plan, he says, “clients focus on the now. They dont see the big picture and they worry.”

Seeing the big picture is what will help older clients the most, he contends. When they see they will have enough income for life and be able to leave some money as a legacy, they can accept the squeeze they are feeling now a little more easily, he says.

Most people need to work with a financial planner to develop such a plan, he contends, adding the planning process itself injects rationality into the situation. It pulls people away from making decisions for today and chasing yields, and positions them to make decisions that will last for their lifetime, he says.

The actual strategy Levine recommends may include an allocation of stocks and bonds, annuities, real estate exposure, and fixed income investments. “There is no magic here,” Levine says. “The clients plan has nothing to do with movements in the market or interest rates. These things go up and down over all years. The focus is on meeting lifetime and multi-generational goals.”

Its important to help keep client expectations in perspective, stresses Jim Summers, president of Senior Market Sales Inc., an Omaha, Neb., marketer that sells through independent agents.

For instance, if talking about a fixed annuity, discuss more than interest rates, he says. “Discuss the other attributes, too–safety and security, tax deferral and so on.

“If talking about the second home on the lake, perhaps ask whether the client still needs that home anymore.

“If the client talks about refinancing the loan on the first house, in order to take advantage of todays low interest rates, ask about the debt structure and how the client will pay back the loan, which now may go to age 80 or 90.

“If the client has an extra $100,000 that has been freed up, say, from refinancing the main house or selling the second one, point out that the place to invest it may not be the same as five years ago, when one could get a 8% return without risk,” Summers says.

And if the client originally planned to use the investment portfolio to fund long term care expenses, says Summers, explore whether the client or the children really want to liquidate the portfolio to pay those costs. “They may want to take a hard look at buying a LTC policy, instead.”

The point, says Levine, the planner, “if you play into peoples fears, and design a plan thats right for the next five years, the client may end up eating cat food at age 89.” His advice: Put the emphasis on financial planning for the rest of life.


Reproduced from National Underwriter Edition, April 28, 2003. Copyright 2003 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.