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April 27, 2003 at 08:00 PM
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.”
