By

Advisors often use asset allocation and product allocation strategies when setting up financial plans for working adults. But seniors and retirees need to do those things, too, and for the rest of their lives, say senior market specialists.

“Once you explain it, most of them really like it,” says Jordan Gary, founder and head of Investment and Asset Planning, LLC, a registered investment advisory firm in Wichita Falls, Texas. “It gives them more confidence that their money is not going to run out, and they can see how it takes away the risk of living on a financial roller coaster.”

For some seniors, asset allocation and product allocation are new concepts, says Richard Dickens, founder and chief executive officer of Keystone Retirement Solutions, LLC, Columbia, S.C.

However, once people understand, he says, “they see that it fits with their mindset.”

The mindset that most of Dickens retired clients have is “concern for their principal,” he says. This concern escalated after the stock market losses of the early 2000s, he adds, and “now some seniors want to guarantee all of their principal, with no equity exposure at all.”

The strategy Gary uses to address this varies by client age. “Asset allocation using equities is a good concept for younger people, during the accumulation years,” he says. “But as the person ages, the issue becomes, can the person keep on with the same allocation and with monitoring it?”

With age comes increased risk of serious sickness of oneself or ones spouse, he points out. Some people develop memory impairment or sometimes the spouse who kept the financial records dies and the survivor doesnt know where everything is or how to manage it. And sometimes the advisor dies or moves on.

“Ive seen all this,” Dickens says. These life changes cause difficulties for seniors, to the point that he has decided it is generally “best to start simplifying seniors investments as they age.”

Hartford Financial Services Group has been studying consumer understanding of asset allocation. In a survey it conducted with Ibbotson Associates, the Hartford, Conn., firm learned that 8 of 10 investors with household incomes of $75,000 or more believe they are practicing asset allocation. However, the survey also found that the majority actually are doing simple diversification of assets, not true asset allocation.

Further, the survey found those aged 55 and up have less familiarity with asset allocation than younger people (see chart).

[Note: Asset allocation does entail diversification of investments, but this is done in a disciplined manner, with the selection of asset classes related to the persons risk tolerance, time horizon and goals. Most asset allocation strategies also fold in regular rebalancing of assets, to keep the portfolio aligned with the desired strategy, as well as periodic reassessment of the overall plan.]

Many dynamics are involved in helping seniors do asset allocation, comments Charles J. DiVencenzo, vice president and director-advanced product marketing in the investments products division of Hartford Life, a subsidiary of Hartford Financial.

For example, seniors need to understand retirement income and how it may be impacted by longevity, time horizon, withdrawals, lifestyle, health care, Social Security and a myriad of other factors. Efficient taxation and wealth transfer should be addressed, too.

Giving up control over ones assets may be a factor as well, DiVencenzo says, especially among high-income clients in wealth transfer situations. A lot of these individuals are self-made people who dont consider themselves to be old or older, DiVencenzo explains. “So, there may be a long transactional cycle here,” and the advisor may need to solve the more immediate needs first and then gradually move into the other areas.

Advisors need to help seniors see that they need to plan for perhaps 25 to 40 years in retirement, he maintains. Even that can be a hurdle, he says, because “for a lot of people, thats a pretty daunting number.”

Gary, the Texas registered investment advisor, says he does exactly thatpoints out that most people have a “very long investment horizon” when they enter retirement.

Some people might take that to mean they should still be investing in the stock market for the long term, he says. The problem is, if a senior does that and also takes out money for income purposes, “this creates a reverse dollar cost averaging situation,” he says. “If the market is down, that can hurt.”

Instead, Gary recommends asset allocating into different types of investments, arranged by time periods. For example, one set of investments would be targeted for spending in the first 5 years of retirement. These would be “very conservative” choices, such as CDs, a bond fund or a 5-year annuity.

Another group of investments, perhaps a blend of stock and bond funds, would target a 10-year period. Money in this portfolio would be shifted gradually over to more conservative investments as the first “spending period” nears the end, says Gary. Meanwhile, other spending periods might have 15- and 20-year horizons, with the types of products chosen for each varying based on existing assets and other particulars.

The point to instill in clients, Gary says, is that “if you set aside and plan carefully, you should have enough money for the reset of your life.” This is easy to explain to people, and it gives them more confidence, he contends.

Dickens, the South Carolina advisor, prefers using a “product allocation” approach. He might, for example, talk with the senior about putting so much in money market accounts, as emergency money; allocating other funds for income needs, with allowances for Social Security, pension income, and required minimum distributions; putting another portion into an immediate annuity; and perhaps putting another portion into a guaranteed fixed annuity and/or and equity index annuity.

The EIA has appeal to people who still want to participate in equities but who also want some guarantees, he says. “It lets them do what I call protected asset allocation, by depositing funds into various index-linked accounts inside the EIA.” The benefit is, “they know that, unless they disturb the money, every day their account will be worth more. They dont have to worry about the ups and downs of the stock market.”

In general, that appeals to seniors, he says. “If they have any complaint about annuities at all, it is about the length of time a person needs to hold an annuity before the withdrawal charges end.” However, he adds, when they learn about the 10% a year liquidity and the penalty-free withdrawal provisions for terminal illness or nursing home confinement, they are more comfortable.

If clients are very conservative, says DiVencenzo, the advisor may need to focus first on getting through to the person that having exposure to different asset classes will help him or her make it through the next 30 to 40 years.

On the other hand, if the client is a boomer who invested aggressively when younger, the advisor may need to educate on why “you just cant be only in tech stocks” during retirement, he says.

How to deliver these messages? Focus on the persons income stage, suggests DiVencenzo of Hartford Life. Point out that in the accumulation stage of life, people not only have 10-20 years or more to invest, but since theyre not taking money out to live on, they also have the ability to make up for any losses that occur. Then remind them that they are now withdrawing money for income, so “they dont have the same cushion” anymore.

The message is that they need to invest their money with care, using an asset allocation strategy suited to their stage in life.

Example: One 70-year-old man had put his money in a Hartford variable annuity but only into an S&P fund and the fixed account. Noticing that, DiVencenzo gave the man a questionnaire tied to the products asset allocation program. The results showed the man would benefit by moving some money into equities using an asset allocation strategy. Seeing the results had a strong impact on the man. He told DiVencenzo: “Okay, Im comfortable with that.”

“People need to be comfortable” with their retirement finances, says DiVencenzo. If advisors educate on the issues, most seniors become comfortable with the asset allocation approach and even like it, he concludes.


Reproduced from National Underwriter Edition, July 29, 2004. Copyright 2004 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.