As fall takes hold here in the Midwest, we have begun the transition from summer clothes to the fall and winter wardrobe. A very common question our younger kids ask is whether it’s going to be warm or cold for the day. The answer dictates the clothing choices they make before heading off to school. After a couple of weeks of this transition, the answer to their question becomes much simpler: “It’s fall.” They eventually stop asking and simply dress warmly.
I know that may not seem very relevant to investing, but it actually is … just bear with me. See, just like the seasonal weather changes need to be recognized and understood in order to choose what to wear, so do the seasons of our clients’ lives need to be recognized and understood in order to best apply appropriate financial strategies for successful outcomes.
You’re already overly familiar with the economic seasons including bear markets, bull markets, recessions, expansions, low interest rates, high interest rates, you get the picture … but are you prepared for the major life seasons that your clients face? Do you truly take each into consideration when it comes time, or do you keep “suggesting the same clothes” you have already suggested for previous seasons?
Let me dig a little deeper. The transition from starving college student to gainfully employed young adult signals the beginning of an accumulation season. In this season, discretionary income begins to appear that may allow investment in a company retirement plan or an IRA. It is here that risk-taking becomes a powerful tool for accumulating long-term wealth.
The investments of choice for many people in this stage have been largely determined by employers, including mutual funds, index funds, and exchange traded funds. It’s no secret that these investment vehicles have played a significant role in growing retirement savings for millions of people in their accumulation stage. This season generally lasts for decades, thus setting the stage for the next major season: retirement.
Retirement is a season that brings with it new challenges and opportunities. Compared with the accumulation season, retirement requires a different view of risk. Naturally, the time afforded to younger people in the early days of accumulation wanes as they near the season of retirement. For those entering the season of retirement, time takes on a second face. While the retiree plans to live for decades in this new season, the time horizon for a portion of their accumulated savings becomes incredibly short. After all, bills need to be paid each month as they always have, but now the origin of paychecks has changed from employer to nest egg. Thus the single pool of retirement funds must generate current income and long-term growth concurrently. This dual focus creates a complexity to retirement planning that cannot be overstated. Why the lengthy discussion of seasons? After all, don’t we all know this? Not necessarily. While most advisors may understand that a transition occurs when clients pass from accumulation to retirement, far too few are adjusting their wardrobe to account for the change in climate. Specifically, a very high percentage of advisors rely on the same tools to serve their retired clients that they used to help those still in the accumulation season.