Dedicated financial advisors certainly don’t want clients to lie awake stressing out about their investments. But when the entire retirement portfolio of someone age 60-plus is wiped out by a cataclysmic event, it can be tough to get through the night.
Sudden, extensive medical bills, job loss and divorce are the top causes for a retirement nest egg to be demolished. Portfolios can also be destroyed when a client steps in to pay an adult child’s creditors or must take care of an elderly parent’s emergency medical or long-term care costs.
The psychological and financial impact of such loss is deep and devastating, especially when so little time remains for these seniors to replenish their savings.
What to do? Simply start from scratch and rebuild. Typically that means postponing retirement by working longer, chopping expenses like mad and re-strategizing investments.
In order to rebuild, though, the client must have some level of income, to be sure. Systematic savings through dollar-cost-averaging is probably the best way to begin again.
“Sometimes the ‘flying fickle finger of fate’ reaches out and grabs you. Life is not fair. You can’t ensure against all catastrophes. But when one happens, the math is fixed: You’ve got to have X amount of capital to generate X amount of income, depending on how long you have to save and how much you’ll need,” says Frank Armstrong, founder-CEO of Investor Solutions, a fee-only RIA in Coconut Grove, Florida.
A client losing retirement savings accumulated over decades—together with expectations of a leisure-filled lifestyle—is painful to even contemplate. But troubling too is that more than a third of U.S. adults have not yet begun to save for retirement, according to a survey by Bankrate.com released this past August. Further, the poll showed that more than a quarter of Americans age 50–64 haven’t even started to put away money for retirement.
To help a client whose portfolio has been totally drained, the critical first step is to address the psychological aspect.
“You need to be understanding and let them know that life will carry on and that there is a solution,” says Robert M. Wyrick, Jr., managing partner, MFA Capital Advisors in Houston.
Then comes the more challenging part: Recommending what must be done to replenish the savings. The focus there is on compromises and sacrifices.
“They may not be going to Rome—they may be going to Branson” instead, says David Mattern, managing director-investment officer, Wells Fargo Advisors, in Lawrence, Kansas.
Pointed financial advice should be tempered with compassion.
“You have to have a lot of empathy and listen but then come back with hard-choice recommendations,” Mattern says. “You have to lay it out exactly how it is; you can’t sugarcoat it. To give proper advice, sometimes you have to be brutally honest. But you always have to have some light at the end of the tunnel to make it an acceptable retirement plan.”
Using a four-part process, Wyrick starts by letting the client know “there is a way out and that the key is to address what is now a new normal,” he says.
In Dallas, a client of Merrill Lynch advisor Michael G. Garcia saw her $1.7 million retirement portfolio erased when she divorced her husband of 20 years. She owned four separate businesses, but a large settlement and a mound of legal fees forced her to liquidate investment accounts, bank accounts and insurance contracts. She was 60 years old, supporting children and paying for her father’s long-term care.
Garcia, a wealth management vice president, created a tight budget apportioned according to work, family, health, home, leisure and giving.
“At first, she didn’t appreciate the strictness with which I suggested she maintain her financial life; but later, she was very thankful,” the FA recalls.
Time came to re-engage in the market, and Garcia recommended that the client start gradually and conservatively, possibly investing in a few well allocated funds, then making “more elaborate, exciting investments,” he says.
“She has slowly built back up—not to the point where she was before, four years ago; but she’s a lot better off than if we hadn’t done the extensive planning and had conversations about [her needs]. We split up the budget into small pieces,” Garcia says, “and just keep adding to them.”
The worst way to rebuild retirement savings is to invest too aggressively in an effort to recoup assets instantly, advisors agree. A last-ditch effort with a slim chance of success is indeed a bad idea.
“A lot of people in this situation might get desperate and make a Hail Mary pass,” Armstrong says. “But Hail Mary passes later in life generally aren’t winning strategies.”
Assessing the client’s new risk tolerance is essential.
“Do they have the appetite to realize more growth; but also, are they prepared to expose themselves to some additional volatility and risk?” are questions that need to be answered, says Stephen Cohn co-president and co-founder of Sage Financial Group in West Conshohocken, Pennsylvania.
“Maybe they can push themselves a little on the risk-return spectrum. But if they don’t have the tolerance to handle volatility,” Cohn adds, “you’re doing them a disservice because when the markets go down, they’re going to pull their money out or be nervous and lose sleep.”
To hedge away risk, Wyrick uses protective put options.
“Above all, you have to avoid really big losses in the market. The only way to do that is to be somewhat conservative and make sure you have some sort of hedge in place,” Wyrick says. For full equity exposure that hedges against dramatic losses, he prefers put options, which take 3% out of the portfolio.
“That allows us to keep the other 97% fully invested,” Wyrick says, “and know that our worst-case scenario is about a 7% loss regardless of what happens in the market.”
The advisor likes puts rather than investing in, say, bonds, which, because of potentially rising interest rates, “aren’t a great solution,” he says.