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Retirement Planning > Saving for Retirement

Starting Over When a Nest Egg Is Gone

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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 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.

Moving Forward

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.

Unhealthy Costs

An exorbitant, unforeseen medical expense can deal a staggering blow to retirement savings. It is estimated that a couple, age 65, retiring today will incur, on average, about $240,000 in total health care costs during the ensuing years. Medicare pays only 50% of medical expenses, and supplemental insurance plans also have limits. Long-term care is high-priced, and so are LTC insurance policies.

Opening a health savings account upfront may be helpful, as can calculating likely retirement health care costs and keeping money to pay for them in a separate portfolio. Also, hospital financial assistance for catastrophic illness is available, and doctors’ fees often can be negotiated.

But sometimes emergency or otherwise unexpected-but-essential medical care for the client or a relative will exhaust retirement savings.

At Wells Fargo, a client of David Mattern who was just moving into retirement was hit with the news that her son needed an extensive stay at a mental health facility. Paying $15,000 per month for that treatment, the woman saw her retirement portfolio disappear.

But Mattern modified her plan and recommended that she downsize her residence to free up cash so she could start saving again, though at a higher level. Big cuts were made to other expenses as well.

Then “we reallocated her portfolio so she could take on a little bit more risk,” Mattern recalls. “Because we needed more return, we had to have more equity exposure.” He used individual equities.

The global financial crisis of course played havoc with many a retirement portfolio. One man in his 60s, who had been just about to retire, sought help from financial planner Debra Neiman, principal of Neiman & Associates Financial Services, an RIA in Arlington, Massachusetts.

“He was picturing one thing, but the reality was something else,” recalls Neiman, co-author of Money Without Matrimony: The Unmarried Couples’ Guide to Financial Security (Dearborn, 2005). “We became a bit more conservative—more bonds, scaling back on the more aggressive pieces, like international and smaller cap. We focused on an income-producing portfolio that was large cap- and dividends-oriented.”

Real Advice

Clients who have had their retirement nest eggs shatter require help—badly. Often their original retirement plan was designed through their 401(k) facility or “by an advisor who was more of a sales person,” Wyrick notes. “But this is one of those critical times when they need an advisor who’s going to give them some real guidance.”

Wyrick explains that, frequently, a plan can be adjusted merely by tweaking the amount needed in retirement, the rate of return and the number of years until withdrawals will be made.

“You can change the trajectory of the plan without having to make overwhelming changes,” Wyrick says. For example, he may suggest: “What if you work an additional three years, and instead of taking $7,000 or $8,000 a month in retirement, you take out $4,800, plus Social Security?”

“This takes away the deer-in-the-headlights feeling and helps demystify the process,” he says. “The sigh of relief comes from understanding there is a path—though maybe not the path they had in mind because here they are 60 years old and beginning again.”

In addition to looking for opportunities to increase income—including a second job, a sideline business or a spouse’s return to work—and using tax-saving vehicles, it is essential to focus on Social Security. But the payments should be for retirement income, not current income.

Postponing the start of Social Security benefits can be helpful: Each year one waits, up to age 70, represents an 8% increase.

“You have to optimize Social Security,” advises Ron Mastrogiovanni, president-CEO of HealthView Services, in Danvers, Massachusetts. But “it’s not just delaying [the start date]. There are 2,000 Social Security filing options, including many for married couples.”

To be sure, Social Security needs to be a key component of the plan, Wyrick says. “It’s predictable and not something you have to rely on investment success to achieve.”

Re-evaluating the locale where clients will retire should also be encouraged. It might be best to relocate to a tax-free state or even another country that is appealing and has a substantially low cost of living.

A major frustration for advisors is that, unfortunately, some clients can be the cause of their own retirement-savings collapse.

“The biggest crises we see are self-generated,” Armstrong says. “We had a guy working for a company that was going down the tubes, and he invested all his retirement funds in the company. It crashed. Another guy spent all his retirement savings—several hundred-thousand dollars—on collectible shotguns. There’s a whole universe of people who systematically destroy their own prospects. They come to us late in life, and I have no magic.”

Mattern is observing a disaster-in-the-making but sees little he can do other than, maybe, use shock tactics. A single female client in her early 60s who has never worked—and is therefore ineligible for Social Security—is consuming her inheritance at a rapid clip. It is her only means of support.

“Our constant battle is having discussions with her about her spending rate, “Mattern says. “If something catastrophic happens and she [exhausts] her portfolio, there’s no Plan B except to turn to the government” and go on welfare. “She’s a very difficult client.”

Helping folks rebuild a now-empty retirement portfolio is not exactly the fun side of financial advisory.

“It’s a very painful conversation to tell a client that they don’t have enough money to retire,” Armstrong says. “It’s the only part of my job that I don’t really love.”

Yet, in this situation, clients truly need expert advice—from an advisor who can connect with them emotionally.

“It’s important to really understand your client; otherwise, there will be a rude awakening when emergency time comes,” Garcia says. “This [job] is not just about investments; it’s about values, emotions and how much you care about people.”


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