Financial advisors routinely need to address the concerns of their clients as they try to make sense of the latest economic news. Some of the news is important. However, much of what we hear about the markets through the media is speculation fueled by financial punditry. Are we headed for a recession? Will the Federal Reserve cut (or raise) interest rates? Is Social Security in jeopardy?
Filtering out the noise, the bottom-line question I hear most among retirees and pre-retirees is “Am I at risk of outliving my money?” This is a concern that is certainly valid: Nobody wants to face a cataclysmic wipeout similar to 2008 or 2000 as they transition into retirement. Vigilance is warranted. Panic due to short-term gyrations of the market usually isn’t.
When volatility spikes, the trade war escalates and domestic politics is at a fever pitch, I like to go to a calm place and review what’s important, namely the core planning principles to which we are adhering. With an advisor, clients don’t face their finances and fears alone.
When clients are concerned about outliving their money, I conduct a behavioral exercise. We discuss:
It was widely covered in financial news recently when the 2- and 10-year yield curve inverted. A few clients called asking if this was time to worry. I reminded them that this inversion was temporary thus far and shared that the U.S. economy has historically had a lag time between a sustained yield curve inversion and a recession. I further noted that the U.S. stock market indexes are up roughly 18.5% on the year. We were experiencing a normal pullback in equities and revisited their current portfolio allocation to confirm appropriate positioning.
If volatile market conditions are causing clients concern about outliving their money, I have them complete a risk tolerance questionnaire between annual reviews. For married couples, I have them complete it independently of one another and tell them “no cheating!” as I want each person’s genuine answers without spousal influence. If the questionnaire unearths a material change in their risk tolerance, we discuss portfolio reallocation, but I make sure to differentiate between short-term market jitters and true changes in investment objectives.
Clients who are currently taking Social Security and withdrawals from investment accounts typically don’t outlive their means. I remind them that they will likely not outlive their money. To demonstrate this, I often run scenario analyses in the financial planning software I use. For clients that can afford to postpone taking Social Security, I remind them of the income they’re projected to receive. These clients often view Social Security income as a “bonus” to withdrawals from their investment accounts and any income they may have from employment in retirement or income-producing real estate they own.
Health Care Costs
It’s no secret that health care can be one of the largest expenses in retirement. As such, clients often vocalize concern about the cost of a major medical event. I revisit the health and long-term care insurance policies they have in place and outline how these policies can help alleviate costs.
Other Income Sources
Clients are often very busy in retirement. Many find part-time jobs that allow them to focus on their passions because of the fulfillment it brings. Others may own income-producing real estate, such as vacation rentals or accessory dwelling units that they rent out on Airbnb, which brings additional income in retirement. Some even have legacy pensions from government careers. These income sources often bring confidence against outliving their money because they can draw less from their nest egg.
The above topics are reviewed when clients vocalize concern about outliving their money. I show clients the impact that certain drawdowns could have on their nest egg. When they see their whole picture, though, it helps put their mind at ease and allows them to focus on their nonfinancial sources of fulfillment and purpose. One aspect of being a fiduciary that I particularly enjoy is bringing clients financial confidence, not only when the sailing is smooth, but also when the waters get choppy.
— Check out Advisors’ Advice: Top 11 Retirement Planning Questions Clients Ask on ThinkAdvisor.
Vance Barse, AIF, is a wealth strategist and founder of Your Dedicated Fiduciary. D. Vance Barse (CA Insurance #0L70885) is an investment adviser representative with and offers advisory services through Commonwealth Financial Network, a Registered Investment Adviser.