When Clients Have High IRA Balances

What You Need to Know

Balances could be at all-time highs this year.
That creates opportunities.
It also creates downturn risk.

I enjoyed a recent article by Ed Slott stating that we should plan for the potentially largest IRA balances ever in 2024.

With the S&P 500 reaching an all-time high, many Americans could have higher balances in their IRAs and 401(k)s than they have ever experienced.

This is great news. However, how long will this last? History suggests that the market will go down at some point in the future, and, when it does, those all-time numbers will fade away.

A big decrease in the balance could create a form of psychological panic known as loss aversion. That may lead to action bias.

Action bias can prompt individuals to sell out of their accounts and shift the cash to safe havens in the hope of riding out the market turmoil. However, this kind of reactive strategy often fails to reap sound long-term results.

Studies have shown that many individuals are not good long-term investors.

A 2023 Dalbar study found that the S&P 500 produced a 9.65% annualized return over 30 years. Meanwhile, the average investor only managed a 6.81% return over the same period. That’s why now may be the perfect time to discuss possible strategies with your clients on how they can best handle their potentially highest IRA and 401(k) balances ever.

Below are four ideas to consider when discussing high IRA and 401(k) balances with clients.

1. Assess risk tolerance.

Inevitably, we’ll experience times of market volatility.

Continuing to talk about your clients’ risk tolerance is a good proactive step, as risk tolerance can change over time.

When the market moves into bull territory, investors can become overconfident.

An extended period of low volatility and high market returns frequently creates a misalignment of risk.

This risk imbalance is apparent when the market again becomes volatile.

We saw this happen in 2020 and 2022.

When IRA balances are high, this provides an excellent opportunity to discuss a client’s risk tolerance to determine if any changes or rebalancing needs to happen to help avoid a misalignment of risk in the client’s portfolio.

2. Discuss diversification.

Diversification isn’t a new concept and you’ve likely talked about it before, but it’s a strategy that should be discussed regularly.

Market run-ups can increase the size of certain assets over others and inadvertently cause imbalance to your client’s portfolio.

Setting up a systematic rebalancing once a year may help avoid this common scenario.

3. Explore options.

When the market becomes volatile, how much could the portfolio be impacted? Diversification may help, but some clients might be interested in other ways to help protect their overall portfolio.

One way this could be done is by using an annuity as part of a client’s portfolio.

4. Revisit income needs.

Individuals getting close to retirement may also be concerned with the potential sequence of return risk.

This is the risk that individuals will draw on their portfolio while the market declines.

Individuals within five years of retirement may want to lock in potential income streams using annuities with living benefit riders.

This allows the client to potentially participate in the market while offering a potential level of comfort that a stream of income will be available when they ultimately retire in five to 10 years.

Suppose you have a client seeking a future income stream.

High IRA balances and elevated interest rates create an environment where individuals can seek to leverage their income strategies.

Don’t get me wrong: IRA balances at all-time highs is good news.

However, we must also be diligent and understand that what comes up almost always comes back down.

It could happen later this year, or in two years, five years, or 10 years from now. But it will happen.

Take time today to discuss various strategies with individuals on how to best manage their portfolio when the bears begin to overwhelm the bulls — and when loss aversion and action bias should be addressed.