Clients can take various approaches to dampen the early retirement market volatility risks that can batter plans and portfolios in the long term, financial planning expert Jamie Hopkins noted in a recent Morningstar conversation.
On "The Long View" podcast, Morningstar's personal finance and retirement planning director, Christine Benz, asked Hopkins — Bryn Mawr Trust Advisors' CEO — to discuss managing this sequence of returns risk in the first five or 10 years in retirement, noting its importance to maintaining sustainable withdrawals should the market slide in those early years.
"I think the sequence of returns risk is one of the two biggest challenges, really, in the retirement income ... equation. If you're trying to just look at this from a math perspective, we have this uncertain first couple of years, potentially, of volatility from the portfolio. The second one is really like, how long are we going to be alive, which we can't really answer," he said.
While advisors and clients can't control market returns or predict with certainty how investments are going to perform in the 5 to 10 years after retirement, they can take steps to reduce the risk of facing large losses and having to take withdrawals, Hopkins said.
Here's his rundown on those strategies, according to a transcript of the podcast:
Start Conservatively
Hopkins said he's a fan of starting in a more conservative investment framework for the two to three years before retiring and the first three to five years after. Spending down assets like CDs, cash and bonds allows the investment mix "as a percentage to get more aggressive," he said. "Now, I'm not telling people to go buy more and more equities, but to essentially deplete some of our fixed income sources earlier on, I think, is really helpful."
Tap Home Equity
Retirees need to consider their total asset pool, Hopkins said.
"I have talked about tapping home equity during those potential down years early in retirement. So, whether it's a reverse mortgage, and you're drawing on that line of credit, using a [home equity line of credit] is also a very powerful tool," he added.
"Maybe you need to redo the roof, and that can be a good way to manage that big expense in the first couple of years of retirement without having to spend down our portfolio, especially if we're seeing a drawdown in the assets we're in."
Diversify the Portfolio
Holding a diversified portfolio is straightforward advice for most investors.
"That's not super complicated, but I still see retirees sometimes retiring with really high concentrations in just a couple of stocks because they were growth vehicles, and they allowed them to accumulate wealth, but that might not be the right vehicle to get through retirement," Hopkins said.
"Wealth generation strategies and wealth preservation strategies are what we're talking about now, are different things," he said. "So a more diversified portfolio, both among equities and across different asset classes, is really important because it gives us flexibility on being able to sell things at different time periods based on how they're performing."
'Know How to Spend'
Hopkins also discussed what he calls the need for mental "rewirement" so retirees can get used to spending after decades of saving. Retirees need to give themselves permission to spend, he suggested.
"When we get to retirement, we have to have this whole shift from finding a lot of our meaning and community and lifestyle from the structure of work, getting our income from a paycheck and saving, and then you retire and we say, 'Just kidding, you don't need to know how to save anymore, you need to know how to spend, which we told you for 35 years was bad, right?'" he said.
Retirees also have to find structure, community and meaning in life outside work.
"Now you live in a new world, in this retirement world, where you have to design it. You have to create your own income. You have to learn how to spend down and all of those things together," and make the money last, Hopkins added.
After watching retirement accounts grow for years, retirees start spending down "and that's very scary, and not only is the money decreasing that we have but ... when we spend money out of our savings it feels like a loss to many people financially, that somehow we lost this money because that principal, that amount that we had saved, is now less," he added.
Clients will be better off and more fulfilled if they do a retirement income analysis to know they'll have safe income, according to Hopkins.
He appeared on the podcast, also hosted by Morningstar portfolio strategist Amy Arnott, with Bonnie Treichel, his co-author on a new book, "Your Retirement Sketchbook."
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