‘Going broke’ is still chief retirement concern
‘Going broke’ is still chief retirement concern
How can retirees reconcile their practical need for capital appreciation with their strong emotional desire for capital preservation? Active, risk-managed strategies can provide an appropriate addition or alternative for advisors and their retirement clients to passive, buy-and-hold strategies in answering this question.
The two market crashes of the 21st century have had a profound effect on investor behavior. According to Betterment, 65% of investors say their risk tolerance has changed since the Great Recession—and 59% say their finances have not recovered fully from that period. A 2017 Gallup Survey found that stock ownership in the U.S. has dropped significantly since 2008.
These issues are particularly important for individuals or couples on the cusp of retirement, or those already in it. It’s uncertain how long today’s retirees might live, but the one thing they want to know is that their money will not run out during their lifetime. Answering this question in a positive fashion requires combining capital preservation with the opportunity for capital appreciation.
In our article “Active management: Don’t retire without it,” author Linda Ferentchak writes,
For advisors with a focus on retirement income planning, understanding the role a risk-managed, active investment approach can play as part of a retiree’s total retirement planning is critical.
Also critical for financial advisors is understanding the current mindset and attitudes of their target segment.
We want to thank the American Institute of CPAs (AICPA) for permission to excerpt commentary and findings from the Personal Financial Planning Trends Survey they conducted in 2018. This study provides some valuable insights from CPA financial planners on the current concerns expressed by their clients who are approaching retirement.
Here are some highlights of the study, as published by AICPA:
Source: American Institute of CPAs (AICPA), 2018 Personal Financial Planning Trends Survey.
The conundrum many retirees, as well as their financial advisors, face is how to reconcile a mindset that fears “going broke” and fervently wants to avoid steep portfolio losses with the likely need for portfolio growth via equity strategies to keep funding retirement—at the very least keeping up with inflation.
This fear is not surprising, given that the broad equity market, as represented by the S&P 500, has suffered drawdowns of 49.1% and 56.8% just in this century.
“Buy and hope,” purely passive investing is, therefore, a poor alternative for most investors—especially retirees—versus a holistic portfolio approach that includes dynamically risk-managed strategies. While it is true that markets over a long enough period have an upward, positive trajectory, strictly passive investing has many issues, not the least of which are investor discipline and controlling one’s emotions.
Further, the “sequence-of-returns” dilemma undermines even very capable application of traditional passive asset-allocation approaches. As numerous studies have shown, when clients are in the distribution phase of retirement, the sequencing of their investment returns can have disastrous effects on the long-term viability of generating an income stream. Put simply, two portfolios may have the exact same “average return” over a 20- or 30-year period, but the timing of those returns can mean the difference between building a very comfortable retirement trajectory and simply running out of money.
The real question is how can investors best achieve their personal return objectives—“goals-based” investing—given their specific financial situation, time horizon, risk appetite, and retirement planning outlook?
Active, risk-managed strategies can provide an appropriate addition or alternative for advisors and their retirement clients to passive, buy-and-hold strategies in answering this question—through full market cycles. These strategies can react and adjust to different market conditions and economic regimes, seek to avoid extreme market highs and lows, and smooth the way through volatile markets.
Ms. Ferentchak points out,
In a recent interview, one Florida-based advisor told our publication he places an emphasis on client education around these types of issues,
As Ms. Ferentchak says at the conclusion of her article, “Active management can be the retiree’s best friend.”
David Wismer is editor of Proactive Advisor Magazine. Mr. Wismer has deep experience in the communications field and content/editorial development. He has worked across many financial-services categories, including asset management, banking, insurance, financial media, exchange-traded products, and wealth management.
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