Between the 2020 coronavirus bear market, albeit a brief one, and last year’s more extensive retrenchment by stocks and bonds, clients are perhaps unnerved and likely feeling as though there’s work to be done to shore up their retirement planning efforts.
Then there’s inflation, which remains elevated and prompted the Federal Reserve to boost interest rates eight times since the start of 2022, punishing bond prices in the process. As for younger generations, there’s emerging fear that Social Security may not be around when they retire or that they’ll have to work longer to receive those benefits.
“Retirees face a confluence of factors in retirement that can affect their ability to generate income. They report that they are most concerned about inflation (71%), meeting future healthcare needs (51%) and potential reductions in Social Security (46%),” according to Goldman Sachs.
Regarding Social Security, it’s cruising toward its largest ever benefits increase due to inflation, which is somewhat good news for current recipients. Still, the data confirm 51% of respondents believe they don’t have enough income in retirement. Bottom line: Clients need and want retirement planning guidance, arguably now more than ever, and that spells opportunity for advisors.
Topics to Address with Clients
An easy yet effective place for advisors to start when helping clients with retirement planning is with a broad overview of exactly where the client stands in terms of number of accounts. For some reason, many retail investors believe it’s a source of prestige to have investment and retirement accounts with multiple brokers, but in reality, this creates inefficiencies and estate planning boondoggles.
Financial advisors can help clients consolidate accounts and reduce inefficiencies. The next concept is assessing why a client may be off track when it comes to retirement. Here’s how Morgan Stanley frames it in terms of clients talking to advisors.
“If you’re not on course because your investments aren’t performing well, your Financial Advisor may suggest you make a change to your asset allocation strategy or to the specific investments you’ve chosen,” notes the bank. “If your investments are not performing at least in line with benchmarks, your Financial Advisor may review the latest research in the context of the original rationale for the investment. Assuming that checks out, it may be preferable to hold off on any changes, as chasing top performers may be a poor way to make decisions.”
Alright. The client knows they’re off track. Now about the business of getting back on track. That can include strategies such as reducing expenses or considering an extension of the timeline to retirement.
“It could mean creating a financial plan that reflects the propensity for retirees to spend less as retirement goes on, which means you might be better prepared than you think. It can also mean increasing portfolio risk, though only after careful consideration of your risk tolerance. It could be that the most palatable option is a little of all three, which makes the magnitude of any one change smaller,” adds Morgan Stanley.
More Solid Ideas to Consider
Other moves for advisors to consider with “retirement short” clients include strategies for boosting portfolio upside while not taking on significant risk. Related ideas include tax loss harvesting and annuities.
Clients should also ask advisors to assess how much risk lies in their retirement plans and if clients don’t think of this, it’s incumbent upon advisors to do. It’s a value-add avenue. Of course, income needs to be part of the conversation, too.
“That could include strategies for claiming Social Security and traditional pension fund payments, and where applicable, approaches to help you secure or maximize rental income. If your reliable sources of income are not significant enough to cover a good portion of your needs, your Financial Advisor may suggest you add more conservative income-oriented investments, such as dividend paying stocks or bonds,” concludes Morgan Stanley.