Your boomer clients are retiring, so they’re going to be spending the money in their portfolios.
Most clients need to stay invested—and do well—if they’re to meet retirement spending targets. But some can’t handle the risk needed to fund all their lifestyle goals.
You’ll be the one who delivers this news. Here are some strategies for making the message click.
Match risk tolerance to spending
Planning has to begin with a distinction between the client’s essential and desired spending, says Don Ezra, director emeritus, global investment strategy at Russell Investments. “What counts as essential varies from person to person. They’re things [clients] cannot imagine living without,” and that could mean a golf membership or annual European vacations. Desired spending covers things they’d be unhappy without, but getting them means risk.
Ezra uses a case study (see “Nediva and Jean-Pierre’s options,” below) to show that clients have two options when their starting asset base doesn’t cover planned spending: change goals or elevate risk.
He suggests advisors adopt a similar approach when clients’ drawdown plans are too lofty for their risk profiles.
Nediva and Jean-Pierre’s Options
To meet their five-year income requirements, the couple can invest one of three ways: ultra-conservative (100% fixed income), moderate risk (82.5% fixed income, 17.5% equities) or high risk (30% fixed income, 70% equities). But only the high-risk portfolio hits their income target. (Fixed-income investments generate 0% annual real return.)
Note: All figures indexed to inflation.
- The couple isn’t worried about longevity risk because a deferred annuity kicks in if they live past age 85.
- Money needed in the next five years isn’t invested in equities. This is based on the idea that it takes time for the equity risk premium to kick in; and the longer you give it, the more reliable it is.
- We assume fixed-income investments keep pace with inflation, so annual real returns will be 0%.
- We assume long-term average equity returns at 4%.