No one is happy with the market's sharp losses and non-existent yields these days. Yet many retirees are weathering this downturn with minimal disruptions to their lives. And their secret is not enormous wealth or an investment Ouija board that only picks winner. It's having a retirement spending and investment plan in place, and the discipline to stick with that plan through bad times as well as good ones.
U.S. News recently interviewed several financial planners and advisers throughout the country. There were nearly as many different investment strategies for today's market conditions as there were advisers.
Some advisers are still into stocks, some aren't. Some are using corporate bonds and even high-grade junk bonds (if there is such a thing) to get decent yields. Some have moved away from individual stocks to low-cost index funds. Some like commodities. Some like stocks of foreign companies in emerging economies. You get the picture.
But what all the advisers had in common was their insistence that clients have a financial plan in place and that they stick to that plan. A closely related observation is that managing their clients' expectations about market performance may actually be harder than managing their actual portfolios.
"I think it's really important that every client does an investment policy statement," says Scott Kaminsky, a financial advisor in Philadelphia with Morgan Stanley Smith Barney. "They should set their goals and parameters at the outset ... The investment policy statement keeps everyone on the straight and narrow."
Retirement spending goals, he adds, should include quantitative and qualitative objectives. Kaminsky uses Monte Carlo simulations to test client investment outcomes, with a goal of achieving quantitative goals 95 percent of the time. In qualitative terms, he explains, the questions to ask include whether you are doing the things in life that you enjoy: "When you envisioned retirement, are you doing what you wanted?"
Investment results should not be measured against only market averages. "You should be benchmarking yourself against what your financial plan says you need to live your life," Kaminsky adds. "Are we meeting the goals set forth at the beginning of this relationship?"
"We create a retirement budget focusing on projected expenses," says Daniel Forbes, a financial planner with his own small firm in Providence, R.I. "It's really important to have a firm grasp on expenses that are expected to increase in retirement, such as health and medical. We also examine ways to reduce expenses wherever possible."
"We then construct their investment portfolio to generate the necessary income" to meet their needs, he explains. Forbes follows a common advisory goal of drawing down client portfolios no more than 4 percent a year. "I set them up on a monthly deposit to their bank account, just like a pension or Social Security."
Forbes says many of his retired clients came to him with the notion that they had to have their retirement money in stocks. But after going through the planning and income analysis, they saw that they could reduce investment risks and still meet their income goals. Forbes uses low-cost bond and stock dividend funds to produce the needed yields. His clients "have seen a small decline in the last few months, but nothing compared to what they would have seen had we left their previous asset allocation in place."
Kevin Meehan works with affluent families at Summit Wealth Advisors in Itasca, Ill., northwest of Chicago. His financial plans for retirement often involve what he calls a "cash flow reserve ladder."
The first rung of the ladder is a checking account with a month of net spending needs (after accounting for automatic income from pensions, Social Security, and other guaranteed sources). Next, he advises setting aside two years of such spending needs in reserve accounts "that won't be earning much of anything" given today's interest rates. Meehan's third rung is three to five years of income needs, at a minimum, in fixed-income assets that carry little risk. Lastly, he says, any remaining assets are invested for longer-term growth and may carry more investment risk.
"If people can get their head around this concept, it helps them deal with investment issues," he says. Today's declining and volatile markets needn't affect current spending, and clients will not be forced to generate retirement income by selling investments at depressed prices. "We think the major conversation to have with people from an investment standpoint is not how much risk you're willing to take, but how much rate of return risk you need to take to reach your [income] objectives," he says.
"Managing people's expectations is huge," Meehan says of his major advisory challenges. And often, clients will make smaller-than-expected returns unless they are willing to take more risk. "And not all [clients] get it."
"Those [clients] who have always lived beneath their means have seemed to weather the volatility of the market in excellent shape," Meehan observes. "It has been much harder for people ... who have suffered big losses in their real estate values. Often, they don't want to go back to how they used to live after they've enjoyed living better. But their solution is not in an investment, but in a lifestyle adjustment."
"A lot of people are just not willing to do it," he concludes. "They almost have no answer, and there are a lot of entitlement issues."