Know your client’s retirement needs

As fresh market warbles hit worldwide stock indexes, many investors slammed down the brakes—or at least flinched—as their portfolios took a tumble. Most exposed to a sudden decline were those nearing retirement, with little time left to recover losses.

Retirement is not a dead end anymore, as many people live active lives after retiring and of course, those lifestyles need steady funds. Unfortunately, there’s no easy way to spot the exact time to start shifting a client’s asset mix; investor needs vary widely. But the good news is the same smart investment thinking that got clients into retirement will serve them well going forward.

Retirement today tends to be a deeper, more varied affair than before. People live longer and usually have more elaborate plans for retirement than in the past. Many clients will need more money in retirement than they originally thought.

As the definition of retirement changed over the past 20 years, so too has the notion of what belongs in a retirement-appropriate portfolio.

David Andrews, Richardson GMP’s director of investment management and research, says retirement portfolio management is more complicated because goals for retiring are more robust than ever.

“People are living longer and they’re doing more in their 70s than they did in their 50s,” he says. “People are starting to think about their retirement in their 30s, so I’d say the goalposts are wider than ever. It’s more difficult to delineate a time when you should adjust your asset mix because it needs to be done on an individual basis.”

First, tally up how much is spent every year compared to the portfolio size. If, for example, a client with a $500,000 portfolio is spending $25,000 yearly, that’s a spending rate of 5%—a decent estimate of returns needed from that portfolio to maintain the same lifestyle post-retirement. For investors still building wealth, this calculation helps determine how much needs to be saved.

Sam Febbraro, executive vice-president at Investment Planning Counsel, says the challenge is staying up-to-date on clients’ current portfolio performance and their changing needs. The old adage of taking your age and putting that percentage into fixed income is not enough; retirement plans are less fixed than ever.

“Determine a client’s retirement objectives, develop a plan, and then monitor and review it on a regular basis,” says Febbraro. “You could use rules of thumb, but ultimately whatever you do has to meet the client’s needs directly.”

Some retiring investors may opt for a higher exposure to riskier investments to maintain returns sufficient to fund their longer life expectancies. That’s okay, Febbraro says, as long as you’re not only diversifying yourself within asset classes, but within investment styles as well.

Don’t abandon the growth segment of your portfolio or completely cut out all speculative segments—just shift the mix towards more comfortable percentages. A portfolio geared to asset preservation can still leave room for a few riskier, bolder investments as long as the overall mix is relatively stable.

Particularly in volatile times, it’s important that clients not to get too emotionally married to the ups and downs of what the market is doing on a daily basis. This is especially true for clients nearing retirement.

Andrews suggests that any changes in the portfolio should be solely fueled by a client’s changing needs. In uncertain markets, people make rash changes because they can’t stand the volatility; most of the time, they lose out.

“Alterations to your investment plan should be driven by your own changing goals, not by events in the market which are beyond your control,” he explains. “Recognize when events in your own life change, when your own goals change. You can outperform the market and still underperform your own goals and objectives.”

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