Low returns create bleak outlook for clients in ‘retirement red zone’

David Blanchett, Morningstar’s head of retirement research, doesn’t have a lot of good news for retirement plan advisers.

Morningstar is forecasting annual compound returns of less than 1% for the next 10 years, said Mr. Blanchett, speaking at the InvestmentNews‘ Retirement Income Summit in Chicago.

While things will rebound eventually, financial planners need to assume low returns for the near future. There’s a good chance some years may see negative returns, which could put those closest to retirement in a “pretty dangerous place,” Mr. Blanchett said.

(More: Nuveen’s Bob Doll predicts bear market unlikely in the near term)

Younger clients have plenty of time for things to change and the oldest clients have already reached their goal, but investors around the age of 65 are in what Mr. Blanchett called the “retirement red zone.”

“If things go wrong, they can’t make it up,” he said.

A portfolio of all cash has no chance of lasting 30 years with a traditional 4% withdrawal rate, according to Mr. Blanchett. An aggressive portfolio would only fare marginally better.

“You can’t risk your way out of the current market,” he said.

Additionally, Morningstar data show that adding risk to a portfolio is the least attractive options to clients.

Underfunded clients are more likely to save more, delay retirement or spend less than they are to increase their portfolio risk. And clients who are overfunded most want to reduce their risk, Mr. Blanchett said.

“What this tells me is risk is the weapon of last resort,” he added.

(More: Riskiest funds fare best over time — but can you keep clients in them?)

There’s just no way advisers can avoid making tough decisions with clients who either just retired or plan to over the next decade. Not even dying sooner is an option that advisers can hope for, as people are living longer than ever — especially the wealthy.

“Retirement today is incredibly expensive. That’s just a fact,” Mr. Blanchett said. “Getting to the outcome is really complicated.”

The good news is that while many are aware of a looming “retirement crisis,” few think it will affect their own life. As long as advisers use realistic return assumptions, consider reducing portfolio withdrawal rates and continually work with clients to adjust their financial plans, Mr. Blanchett said clients can still retire happily.

“Things tend to work out for most people,” he said. “As they get older, they get happier with their own retirement. So they aren’t in a crisis as we think of one.”