Retirement planning's tough choices

Retirees unwilling to trade risk for yield are cutting back their lifestyle

Mar 25, 2012 @ 12:01 am


Michael and Nancy Hoaglund saved diligently for many years to fund a secure retirement, but it took just one miscalculation to scuttle their plans.

“I am the kind of person who wears a belt and suspenders,” Mr. Hoaglund said of his aversion to risky investments. “We never got into any dot-com stocks in the 1990s or any other get-rich-quick schemes.”

Whenever his broker called him with hot stock tips, Mr. Hoaglund firmly told him that he wanted only conservative investments.

When they were working, the Bloomington, Minn., couple saved regularly for their retirement. Mr. Hoaglund, now 75, retired in 1997 when he sold his small manufacturing business. A year later, Mrs. Hoaglund, now 74, retired from her job as an administrative assistant at a local church.

The couple did many things right but made one mistake that has haunted them, Mr. Hoaglund said. They used their broker's too-optimistic estimate that they could count on annual market returns of between 6% and 8%, and they overspent in the crucial early years of their retirement.

When the stock market declined in the aftermath of the dot-com bubble and 9/11 terrorist attacks, so did the value of the Hoaglunds' retirement account. That, combined with tepid market returns and low interest rates over much of the last decade, has forced the couple to scale back their lifestyle and left them with a retirement far more frugal than they ever planned for.

The Hoaglunds are not alone. Whether it is the result of poor planning, bad advice or plunging markets, many retirees are licking their financial wounds. The current low-interest-rate environment doesn't help, especially for conservative investors such as the Hoaglunds, who are unable or unwilling to sacrifice safety for yield.

“Retired investors want riskless returns, and that is a tall order,” said Brian Ullmann, a wealth manager with Ford Financial Group. In recent years, he has spent time educating many clients about the trade-off between risk and return, he said.

“One client told me, "I'm not risk-averse; I just hate losing money,'” Mr. Ullman said, noting that it's an attitude that sums up the way many retirees feel about their investments. “It is a scary environment for retirees right now.”

Most retirees have adjusted by reducing the amount of money they take out of their accounts, although once they pare back their budgets as much as they can, some accept the idea of taking on more risk. “Others lose too much sleep, and it is not worth their sanity to increase their risk,” Mr. Ullmann said.

Today, the Hoaglunds take their reduced lifestyle with cheerful good humor. Married for 50 years, they said they consider themselves fortunate because they have good health, and don't mind that a rare evening out typically consists of a hot dog dinner at the local Costco.

When Mr. Hoaglund had knee replacement surgery a few winters ago, Mrs. Hoaglund carefully shoveled the walk so he wouldn't slip, and said she was just a little wistful when she thought of how much nicer it would have been for him to recover at the second home in Florida they were forced to sell in 2004. They can afford only one car instead of the two they had before, which makes both feel a little less independent.

“You need to be much more hands-on with your retirement planning,” Mr. Hoaglund said. “You need oversight, and I didn't do it the way I should have.”


Although Mr. Hoaglund was diligent about preparing cash flow statements for his business, his broker never did that for his retirement plan, an omission that he believes led them astray. Eventually, he took over managing his investments and in 2008 met with a retirement specialist to develop a comprehensive plan.

“The Hoaglunds were wise enough to re-evaluate how to manage their assets,” said Joseph S. Lucey, president of Secured Retirement Advisors LLC, who worked with the couple. “They had to make some tough choices, but we were able to find them what they most needed — an income stream they will never outlive.”

The Hoaglunds used some of their savings to buy enough annuity income to cover their basic ex-penses, and invested the rest in a conservative portfolio for supplemental income.

“When we look at annuities, we plan based on the guaranteed return, not the hypothetical or average return,” said Mr. Lucey, adding that retirees crave that kind of certainty.

For retiree investment portfolios, Mr. Lucey focuses on yield, using REITs selectively, along with dividend-paying stock funds and separately managed accounts.


Annuities have become far more popular in recent years, partly because low interest rates have made it difficult for retirees to wring much income out of laddering CDs or bonds, said Shannon Reid, director of retirement solutions at Raymond James Financial Inc.

So-called aristocrat dividend stocks also are popular now, she said. Aristocrats are blue chips, such as Verizon Communications Inc. (VZ), Lowe's Cos. (LOW) and Stanley Black & Decker Inc. (SWK), that consistently increased their dividends over the past five years.

“You have to be in the market, because you need growth and in-come,” Ms. Reid said. “Advisers and investors are much more open to product allocations that include annuities and are more inclined to stay in fixed income and equity markets.”

The search for safe yield leads some advisers to recommend ultradiversification into products that can provide better returns than the ultra-safe Treasury bonds many retirees favor.

“It really is a matter of what they are comfortable with,” said Jim Sloan, president of Jim Sloan & Associates. He tells his retired clients that he might be able to generate more income by taking on a little more risk, “but there is no guarantee,” he said. “It is called "maybe' income.”

Wealthier clients with several million dollars are more likely to go that route, he said.

The Hoaglunds went the more conservative route. They contend that having ironclad income security outweighs the lure of taking on risk to gain a little more yield, especially for a belt-and-suspenders couple.

“I thought we would be able to play more,” Mr. Hoaglund said. “We thought we would be able to travel, but sometimes your blessings are different than what you expected.”


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