Any seasoned financial adviser already knows that the hard work of helping clients save and invest for retirement does not end with a client's retirement date. But based on where we are in terms of market cycles, advisers might soon find themselves blending mathematical realities with behavioral finance skills.
As InvestmentNews reporter Greg Iacurci detailed in last week's cover story, the current market cycle for both stocks and bonds is not ideal for just kicking back and coasting into the golden years.
Because most investors will want to retire at a certain predetermined age, and many won't have the option of postponing retirement, advisers should be ready to prepare older clients for what could be an altered game plan.
We would never pretend to know with certainty what the financial markets will do next, but we can rely on history as a guide to point out that, as Mr. Iacurci reported, right now could be a tough time to stop working.
The current record bull market for stocks, which began in earnest nine years ago, is by most measures due for some kind of correction.
The bond market, which is typically viewed as the crucial income foundation of a retirement portfolio, is coincidentally on the cusp of a similar scenario with the Federal Reserve inching interest rates higher.
That could mark the start of the first real bear market for bonds since VCRs first came onto the scene in the early 1980s.
Again, we're not making predictions. We're just reading the data, which brings us to the challenge potentially facing advisers with clients in or near retirement.
Even under the most ideal market conditions for retirement, such as the end of a bear market, advisers know that clients will often abruptly switch into ultra-conservative investing mode the moment they leave their retirement party.
Although it might not make great financial sense, it is human nature to instinctively strive for maximum conservation of the assets accumulated over an entire working life once the switch is flipped to having to live off those assets.
Advisers tell us it is not uncommon to have to remind clients in the most tactful way possible that retirement is not the same as dying. And because most people who retire in their mid-60s can expect to live for another 20 years — or more — an adviser's biggest challenge often is getting retired clients to embrace enough investment risk to avoid running out of money.
Investment risk is for life
Unless a client retires with Bill Gates' kind of money (which is rare, considering the average 401(k) balance today is hovering around $93,000), advisers should be ready to don a behavioral finance cap to help retirees appreciate that investment risk is a lifelong reality for most people.
Some advisers address their clients' post-retirement aversion to risk with various Monte Carlo simulations that put risk and market volatility into context as a necessity of investment performance.
The retiree's anxiety also can be managed, and hopefully tempered, by separating a portfolio into distinct buckets representing ready cash, income and growth, the latter of which will usually house the bulk of the market volatility.
Of course, even risk has its limits, which brings us back to an honest assessment of the current state of the financial markets.
Investors pay for professional financial advice because they want help building financial security, which is essentially accomplished through a long-term combination of saving, investing and spending.
At retirement, the savings part is mostly over, and the investing part is all about embracing a comfortable but realistic level of risk.
That leaves spending, also known as "portfolio decumulation."
For clients who were taught the popular notion of a 4% annual withdraw rate, it might be time for another conversation about spending habits.
But, just like the conversation about accepting investment risk in retirement, it's probably a good idea to present these topics regularly, long before anyone starts planning a retirement party.