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Retirement planning 10 years after the financial crisis

The damage caused by the 2008 crisis left investors focused on income vehicles that provide reliable returns

Jun 28, 2018 @ 3:05 pm

By Eric Watson

Ten years after the start of the 2008 financial crisis, the retirement income conversation is starkly different than it once was. In fact, everything has changed, from the way advisers and investors look at risk, to the investment vehicles they rely on to cover their expenses in retirement, to pretty much everything else.

Above all, the crisis sent a message to investors that things may never be the same when it comes to their money. This is why nowadays advisers are almost more interested in cash-flow preservation than they are in capital appreciation, especially if their clients are approaching, or in, retirement.

This takes us to the prevailing question of "How much?" The answer has as much to do with risk as it does monthly income, though perhaps it's got more to do with the former following a financial catastrophe that depleted wealth on a global scale.

According to the Federal Reserve, the median net worth of families dropped by 39% between 2007 and 2010. So clients who may have had a nest egg of $1 million were suddenly looking at just over half of that.

At the same time, the Pew Research Center notes that nearly 10,000 baby boomers hit 65 and retire each day, so this drop was particularly devastating for many who were relying on their savings. In the years since the crisis, 2009 bull market aside, more and more boomers have taken additional steps to protect their assets.

The Bureau of Labor Statistics' latest consumer expenditures data show that on average, households with individuals 65 and older spend $45,756 per year, or $3,818 per month. Of course, high-net-worth clients' figures will be much higher. While this is a good benchmark to give investors an idea of how much income they need in retirement, every person's retirement income needs will vary, based on a variety of factors, from where they live to how much they typically spend on groceries.

Whatever the circumstances, many advisers are now focusing their investment strategies on income vehicles that provide reliable returns, such as variable annuities and tactical fixed income through exchange-traded funds and private placements.

Here's why: Annuities were one of the most successful vehicles for people trying to avoid or at least soften the impact of the stock market's 2008 drop. In fact, they are still so popular that insurance group Limra estimates a 50% spike in sales of variable annuities through 2019, as investors who witnessed their retirement nest eggs fall apart in 2008 view annuities and the income guarantees they provide as a safe and favorable option.

Today, annuities remain an attractive investment vehicle for investors who may be worried they will outlive their savings, have an extremely low risk tolerance or are hyperfocused on achieving steady, predictable income. With annuities, clients have the option to receive payments immediately or defer them, allowing their earnings to accrue tax-deferred while some future payments can be tax-advantaged. Many investors prefer annuities for this reason and because they don't limit how much you can contribute. However, as with all investments, advisers need to be mindful and ensure that any potential risks that come with purchasing an annuity, such as liquidity or fees, don't outweigh the potential benefits.

Another popular investment strategy since the financial crisis is to invest in dividend-paying stocks, especially if the company has a history of increasing its dividend payments over time. These stocks are attractive because they offer the benefit of steady payments and give investors the opportunity to reinvest their dividends to purchase additional shares of stock.

In terms of risk, most investors know that companies that pay consistent and rising dividends are most likely financially healthy and have strong cash flow. These companies are often more financially stable and have less volatile stock then the overall market, making them a good option for investors trying to secure steady retirement income. The average dividend yield is about 2%, according to data from Siblis Research, a European global equity valuation data provider, but there are stocks with yields as high as 6%, although they're much rarer.

And let's not forget another retirement income vehicle that has risen in popularity in the last decade: bonds. Bonds are considered low risk, so they don't provide as large a return, but for investors interested in making some extra money off the interest and remaining capital once they mature, bonds are a great option.

However, this doesn't mean that bonds and other fixed-income strategies don't come with their own challenges. According to Invesco's 2018 Global Fixed Income Study, while the 2008 crisis severely disrupted fixed-income markets and created large losses in many categories, the single biggest challenge facing fixed-income investors recently has been the low-yield environment. This situation has continued much longer than many investors anticipate, and has forced them to adapt and become more selective when working with bonds.

In 2008, in the throes of global financial duress, Warren Buffett wrote to Berkshire Hathaway shareholders: "Amid this bad news, however, never forget that our country has faced far worse travails in the past." Mr. Buffett went on to say that in the 20th century alone, the U.S. has dealt with two wars, a dozen or so market panics and recessions, virulent inflation and the Great Depression, which entailed many years of high unemployment. "America has had no shortage of challenges," he wrote. "Without fail, however, we've overcome them."

It's with this degree of optimism that we must help our clients plan for a meaningful, and fruitful, post-work life.

Eric Watson is a financial fiduciary, senior partner and managing director at Snowden Lane Partners, a nationally branded, open-architecture, hybrid registered investment adviser and broker-dealer that provides wealth advisory services to high-net-worth individuals, families and institutional clients.

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