Three retirement planning conversations advisers can't ignore

Working with clients to clearly define their priorities is a fundamental first step toward structuring a portfolio strategy

Jun 4, 2019 @ 3:55 pm

By Katherine Roy

Many people feel overwhelmed when it comes to saving and investing for retirement, particularly when the transition into this new life stage is imminent. Advisers play a critical role in supporting clients through their retirement journey, with the planning decisions made in the lead-up to retirement having a significant impact on outcomes.

In my role, I've seen first-hand the pitfalls and opportunities associated with guiding people through to the retirement finish line. Below are what I believe to be the three most pressing conversations advisers need to have with their clients to adequately prepare them for retirement.

Expectations around longevity and ability to work

One of the most common mistakes made by those planning for retirement is underestimating how long they will live. Recent J.P. Morgan research shows that at least one member of a 65-year-old couple now has a 90% chance of living to 80 or beyond. Living longer affects key retirement decisions such as how to make the most of your time, how to invest, when to claim Social Security and whether you might need long-term care.

Beyond longevity, many are overly optimistic about how long they can work, often resulting in a gap between anticipated retirement age and actual retirement age. While more than two-thirds of retirees expect to continue working until age 65 or older, in reality, less than a third are actually still working at this age.

Given the mismatch between assumptions and actual events, it's critical for advisers to be proactive with clients to manage expectations around the probability of living much longer than they expect. This means investing a portion of their portfolio for growth to maintain purchasing power over time and having a back-up plan in the event they exit the workforce sooner than expected.

Sequence-of-return risk and spending

Educating clients on the concept of sequence-of-return risk and taking proactive steps to mitigate this risk in advance of the retirement transition is critical. The return sequence experienced just before and after retirement, when wealth is greatest, can have a significant impact on retirement outcomes.

Demonstrating how powerful spending behaviors can be in different market conditions is important to establish expectations with clients should they enter retirement "at the wrong time" from a market perspective. Overspending or mistiming withdrawals can ravage a portfolio during challenging markets. Alternatively, reducing discretionary spending during these same periods or proactively harvesting for future spending needs during positive markets can produce better outcomes.

A 'bucketing' approach

Retirement transition means shifting from a singular focus — wealth accumulation — to multiple priorities: current spending needs, future expenses and perhaps a desire to leave a legacy. This shift typically introduces conflicting emotions that can derail any investment strategy.

Working with clients to clearly define these priorities is a fundamental first step toward structuring a portfolio strategy that can effectively take on varying levels of risk based on expense type or time horizon. It may be useful to match your client's dependable income sources (e.g., Social Security, fixed income) with fixed retirement expenses, while coordinating other investments (e.g., multi-asset solutions, equities) with more discretionary expenses.

(More: A new way to look at retirement income planning)

Another approach to consider is adopting a "bucket strategy" that aligns a client's time horizon with an investment strategy — an effective way to make clients comfortable with maintaining diversified allocations in retirement.

Katherine Roy is chief retirement strategist for J.P. Morgan Asset Management.


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