Coaxing boomers to keep investing

Advisers must convince clients they need assets besides cash and fixed income to sustain retirement

The stock market has recovered from the plunge sustained during the financial crisis, but that doesn’t mean the confidence of your clients has been fully restored. Some fear lingers when it comes to investing, and chances are, you’ve seen this firsthand, particularly with clients close to retirement.

Understandably, clients don’t want to experience a repeat of 2008 (or the span of the last bear market from late 2007 to early 2009). Investor sensitivity is much higher today than it was prior to the financial crisis, and most clients are likely to become skittish at any sign that the stock market is going through a correction.

Gone are the days when that old standby, the Ibbotson chart on stocks, bonds, bills and inflation, could make the case for equities. Clients who are cautious about the future are not likely to feel emboldened by looking at long-term trend lines. This is especially true for baby boomers, who don’t sense that the phrase “long term” relates to their current position in life as retirement draws near.

Convincing them to own assets besides cash and fixed income requires both facts and an emotional appeal to their better judgment. The emotional discussion starts by acknowledging what everybody knows, which is that the market will go through periods of significant volatility. Recessions have not been eradicated and they may occur in the future — even when your clients are retired.

It’s important not to sugarcoat the realities of the investment environment. Confirm with clients that you understand the reality of investing in the markets and that your focus is to help them position their portfolio in a way that can effectively prepare them for the future. In the final years of the accumulation phase, that usually means putting greater emphasis on a more defensive posture within their equity holdings.

At the same time, clients should be realistic about putting too much money into fixed-income products. The 30-year downward trend in interest rates is nearly as low as it can go. For example, bonds today, especially long-dated maturities, carry much more inflation and interest risk than traditionally has been the case. So clients need to be smarter about how to invest in all asset classes.

RUNNING OUT OF MONEY

Another emotional point to discuss with clients is the risk of running out of money in retirement. This concern often greatly outweighs the risk of short-term market loss. Clients should prioritize their goals to manage spending and build their nest eggs throughout retirement to keep pace with living costs. A diversified portfolio, including equities, is one of the best solutions to reach this goal.

Demonstrating to clients how various portfolio models are intended to perform, given different risk levels, can help them understand their options more clearly. Beyond that, you can offer specific strategies designed to mitigate some of the market’s unpredictability. Options clients may want to consider include:

• Investment products that offer some principal protection and may provide better income opportunity than bank certificates of deposit or savings accounts.

• Continuing investment while they work. The final years of employment are often a time when individuals can boost their retirement savings. One of the best ways to increase their nest egg is to put more money into it. Enhancing systematic saving in the final years before retirement may help offset the impact of a volatile market.

• A “bucket” approach when retirement begins. This includes setting aside two to three years’ worth of savings in cash and cash equivalents that will provide liquidity for immediate needs. The rest might remain invested in a diversified portfolio that includes a mix of other types of investments that potentially have time to grow and overcome market volatility and inflation.

CASH ISN’T THE BEST IDEA

Too often, investor behavior is driven more by fears and concerns than realistic goals. A diversified portfolio that addresses protection and growth helps clients ride out market fluctuations. Abandoning ship and retreating to the sidelines in cash is usually not a successful long-term financial strategy. Advisers should be proactive in recommending a portfolio solution that will keep clients on pace for the retirement they desire.

Craig Brimhall is vice president of retirement wealth strategies for Ameriprise Financial Inc.