With the equity market wreaking havoc on retirement portfolios, advisers are helping clients reassess their priorities and determine which objectives to fund first.
Many investment-oriented advisers, in fact, said they are adding a greater financial planning component to their work, suggesting that clients return to simple budgets, sock away additional cash in savings accounts and draw up new plans for financial contingencies.
"People are coming through the walls these days, breaking the 50/51 rule," said John Dondero, a certified financial planner, referring to the old saw: "If you make $50, don't spend $51."
"We're taking two steps back to do a budget and working on deleveraging with some people," added Mr. Dondero, whose firm, Little & Dondero, a Jacksonville, Fla.-based affiliate of LPL Financial in Boston, manages $50 million. "Some people tell me they want to get into some stock mutual funds now, but they owe $90,000 in loans. I tell them, 'Don't even think about investing — you are leveraged to the hilt.'"
Clients who are more inclined to be fiscally conservative and have sufficient funds to cover their needs often have other concerns. For ex-ample, a married couple in their 50s who are clients of Kirchenbauer Financial Management and Consulting have been concerned about the market's toll on their 11th-grader's Section 529 plan. However, the portfolio was age-weighted and was invested mostly in cash and bonds, so it largely held its value while the equity markets suffered, noted Lisa Kirchenbauer, president of the Arlington, Va.-based firm, which manages $45 million.
However, that's not the case for many investors who are scrounging around for cash to take care of college needs, pay their debts and still have enough left over to fund retirement accounts.
"From a practical standpoint, if you had to choose one or the other — education or retirement — the retirement funding is where you want to make sure you're maximizing first, because there's much more you can do with that account than with the 529," Ms. Kirchenbauer said.
Clients will need several months to adjust to the new realities of lower equity prices, she added. Next year, Ms. Kirchenbauer will revisit everyone's plans and tell them how to reassess their priorities, she said.
"I don't want to do that this quarter," she explained. "It would be overly pessimistic and leave them feeling hopeless about what they can do about it."
Some clients with more immediate concerns, including homes that they can't unload and mortgages close to foreclosure, have had to consider unorthodox solutions to scrape by. Renee Porter-Medley, a Bonita Springs, Fla.-based certified financial planner with Rehmann Financial of Lansing, Mich., has a handful of clients whose real estate investments are endangering their retirement accounts.
Some of her clients who bought Florida homes with the intention of flipping them now are stuck with mortgages they can't afford and with houses they can't unload. They also face the possibility that frugal snowbirds will be looking for rental bargains — or not visiting Florida this winter at all — and therefore leaving the strapped homeowners without a supplemental income stream.
"I've had to ask [clients] point blank, 'What is the drop-dead point?'" said Ms. Porter-Medley, whose firm provides planning services only. "If the clients can't make these tough decisions, then it's not going to be OK."
Meanwhile, Ms. Porter-Medley has had to suggest to her clients the very real idea that sometimes foreclosure is the only way to get lenders to work with borrowers who are having a hard time making their monthly payments.
In the meantime, she has stressed the need for a cash nest egg for clients who can put the money away: two years of cash reserves for retirees or six months to a year of cash for those who are still working. Meanwhile, the investment portfolio and the 401(k) can continue to grow instead of being used as a piggy bank by cash-strapped clients.
Though some advisers see the current downturn as an opportunity for investors to add quality stocks on the cheap, others are implementing a more basic approach of pointing out areas where clients can pick up cash for immediate needs — without destroying potential by liquidating assets.
Not only does that include identifying all cash sources available in savings accounts, bonds and certificates of deposit, but it also means finding ways to save by refinancing debts at a lower rate or for a longer term. Budgeting to slash discretionary expenses also has be-come a new focus for advisers.
"My only fear is that if we get a rally that can easily turn around, people get lulled into thinking that it's OK," Ms. Kirchenbauer said. "I hope people will see this for the wake-up call that it really is — an opportunity to spend consciously and make better decisions to support their goals."
E-mail Darla Mercado at [email protected].
