As the baby boom generation continues to
transition into retirement, financial advisers are facing the increasingly common challenge of clients who become overly conservative with their investments once they stop working.
"It's a weird mental state that happens, almost like a panic of not wanting to lose whatever they've saved for retirement," said Alex Goss, chief executive of Goss Advisors, which manages more than $3 billion worth of client assets.
"It's the biggest issue I come across with clients, and it's so infrequently talked about by our industry," he added. "I don't really understand it, because it's not like life stops at retirement."
Considering that the
average 401(k) balance is less than $95,000, it is safe to assume that most retirees are not sitting on the kind of assets that can be moved to a low-yielding but safe cash equivalent. And it doesn't help that interest rates are still hovering near historic lows.
But, as most advisers acknowledge, the natural survival instinct tends to kick in as soon as clients stop contributing to their retirement savings.
"It's very fortunate if we have a client who can just live off the income of a portfolio," said Mark Paccione, director of investment research at Captrust, which has $250 billion under management.
Mr. Paccione said that generating about 3% annually off a
conservative income allocation will not provide enough money for most retirees because of the limited size of their portfolio, combined with longer life expectancies and rising health care costs.
"You expect a person's mindset to change once they enter retirement because their life is changing dramatically," he said. "But part of the reason they get nervous is that they do have more time to worry about it and more time to watch the financial news, which will not make them feel better."
Mr. Paccione said he works to prepare clients for a retirement mindset by allocating assets into three separate buckets representing the ready cash of "capital preservation," the safer "income bucket" and the more aggressive "growth bucket."
"It's different than it was 15 or 20 years ago, when you went all to fixed income when you retired," he added. "Now you will live through multiple market cycles if you spend 20 or 30 years in retirement. People are living longer, but still they're retiring around the same age."
Separating the portfolio into buckets helps clients better accept the risk that is needed to generate enough investment return to avoid running out of money in retirement.
Tim Holsworth, president of AHP Financial Services, which has $200 million under management, said he relies on Monte Carlo simulations to help clients grasp the concept of investment risk in retirement.
"I always tell clients to not confuse retiring with dying, because if you're going to live 30 years in retirement we need to make the money last that long," he said. "We use goals-planning and simulation programs to try and appeal to logic by taking the emotion out of it. We try to explain that this is the only way it works and you have to take the good with the bad, in terms of market performance."
While
interest rates are slowly on the rise, they are still a long way from the environment of the 1980s, when income investors could sit safely sit on large allocations to bonds.
"Retirees today have to look at their portfolios differently than retirees did even 15 or 20 years ago," said Randy Allen, senior wealth adviser at Kayne Anderson Rudnick Wealth Advisors, which manages $20 billion.
"If we do our planning on the front end, we can model it out and show clients the cost of getting too conservative," he said. "That's usually the best way to deal with it. When it's in front of them, it usually helps to reshape their feelings about risk."
