The retirement challenge? Uncertainty

Douglas Barber has been a financial advisor for over three decades, and, as principal and advisor at Rehmann Financial, he has seen a lot of change in the investment landscape. This year, however, Barber has identified a particularly significant challenge facing his clients – and it could be at record levels.

“I categorize it under a single word: ‘uncertainty.’ I have been doing this for 34 years, and the level of uncertainty may be as high as I've ever seen it,” he says.

The problem is being exacerbated by improved medicine, food, and genetics, which all lead to longer lives. This increased lifespan means that financial planning must accommodate longer life expectancies, which introduces a great deal of uncertainty into the retirement planning process.

Barber also highlights the unpredictability surrounding Social Security as a key concern. “You really can’t plan for it right now. We know that the 2024 Social Security trustees report says the trust fund will run out of money in 2035. At that point, benefits would be reduced to about 78 cents on the dollar” unless changes are made, he explains.

This looming issue makes it challenging for advisors to create reliable long-term plans. As a result, Barber and his team focus heavily on income planning to ensure clients have sufficient funds to cover not just their everyday expenses but also significant healthcare and nursing-care costs in their later years.

The investment landscape has also undergone substantial changes over the last few years, adding to the uncertainty. Barber says, “I’ve done this long enough that there’s been a sea change in the fixed-income markets. I am old enough to remember going to college in the ‘80s when inflation and interest rates were through the roof.

“We had a bull market in bonds in the ‘90s and 2000s when yields dropped. Then the Federal Reserve lowered rates further after the Great Recession in 2008, and they stayed that way until the recent rise in inflation and the Federal Reserve’s aggressive rate increases to combat that. Suddenly, in the post-COVID era, we’ve had a major uptick in inflation and a resetting of higher fixed-income yields.”

This shift has necessitated a re-evaluation of investment strategies. “We’ve got to adjust to a new frontier that we haven’t seen since pre-2008,” he says. “Bonds are attractive again, and the Fed’s rate changes mean we need to rethink our portfolios. We can generate more income now. A core bond portfolio is now generating over five percent.”

Annuities, especially those with income riders, have also become more appealing due to rising rates. “Many of those annuities, especially the income riders on the annuities, which would guarantee lifetime income, have become more attractive because, as rates have gone up, they’ve been able to increase their distribution rates,” he explains.

This provides a sense of security for retirees looking to ensure they have a steady income stream.

Mobility is another significant trend among retirees. With housing prices at record highs, many are selling their homes and opting for mobile living solutions. "People are selling at the top of the market and buying RVs to travel for a few years before settling down," Barber said, although this may not apply in all states. In Michigan, for example, the Headlee Amendment caps property taxes, which can significantly increase if a new property is purchased. "Maybe I've been in my house for 30 years, so my property taxes have been fairly low. When I sell it, that gets uncapped. I buy a new place, I've got to pay taxes on the new purchase price, not on my old, grandfathered rates," he explained.

For high-net-worth clients, Barber tailors his strategies to include alternative investments and extensive estate planning. "High net worth clients want differentiation. They want investments that are going to lower the correlation to the markets in general," he said.

Alternatives such as private equity, hedge funds, and real estate provide diversification and potentially higher returns, which are particularly appealing in volatile markets. Moreover, the upcoming sunset of the Tax Cuts and Jobs Act has made estate planning even more critical. "We've had higher estate and gift tax brackets for almost 15 years. But with the limits potentially dropping, more clients could be hit by estate taxes," he explained.

Proactive planning can help mitigate these impacts and preserve wealth for future generations.

Some clients however, particularly those in the medical and dental fields, often require a different approach. "They tend to be younger clients, and so they're really in an aggressive allocation where they're trying to build wealth," Barber said.

Barber’s solution includes a mix of passive investments, such as index funds, and active management to capture growth opportunities. "The medical and dental practices, you're really trying from a risk management perspective to help them accumulate wealth and protect them using disability insurance and other risk management tools to help them meet their income [requirements]," he added.

Barber's comprehensive and modular approach to financial planning ensures that each client's unique needs are met. "Every client is different, and our strategies reflect that diversity," he said. By staying adaptable and responsive to market changes, Barber and his team at Rehmann Financial help clients navigate the complexities of retirement planning.

The key to success, according to Barber, is staying informed and adaptable. "The landscape is always changing, and so must our strategies," he said.

Adaptability, comprehensive planning, and individualized strategies ensures that clients are well-prepared to face whatever challenges the future may hold. Troy, Michigan headquartered Rehmann is one of the largest accounting, consulting and financial services firms in the Midwest. The company, which was established in 1941 has nearly 800 professionals working in offices across Michigan, Ohio and Florida.