NEW YORK — Advisers may want to think twice before loading a new retiree’s portfolio with equity investments, according to a retirement software developer.
Charles S. Yanikoski, president of Still River Retirement Planning Software Inc. in Harvard, Mass., said that although greater longevity increases the risk of retirees’ outliving their funds or seeing those assets erode due to inflation, taking on more investment risk is not the answer.
“When you’re talking about retirees, investment management is a lot less important than it is for younger people,” he said. “Retirees can’t take on that kind of risk; they usually can’t afford it.”
In a recent paper, “Half-Baked Investment Concepts for Retirees,” Mr. Yanikoski rebutted three popular planning ideas: investing for growth during retirement, including guaranteed-income sources in asset allocation and creating separate portfolios for different age periods in retirement.
“In order to determine risk capacity, you need to look at the elements of a client’s situation — not just assets and investment income but expenses and other income sources,” he said.
Other advisers agree that managing for future risk should be considered first when determining asset management.
“My concern would be that a client would retire today, go heavy into equities and then [be forced to] go back to work when the market goes down 30% over the next three years,” said certified financial planner Matthew Tuttle, president of Tuttle Wealth Management LLC in Stamford, Conn. The solution for advisers is not to eschew equities altogether, he said, but to focus on goals, risk capacity and risk tolerance rather than on trendy investments and beating the market.
When it comes to including guaranteed-income sources as part of asset allocation, Mr. Yanikoski said, while
Social Security can be considered a conservative asset, an adviser shouldn’t raise the equity component of a client’s portfolio. Other elements, such as long-term debt, expenses and non-guaranteed income, should be considered when determining the level of equity, he said.
“There are three things retirees can control: how much they spend, when they can retire or if they can go back to work, and how much they are leaving behind,” Mr. Yanikoski said. “If they’re vulnerable, the solution isn’t to make the portfolio riskier — the solution is to cut expenses or work a little longer.”
Steady retirement income streams may make clients more comfortable with placing some of their money in equities, but they also need a safety net as part of the plan to help guard against losses, said Elaine B. Morgillo, a CFP and president of Morgillo Financial Management Inc., a firm with offices in North Andover, Mass., and York, Maine.
“We always make sure that we have a safe pot of money so that we can get to a point where clients don’t have to worry about how the markets are doing,” she said. Laddering short-term certificates of deposit and short-term individual bonds ensures that money is either in reserve or maturing, Ms. Morgillo added.
Mr. Yanikoski also suggests to advisers that they reconsider building separate portfolios that adjust allocations for each age period during retirement. The split-portfolio concept assumes that the cash flow requirements will increase steadily over time and does not consider the possibility that surprises such as the need for long-term care may be imminent, he wrote.
“After the first 10 years in retirement, you may realize that your life is very different from what you thought it would be,” Mr. Yanikoski said. “If your spouse dies or you’re diagnosed with a serious illness, your portfolio needs to adjust to these changes, and your adviser should reanalyze right away.” To guard against these surprises, Mr. Yanikoski recommends that clients meet with their advisers each year to evaluate their changing risk capacity.
“We manage the portfolio’s progress each year against what was laid out in the retirement plan,” said CFP Frank Marzano, managing director of GM Advisory Group Inc. in Port Washington, N.Y. “If the client is 50 and looking to retire at 60, we evaluate how much he has accumulated, figure out if we’re behind or ahead, and make decisions from there.”
Extra measures that advisers can take include planning for catastrophes with life and long-term-care insurance, Mr. Tuttle said.
Comprehensive analysis that accounts for possible pitfalls is the way to go for investors, rather than advice that centers entirely on investment performance relative to the market, Mr. Yanikoski said.
