As a result of the economic climate, boomers in or near retirement need to do a better job of playing all the keys that contribute to retirement security. These are:
- Investment management;
- Lifestyle level (specifically amount of monthly expenses);
- Decisions about how long to work and whether to work part-time in retirement;
- Leveraging the value of their houses;
- The timing of Social Security redemptions; and
- Legacy wishes.
Until recently, clients could ignore some of these and remain financially secure. They could simply tell their advisor the date they wanted to retire and the lifestyle they wanted. They could reflexively claim Social Security precisely when they retired without calculation or thought. The house was often not deployed as a financial asset. Leaving money behind for children and grandchildren was an important and realistic goal. In sum, many could afford to limit the financial advisor’s role to managing money, because effective investment management could produce retirement security.
For those in their mid-50s and younger, effective investment management will one day be enough to assure a financially secure retirement. But for those within five years of retirement (or those now retired), the downturn’s toll is already too high and the time for sufficient recovery too short to expect effective investment management will be sufficient by itself. This means that for more boomers, the method to achieve quality retirement is more complex with more difficult trade-offs. As a result, all six keys to retirement security will have to be evaluated and utilized in the most effective manner.
Some will work longer, others will pull money from their homes in reverse mortgages and still others will annuitize more assets. These should not be “either/or” decisions.
Most clients cannot formulate the most effective strategy for themselves to optimize both life satisfaction and retirement security. They cannot harmonize the six keys to work together most effectively. They need a financial advisor to help them evaluate options, calculate prudent levels of spending and analyze the risks of each approach.
Of course, different clients have different styles of decision-making and different levels of advisor trust. Each client has to be handled differently. However, in general, it’s useful for advisors to identify each area in which the client has some leverage to affect retirement security.
Another reason why each of the elements of retirement security must be deployed most effectively is volatility has increased and is likely to continue. The goal of most retirees is to have consistent income to support consistent lifestyles. This is much easier to achieve when markets are stable and housing prices rise consistently. Getting income consistency in a volatile market is harder to manage. When the market dramatically decreases, it’s extremely detrimental to the future of the portfolio to withdraw income. If that is the only key the client can play, they’re stuck. If other approaches for income can be utilized, such as continued work, a home equity loan or expense reduction, assets can be preserved.
The current market and economic conditions are the worst most of us have experienced. The good news is that financial advisors are more important than ever. However, to do the best job, the role must be expanded. You must know your clients needs and preferences. And you must explain the six keys of retirement security and how they interrelate.
Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.