Market shifts and an increase in client longevity have made it increasingly tough for advisors to create a plan that will allow their clients to use their wealth in retirement without depleting their assets, said retirement experts at a
"The penalty for running out of money is worse than the penalty for dying with money," said
Roth discussed new ideas to help clients manage retirement costs with
1. ALLOCATION SHIFTS
The initial years of retirement are when clients are most vulnerable to market tumbles — so advisors may want to think traditional allocations for the newly retired, Kitces said. In some recent research, he said, "We looked at what happens if you start more conservatively but spend down the bonds first."
The outcome: "You get slightly better results," Kitces said. "You own less in stocks on average but you finish slightly better — because if you get a horrible bear market at beginning, you own less in stocks."
The caveat, he added, was that such a glide path didn't guarantee a large bequest — but "if you aren't concerned about residual wealth, you do quite well."
Roth agreed, advising planners to design their client's portfolio in retirement with caution in mind following a glide path. "Chasing what's hot" can have catastrophic results for someone on a fixed income, he said.
2. PREVENT FLIGHT FROM BONDS
Recent fears about the bond market have clients asking to be moved more into equities, said the panelists, noting concern about the trend.
"The thing that worries me most is this idea that we're so afraid of what happens to bonds if rates rise that we go into stocks," Kitces said. "Running from something where you can lose 5% to something where you can lose 45% is not a good risk management strategy."
Don't demand that bonds be a cash generator, the panelists said; stick with government bonds rather than corporate bonds, which have a higher correlation to equities.
"The role of bonds is strictly a shock absorber," said Roth, who noted that having bonds in a retiree's portfolio can prevent large losses if a dip in the market occurs.
3. LONG-TERM CARE EVOLUTION
The panelists were mixed on long-term care coverage, with Roth suggesting that wealthy clients self-insure to the extent possible. After all, he argued, at the point when long-term care costs jump, clients will likely be cutting other costs — they won't be going out to eat, traveling or using a car.
Still, he said: "I believe in insurance."
Kitces, meanwhile, said he was "still a pretty strong advocate" for long-term care coverage. The sharp premium increases seen in the last couple of years were driven by a couple of industry miscalculations — one on rates of return, another on lapse rates — that are unlikely to be repeated, he argued. "Now coverage is expensive," he conceded, but added that he thought similar rate increases were unlikely.
4. ANNUITY RETHINK
Looking for an annuity for clients? Start by deferring
He also urged advisors to consider annuities as longevity insurance, not portfolio strategies. "Remember that annuities are not a net present value investment," Blanchett said. "Think of car insurance. Do you expect to make a profit?"
Kitces said he was looking at using deferred income annuities, which kick in after 30 years. Although he said the product still needed refining — inflation riders were a particular challenging, panelists said — he suggested it might become an effective longevity policy.
"There's a high risk of total loss," he said, if a client dies before the annuity payments begin. "But the leverage is so huge that if 5% of a portfolio is in there, then everything after 85 is covered."
|Copyright:||(c) 2014 Financial Planning. All rights Reserved.|
|Source:||Source Media, Inc.|