Living longer means longer retirement, which means clients may need to reassess their views on risk to meet financial needs.


Jon Lagerstedt: This is the first of a two-part conversation we’re having about helping your clients overcome longevity challenges—particularly those that could affect their lives in retirement. This week, we’re talking about helping clients revise their views on risk. I’m Jon Lagerstedt.

Todd Crawley: I’m Todd Crawley, and this is The Essential Practice podcast. Jon, as you mentioned in the outset, we’re living longer—that’s a reality. And while that’s great on many levels, we still need to fund our retirement—that’s the challenge. And so financial advisors have an opportunity to help their clients now and down the road.

Jon: You know, Todd, it’s funny. One of the biggest challenges clients face is getting a better understanding of risk, especially with their retirement accounts having to do so much of the heavy lifting to fund their lives in what very well could be an extended retirement. What do you think about that?

Todd: Taking on risk today is a whole other element than it was maybe, say, 10-15 years ago because the investing environment has changed.  I mean, think about the interest rate environment we’ve been living in the last eight or nine years, which has basically been zero.

And that usually was the safe haven for retirement accounts. As you got older, you shifted your allocation to more fixed-income type investments. Well, if you’ve done that here in the last seven or eight years, you didn’t have a whole lot of income to harvest there. So you kind of have to rethink your whole meaning of risk going forward.

Jon: You talk about this nine-year bull run that the market has been on, and I wonder out there for our audience and financial advisors, how many clients understand the risks that are embedded in the market today but are lulled into a sense of calm because it has been a heck of a ride with extremely low volatility for much of the way?

Todd: Yeah, you’re right. And another thing to think of is if you just retired in the last several years, that allocation you had to equities five years ago—if you’ve done nothing today—is a whole lot bigger because of the market moves than it was five years ago, so your allocation or risk in that portfolio may be greater than what you think.

Jon: Excellent point.

Todd: I think a big question today for folks in retirement is: “Where am I going to get that income?”

Jon: Working with a financial advisor, I would think that you could devise a strategy. One of the ones I thought about a little bit myself is utilizing some type of bucket strategy, for lack of a better term—a way to compartmentalize different streams of income so that you can have an income stream to help you through those first years of retirement, whatever duration that is. Your financial advisor might say “Let’s put together a really conservative allocation,” and that’s designed to give you that income stream with very little volatility in that first one to five years of retirement. In the meanwhile, establishing a second bucket where you take on a little more risk to allow for some growth to hopefully outdo inflation and give you some true growth in your portfolio.

And that second bucket, you would tap into it in years six through whatever it might be—10, 12, 15—until that’s depleted. And then you have a third bucket where you can take on the most risk and let that grow over that 10-12 year period that you’re depleting buckets one and two. So hopefully that’s grown your nest egg to be able to help accommodate this extended period of retirement that many, many retirees are now focused on.

People have this extended longevity, and it’s not unheard for a non-smoking couple age 65 today for one of those folks making it to 90 years old or beyond.

Todd: Exactly. We’re living a heck of a lot longer, so how do we not run out of money before our retirement is over, so to speak?

Jon: That’s a huge challenge for not only the folks going into retirement or already in retirement, but take any one of the generations and we’ve all got to start to put that thinking cap on and ask “How am I going to set myself up today to be able to potentially live a life that’s as long in retirement as it is in the workplace?”

Todd: Absolutely.

Jon: Well Todd, let’s wrap the conversation up here and pick it up again next time with a discussion on another pressing challenge clients face—under-funding their retirement. But for now, I’m Jon Lagerstedt.

Todd: I’m Todd Crawley, and this is The Essential Practice podcast.


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