Fifteen retirement readiness tasks for clients

Wednesday, April 25th, 2012

In May, U.S. insurer Met Life issued a 28 page report, quan­ti­fy­ing where Amer­i­cans stand in terms of their prepa­ra­tion for retirement.

This readi­ness index mea­sures fif­teen tasks — attached to the report is a ques­tion­naire that advi­sors can take clients through to bench­mark where clients stand on each task and iden­tify areas to work on.

The fif­teen tasks for retire­ment readiness

The fif­teen tasks fall into five areas:

Activ­i­ties related to income and benefits.

This includes assess­ing when full time retire­ment will be finan­cially fea­si­ble, eval­u­at­ing the impact of changes in the econ­omy on pen­sions, invest­ments and retire­ment ben­e­fits and deter­min­ing what has to be done to receive the com­pany and Gov­ern­ment ben­e­fits that clients are enti­tled to.

Work related tasks

This makes up five of the fif­teen things to do.

These include decid­ing whether to fully retire or work part-time, iden­ti­fy­ing the options for full time or part time work in retire­ment, fig­ur­ing out if skills can be eas­ily trans­ferred to part-time work and explor­ing alter­nate career or part time oppor­tu­ni­ties in retirement.

Leisure related activities

Leisure related tasks include things like deter­min­ing the bal­ance between work and leisure in retire­ment and iden­ti­fy­ing per­sonal goals in retirement.

Rela­tion­ship tasks

Rela­tion­ship tasks to pre­pare for retire­ment cap­ture think­ing through the impact of retire­ment on rela­tion­ships with a spouse, fam­ily and friends and also con­sid­er­ing the effect on rela­tion­ships with co-workers.

Plan­ning for retirement

This includes deter­min­ing what it will take to have a sat­is­fy­ing retire­ment, iden­ti­fy­ing alter­nate plans should there be an unex­pected set­back related to health or finan­cial issues and also eval­u­at­ing whether retire­ment plans meet the demands of poten­tial changes.

Con­clu­sions on retire­ment readiness

This report reached a num­ber of gen­eral conclusions.

First, get­ting ready to retire is more com­pli­cated than just hav­ing enough money — there are many dimen­sions to a sat­is­fy­ing retirement.

In fact, the report points out that exist­ing retirees have pro­vided a road map to what has to hap­pen to max­i­mize the odds of a sat­is­fy­ing and ful­fill­ing retirement.

And sec­ond, com­plet­ing these tasks doesn’t mean that some­one should retire — but it does mean they can retire, they’re ready to retire.

The cur­rent think­ing on the tim­ing of retirement

Amer­i­cans are about evenly split on when they plan to retire — about half plan to retire at the age they’d been plan­ning to a cou­ple of years ago, the other half say they plan to work past the date they’d planned to.

Exist­ing retirees

About 64% of exist­ing retirees say they retired ear­lier than they’d expected, 33% retired when they’d expected to and only 3% said they’d retired later than expected.

The sur­vey didn’t ask if that early retire­ment was vol­un­tary — in all like­li­hood there were some cases in which com­pa­nies made the deci­sion for these early retirees.

Peo­ple feel­ing that they can retire on target

Peo­ple who say they can retire when they’d planned to were more likely to have estab­lished per­sonal goals. Estab­lish­ing those goals and then fol­low­ing through on them appears to focus peo­ple on the impor­tant activ­i­ties that will keep them on track.

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Tags: Alternate Plans, Benchmark, Co Workers, Compendium, Family And Friends, Government Benefits, Insurer, Opportunities In Retirement, Part Time Work, Pensions Investments, Personal Goals, Planning For Retirement, Planning Retirement, Questionnaire, Retirement Benefits, Retirement Plans, Retirement Readiness, Setback, Target, Time Opportunities
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The Coming Retirement Revolution — and What it Means to You

Wednesday, November 2nd, 2011

The com­ing retire­ment rev­o­lu­tion — and what it means to you

Most advi­sors look to seniors as a core part of their client base.

That’s why it’s essen­tial to under­stand how boomers are going to trans­form retire­ment, just as they have rede­fined every other stage of their lives. Let’s look at two new two pieces of research that quan­ti­fies boomers’ inten­tions in retirement.

A lead­ing researcher’s perspective

Michael Adams is founder of Envi­ron­ics Research Group, a leader in social val­ues research and author of a recent book on boomers in retire­ment. He con­trasts the atti­tudes towards retire­ment of today’s early boomers (aged 53 to 62) with the pre­vi­ous gen­er­a­tion of retirees, who were in their six­ties in 1992. As an exam­ple, he looked at today’s inten­tions for retire­ment among boomers com­pared to early retirees twenty years ago. Boomers are dra­mat­i­cally more likely to plan to engage in active out­door pur­suits, explore exotic places and take classes to develop their interests.

At the same time, they’re much more likely to be con­cerned about hav­ing enough money to live on; six in 10 intend to work in retire­ment, almost twice the level of retirees in 1992.

This will lead to stresses as boomers’ “I want it all and I want it now” mind­set clashes with their abil­ity to pay for this — and will also chal­lenge advi­sors in devel­op­ing retire­ment plans to fund some of those planned activities.

Not their par­ents’ retirees

A recent Mer­rill Lynch sur­vey of afflu­ent Amer­i­can boomers aged 46 to 64 pro­vides hard data on the extent to which boomers are plan­ning to oper­ate entirely dif­fer­ently in retire­ment than pre­vi­ous retirees.

Here are some of the sur­vey find­ings among these boomers, all with invest­ments of at least $250,000. First of all, they were asked to com­pare their expec­ta­tions to their par­ents’ retirement:

• 86% plan a more active lifestyle
• 84% say their retire­ment will look different
• 72% expect a higher stan­dard of living

Dig­ging deeper in the kinds of activ­i­ties boomers antic­i­pate in retire­ment con­firms some of the data from Michael Adams’ research:

• 70% plan to keep working
• 32% expect to pur­sue addi­tional pro­fes­sional success
• 26% antic­i­pate to take courses and con­tinue their education
• 24% plan to learn a new trade
• 20% expect to start or fur­ther their own business

Another recent research study spon­sored by US Trust rein­forced the dra­matic dif­fer­ence in pri­or­i­ties for boomers com­pared to pre­vi­ous gen­er­a­tions. Investors with at least $3 mil­lion were asked what they wanted to achieve with their money. Finan­cial free­dom and finan­cial secu­rity ranked at the top — no sur­prise there. Then came travel and improv­ing rela­tion­ships with fam­ily and friends. Past gen­er­a­tions would have given pri­or­ity to leav­ing an inher­i­tance — wealthy boomers ranked it num­ber five, just ahead of “hav­ing fun” in sixth place .… Proof again that these are not your par­ents’ retirees.

Gen­der dif­fer­ences in retire­ment expectations

The Mer­rill Lynch sur­vey also pointed out sig­nif­i­cant dif­fer­ences in how men and women expect to spend time in retire­ment. Here are the responses among afflu­ent men and women who are not yet retired about the activ­i­ties they plan to pur­sue once retired:

Seven impli­ca­tions for retire­ment planning

There are a num­ber of crit­i­cal impli­ca­tions from this research that could put pres­sure on exist­ing retire­ment plans:

1. Reex­am­ine the assump­tions on retire­ment spending

The con­ven­tional think­ing on spend­ing in retire­ment was that there would be a burst of spend­ing in the imme­di­ate years after retire­ment on things like travel, after which health issues and the fatigue asso­ci­ated with age would lead to less active lives and lower spending.

That may in fact be the case with afflu­ent boomers .… but it’s clear that most will be dragged into their rock­ing chairs kick­ing and scream­ing. It’s pos­si­ble that the appetite for spend­ing in retire­ment won’t abate, but will con­tinue longer than is cur­rently antic­i­pated — putting stress on retire­ment plans that don’t account for this.

2. Dig deep on each client’s retire­ment thinking

Just as no two clients are alike before retire­ment, no two will be alike in retire­ment. Clients with sim­i­lar back­grounds and in sim­i­lar finan­cial sit­u­a­tions can have entirely dif­fer­ent plans for retire­ment. If you haven’t had a detailed con­ver­sa­tion with clients about exactly what the visu­al­ize in retire­ment, now’s the time to have that chat. And be par­tic­u­larly alert to dif­fer­ences in plans and expec­ta­tions between spouses

3. Tap into the inter­est in active travel

Last week, I wrote an arti­cle on a research study among ultra afflu­ent Amer­i­cans con­ducted by US Trust, in which I pointed to the strong pri­or­ity to travel in retire­ment. If retirees are a key group for you, con­sider mak­ing your­self a resource for retired clients look­ing for new and excit­ing adven­tures to explore.

If you missed it, here’s an excerpt from that article:

The impor­tance of travel cre­ates an oppor­tu­nity for advi­sors look­ing to deepen client rela­tion­ships. Con­sider explor­ing a rela­tion­ship with a travel agent who spe­cial­izes in travel for active seniors — of note, the kind of travel most retired boomers have in mind is very dif­fer­ent than the bus tours of Europe their par­ents went on. Some advi­sors have seen a great response to quar­terly pre­sen­ta­tions on inter­est­ing and unusual travel des­ti­na­tions — and in some cases have estab­lished refer­ral rela­tion­ships with travel agents spe­cial­iz­ing in high end travel. (Note that high end trips for seniors are one of the fastest grow­ing niches in the travel industry.)

As part of this, be sure to inform your­self about out of coun­try health insur­ance options for seniors — health insur­ance while abroad is a big con­cern for many retirees inter­ested in travelling.

And here’s the entire piece on new research find­ings among afflu­ent investors.

Arti­cle: http://​www​.cli​entin​sights​.ca/​a​r​t​i​c​l​e​/​r​e​d​-​f​l​a​g​s​-​f​o​r​-​a​d​v​i​s​o​r​s​-​c​o​m​m​u​n​i​c​a​t​i​o​n​-​g​a​p​s​-​w​i​t​h​-​a​f​f​l​u​e​n​t​-​c​l​i​e​nts

Video: http://​cli​entin​sights​.ca/​v​i​d​e​o​/​d​a​n​-​r​i​c​h​a​r​d​s​-​r​e​d​-​f​l​a​g​s​-​f​o​r​-​a​d​v​i​s​o​r​s​-​c​o​m​m​u​n​i​c​a​t​i​o​n​-​g​a​p​s​-​w​i​h​-​a​f​f​l​u​ent clients/type:investor

4. Help retirees see the impact of char­i­ta­ble giv­ing now

Another find­ing from the US Trust research is that many wealthy Amer­i­cans with over $3 mil­lion in assets are inter­ested in see­ing the impact their giv­ing now, rather than leav­ing a legacy when they pass away. In some cases, that’s influ­enced by the desire for acknowl­edge­ment and recog­ni­tion for their char­i­ta­ble contributions.

Despite this, four in 10 afflu­ent Amer­i­cans haven’t dis­cussed or sought advice about legacy goals or their phil­an­thropic strate­gies. It’s almost cer­tain that the num­bers are sim­i­lar in Canada. If you’re deal­ing with afflu­ent clients, you need to engage them in a con­ver­sa­tion about where char­i­ta­ble giv­ing lies in their pri­or­i­ties and then help give life to their desires.

5. Be cau­tious about income from part-time work

Some suc­cess­ful boomers visu­al­ize life in retire­ment as a suc­ces­sion of well paid board jobs and con­sult­ing assign­ments, per­haps serv­ing as exec­u­tive res­i­dence at the local uni­ver­sity. While that might describe life in retire­ment for a for­tu­nate few, the surge in retired boomers com­pet­ing for part time work will limit these kinds of oppor­tu­ni­ties. Retire­ment plans should be cau­tious about rely­ing on sig­nif­i­cant income from part-time work while in retire­ment, espe­cially given the fre­quency with which seniors run into health issues that con­strain the abil­ity to work.

Be espe­cially cau­tious in cases where clients plan to oper­ate their own busi­ness. Unless a client is con­tin­u­ing a busi­ness that they’ve been run­ning before they retire, busi­nesses in retire­ment should be viewed as hob­bies that will cost money, not as even a mod­est source of income. This is espe­cially the case with start-ups, whose fail­ure rate is notorious.

6. Fac­tor in the impact of health costs

Adding to the pos­si­ble strain on retire­ment bud­gets are new med­ical advances that are extend­ing lifes­pans — over the past hun­dred years, life expectancy at birth has increased by a remark­able 30 years, from under 50 in 1900 to 78 for a new­born child today. If you have a rea­son­ably healthy cou­ple as clients, there’s a good chance that one or both will live well into their 90s or beyond.

The down­side is that this longevity comes at a cost — with 80 year olds lin­ing up for hip replace­ments, it’s likely that we’ll see more boomer retirees writ­ing checks to get timely care. And while they could wait, we all know that boomers have never been known for their patience.

Mean­while, sci­ence is extend­ing seniors’ phys­i­cal vital­ity, progress on men­tal capac­ity is slower to come. There’s alarm­ing data on the inci­dence of demen­tia above age 70; this will put pres­sure both on fam­i­lies’ abil­ity to cope as well as the abil­ity to fund the qual­ity of care that most retirees and their fam­i­lies want.

Given the mag­ni­tude of uncer­tainty, it’s impos­si­ble to fac­tor all of these pos­si­bil­i­ties into a retire­ment plan with any accu­racy. For clients who can afford long term care insur­ance, the best route to reduc­ing the risk of health issues of this kind may be to invest in that kind of insurance.

7. Encour­age clients to con­sider extend­ing full time work

In some cases, a pre-retiree’s finan­cial sit­u­a­tion is such that money won’t be a con­cern regard­less of how long he or she lives — but given extended lifes­pans and the desire to pur­sue active and poten­tially costly pur­suits, those clients are rel­a­tively rare.

Last year I spoke with Ali­cia Munnell, Direc­tor of the Cen­ter for Retire­ment Research at Boston Col­lege. Dur­ing our inter­view, I asked what advice she would offer baby boomers con­tem­plat­ing retire­ment. Her answer was sim­ple: “Most should work as long as they pos­si­bly can.”

We’re all crea­tures of habit and it’s nat­ural to expect the future to look sim­i­lar to the imme­di­ate past. While that may be true of some aspects of our lives, it won’t be true of boomers in retire­ment — and to serve them effec­tively, advi­sors will have to dis­card pre­con­cep­tions about retire­ment from the past and embrace a very dif­fer­ent reality.

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Tags: Boomers, Clashes, Enough Money, Exotic Places, Merrill Lynch, Michael Adams, Mindset, Outdoor Pursuits, Research Group, Researcher, Retirement Fund, Retirement Plan, Retirement Plans, Retirement Revolution, Sixties, Social Values, Stresses, Survey Findings, Twenty Years, Two Pieces
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Helping Clients Close the Retirement Gap

Wednesday, November 2nd, 2011

“How do I close the gap on hit­ting my retire­ment goals?”

If you’re meet­ing with clients in their 40s and 50s, chances are you’re run into that ques­tion. Weak equity mar­kets over the past decade, low inter­est rates and a new con­sen­sus on a muted out­look for future returns means that some clients who five years ago were on track to retire at 60 or 62 can no longer be con­fi­dent about doing so.

It’s here that advi­sors can add real value, as you’re able to engage clients fac­ing a short­fall in a dis­cus­sion about the six options avail­able to them:

• Option 1: Work longer
• Option 2: Work part time after retirement
• Option 3: Increase the risk in asset mix before and dur­ing retire­ment to increase poten­tial returns
• Option 4: Change retire­ment plans; down­size houses ear­lier or cut back on spending
• Option 5: Reduce spend­ing now and invest more lead­ing up to retirement
• Option 6: Buy lot­tery tickets

Set­ting aside option 6, every solu­tion to clos­ing the gap en route to retire­ment will likely include some com­bi­na­tion of these alter­na­tives. And it’s here that finan­cial advi­sors can add real value; clar­i­fy­ing alter­na­tives and help­ing clients under­stand the trade­offs avail­able to them.

His­tor­i­cally, some advi­sors have been reluc­tant to get into con­ver­sa­tions about client bud­get­ing and spend­ing, focus­ing on the invest­ment side of the equa­tion. That may have worked in the past, but for clients look­ing to close a short­fall in retire­ment plans, you can’t ignore the impact of spend­ing, both now and in retire­ment. As part of that, an inter­ac­tive new web site gives clients the tools to quan­tify and man­age those reductions.

Quan­ti­fy­ing “the latte effect”

Most advi­sors have heard of “the latte effect;” the big impact that a small reduc­tion in non-essential spend­ing make on retire­ment portfolios.

And while many clients are vaguely aware of this, the chal­lenge is get­ting them to take action.

Iner­tia is an incred­i­bly pow­er­ful bar­rier to change. Telling peo­ple they need to alter behav­iour doesn’t work; they have to dis­cover this for them­selves. That’s why an inter­ac­tive sav­ings cal­cu­la­tor on a web­site called bills​.com (http://​www​.bills​.com/​w​a​y​s​-​t​o​-​s​a​ve/) offers an effec­tive way to show clients what hap­pens if they reduce spending.

There are three sim­ple steps. First, clients choose the return that they’ll earn on their sav­ings from 1% to 10%. Next, they select the length of time for which these sav­ings will be main­tained; any­where from 1 year to 30 years.

Finally, the site allows peo­ple to look at 20 ways they can cut back. From daily cof­fees and snacks to bot­tled water, gym mem­ber­ships, lot­tery tick­ets, enter­tain­ment and din­ing out. You pick a cat­e­gory and how much you think could be cut. Depend­ing on the expen­di­ture, the sav­ings are shown on a weekly or monthly basis. As peo­ple go through the dif­fer­ent cat­e­gories, there is a run­ning tally of how much bet­ter off they’ll be as a result.

Clients could go through this process in two dif­fer­ent ways. One is to go through each cat­e­gory look­ing for sav­ings and see where they end up. The other is to set a monthly sav­ings goal and then go through each cat­e­gory look­ing for ways to get to that goal.

Help­ing clients stick to their plan

Imag­ine that a 45 year old cou­ple chooses a 20 year time­frame and a 6% return on the amount they save, based on an all-equity port­fo­lio of qual­ity div­i­dend stocks. Hav­ing done that, they decide to elim­i­nate their two daily lattes while at work. At $4 each, that adds up to $80 a week that they put into a TFSA. By doing this alone, in 20 years they end up with an extra $160,000 in retire­ment sav­ings; at a 4% with­drawal rate, that works out to an extra $125 a week to spend in retirement.

Or let’s sup­pose they iden­tify weekly sav­ings of $200, adding up to $10,400 annu­ally. Of this amount, half goes to fund quar­terly long week­end mini-vacations in nearby cities, the other half goes into a TFSA for retirement.

After 20 years, that $100 a week into their retire­ment fund accu­mu­lates to just over $200,000. One way to trans­late this into con­crete terms is to tell clients that at a con­ser­v­a­tive 4% with­drawal rate, set­ting aside an extra $100 a week for the next 20 years results in an extra $150 a week for the dura­tion of their retire­ment, indexed for inflation.

As for the other half of their sav­ings that’s allo­cated to quar­terly mini-vacations, this is dri­ven by two pieces of behav­ioural research.

One relates to the need for short term rein­force­ment to main­tain dis­ci­pline. Quite sim­ply, most peo­ple need more than the prospect of a more com­fort­able retire­ment in 20 years time to sus­tain short term sac­ri­fice. That quar­terly mini-vacation pro­vides reg­u­lar imme­di­ate rewards en route to that long term goal.

The other research is on the pay­off from hol­i­days, some­thing I’ve writ­ten about before. There are three ways that peo­ple get a lift from vaca­tions; the antic­i­pa­tion lead­ing up to them, the enjoy­ment while on hol­i­day and the pos­i­tive mem­o­ries after­wards. What’s fas­ci­nat­ing is that as a gen­eral rule, the most pow­er­ful of these three ben­e­fits from vaca­tions is the antic­i­pa­tion in advance of get­ting away.

The con­clu­sion is very sim­ple: In addi­tion to tak­ing peri­odic longer breaks to decom­press and recharge, we’d all be bet­ter off if we sched­uled more fre­quent, shorter hol­i­days, so that we always have some­thing com­ing up to look for­ward to. That’s true for us and it’s just as true for our clients.

A last obser­va­tion on this site: Many clients who are fairly fru­gal or who don’t have to be con­cerned about their retire­ment still worry about the “live for today” mind­set of their chil­dren. The site can be a use­ful resource for your clients, but can be even more effec­tive if they can per­suade their kids to spend some time with it.

Note: The extra dol­lars at retire­ment are actu­ally greater than shown on the site, since the cost of those lattes and gym mem­ber­ships will go up with infla­tion. Off­set­ting that, the dol­lar amount the site shows clients end­ing up with down the road is in today’s dol­lars and will have lost pur­chas­ing power. In the inter­est of sim­plic­ity, I sug­gest you set this aside when hav­ing this con­ver­sa­tion with clients.

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Tags: 40s, 50s, Asset Mix, Closing The Gap, Consensus, Conversations, Financial Advisors, Future Returns, Gap, Inertia, Investment Side, Low Interest Rates, Option 1, Retirement Goals, Retirement Option, Retirement Plans, Retirement Portfolios, Shortfall, Tradeoffs, Work Part Time
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The Coming Retirement Revolution – And What It Means To You

Wednesday, September 28th, 2011

The com­ing retire­ment rev­o­lu­tion — and what it means to you

Most advi­sors look to seniors as a core part of their client base.

That’s why it’s essen­tial to under­stand how boomers are going to trans­form retire­ment, just as they have rede­fined every other stage of their lives. Let’s look at two new two pieces of research that quan­ti­fies boomers’ inten­tions in retirement.

A lead­ing researcher’s perspective

Michael Adams is founder of Envi­ron­ics Research Group, a leader in social val­ues research and author of a recent book on boomers in retire­ment. He con­trasts the atti­tudes towards retire­ment of today’s early boomers (aged 53 to 62) with the pre­vi­ous gen­er­a­tion of retirees, who were in their six­ties in 1992. As an exam­ple, he looked at today’s inten­tions for retire­ment among boomers com­pared to early retirees twenty years ago. Boomers are dra­mat­i­cally more likely to plan to engage in active out­door pur­suits, explore exotic places and take classes to develop their interests.

At the same time, they’re much more likely to be con­cerned about hav­ing enough money to live on; six in 10 intend to work in retire­ment, almost twice the level of retirees in 1992.

This will lead to stresses as boomers’ “I want it all and I want it now” mind­set clashes with their abil­ity to pay for this — and will also chal­lenge advi­sors in devel­op­ing retire­ment plans to fund some of those planned activities.

Not their par­ents’ retirees

A recent Mer­rill Lynch sur­vey of afflu­ent Amer­i­can boomers aged 46 to 64 pro­vides hard data on the extent to which boomers are plan­ning to oper­ate entirely dif­fer­ently in retire­ment than pre­vi­ous retirees.

Here are some of the sur­vey find­ings among these boomers, all with invest­ments of at least $250,000. First of all, they were asked to com­pare their expec­ta­tions to their par­ents’ retirement:

• 86% plan a more active lifestyle
• 84% say their retire­ment will look different
• 72% expect a higher stan­dard of living

Dig­ging deeper in the kinds of activ­i­ties boomers antic­i­pate in retire­ment con­firms some of the data from Michael Adams’ research:

• 70% plan to keep working
• 32% expect to pur­sue addi­tional pro­fes­sional success
• 26% antic­i­pate to take courses and con­tinue their education
• 24% plan to learn a new trade
• 20% expect to start or fur­ther their own business

Another recent research study spon­sored by US Trust rein­forced the dra­matic dif­fer­ence in pri­or­i­ties for boomers com­pared to pre­vi­ous gen­er­a­tions. Investors with at least $3 mil­lion were asked what they wanted to achieve with their money. Finan­cial free­dom and finan­cial secu­rity ranked at the top — no sur­prise there. Then came travel and improv­ing rela­tion­ships with fam­ily and friends. Past gen­er­a­tions would have given pri­or­ity to leav­ing an inher­i­tance — wealthy boomers ranked it num­ber five, just ahead of “hav­ing fun” in sixth place .… Proof again that these are not your par­ents’ retirees.

Gen­der dif­fer­ences in retire­ment expectations

The Mer­rill Lynch sur­vey also pointed out sig­nif­i­cant dif­fer­ences in how men and women expect to spend time in retire­ment. Here are the responses among afflu­ent men and women who are not yet retired about the activ­i­ties they plan to pur­sue once retired:

Seven impli­ca­tions for retire­ment planning

There are a num­ber of crit­i­cal impli­ca­tions from this research that could put pres­sure on exist­ing retire­ment plans:

1. Reex­am­ine the assump­tions on retire­ment spending

The con­ven­tional think­ing on spend­ing in retire­ment was that there would be a burst of spend­ing in the imme­di­ate years after retire­ment on things like travel, after which health issues and the fatigue asso­ci­ated with age would lead to less active lives and lower spending.

That may in fact be the case with afflu­ent boomers .… but it’s clear that most will be dragged into their rock­ing chairs kick­ing and scream­ing. It’s pos­si­ble that the appetite for spend­ing in retire­ment won’t abate, but will con­tinue longer than is cur­rently antic­i­pated — putting stress on retire­ment plans that don’t account for this.

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Tags: Boomers, Clashes, Enough Money, Exotic Places, Merrill Lynch, Michael Adams, Mindset, Outdoor Pursuits, Research Group, Researcher, Retirement Fund, Retirement Plan, Retirement Plans, Retirement Revolution, Sixties, Social Values, Stresses, Survey Findings, Twenty Years, Two Pieces
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Today’s Most Important Client Conversation

Wednesday, November 24th, 2010

Of all the assump­tions that go into retire­ment plans, none has a big­ger impact than the expected return on a client’s portfolio.

Media cov­er­age about the returns investors can expect is not gen­er­ally help­ful in bring­ing clar­ity to this ques­tion .  Often the media fea­tures attention-seeking apoc­a­lyp­tic voices of doom. And in part it’s because when the media talks about a return fore­cast, they often fail to clar­ify whether that return is before or after infla­tion and whether it’s for equi­ties only or for a bal­anced port­fo­lio.

Fram­ing a client conversation

Given the impor­tance of the deci­sion on the expected return on invest­ments, this is one of the most impor­tant con­ver­sa­tions you can have with your clients.

You could start by remind­ing clients that over the very long term, stocks have aver­aged a pre-inflation return of about 10% a year – even after the mar­ket tur­moil of 2008. Then acknowl­edge that in the last while, many cred­i­ble indus­try voices have sug­gested that it would be over-optimistic to expect this kind of return going forward

When it comes to your return assump­tions, there are obvi­ous costs to being too bull­ish — overly rosy assump­tions can result in com­pla­cency and ulti­mately dis­ap­point­ment as peo­ple to fail to save enough and fall short of their goals as a result.

But there’s a price to being too con­ser­v­a­tive as well, as overly pes­simistic assump­tions can lead to undue stress and to investors mak­ing bad finan­cial choices. After all, if you think you’re only going to get low sin­gle digit returns on stocks, why not just buy GICs?

Three key decisions

To think intel­li­gently about expected returns, you need to talk to your clients about three things.

First, shift their think­ing to after infla­tion or real returns  instead of the nom­i­nal, pre-inflation returns so com­monly used.  This way, you’ll focus on spend­ing power – what really counts in retire­ment. Indeed this is what sophis­ti­cated pen­sion plans and high net worth investors  focus on.

Sec­ond, you have to help clients extend their time­frame. The shorter their time­frame, the more dis­per­sion they’ll expe­ri­ence on returns – pick one year as your time hori­zon and you could expe­ri­ence swings of 50% in either direction.

Even five and ten year peri­ods sub­ject you to sub­stan­tial swings in returns on stocks, espe­cially if your clients do what many investors do – and set their expec­ta­tions based on what hap­pened in the last three to five years.

The only way to bring sta­bil­ity to investors’ expected returns is to fol­low pen­sion funds and high net worth investors – and look out fif­teen or twenty years. That may seem an unduly long time­frame to some clients, but in fact that’s the min­i­mum hori­zon that most Cana­di­ans need to think about. Even if your clients are a 65 year old cou­ple, half the time one of them will live to age 90. And one in ten cou­ples will see the last sur­vivor reach age 98 – a thirty-three time hori­zon.

Adver­tise­ment

Look­ing inside aver­age returns

The third key deci­sion for investors is to look beyond averages.

Recently, I sat down with Michael Nairne and his team at Tacita Cap­i­tal to look at data on stock mar­ket returns in the U. S. going back to 1926.

In the 85 years since then, after infla­tion returns have aver­aged 6.6%. The big dif­fi­culty with an aver­age num­ber is how often you’ll be below it. Given the hard­ships  imposed from under­per­form­ing a return assump­tion, when select­ing the fore­cast return for the equity com­po­nent of their port­fo­lio you need to help clients look beyond the aver­age return to the dis­tri­b­u­tion of returns that got to that aver­age –that will tell them how badly they might fall short based on his­tor­i­cal precedent.

Since 1926, there have been 65 twenty-year peri­ods. If we list the real returns dur­ing those 65 peri­ods from high­est to low­est – and look at how often  those returns hap­pened, here’s what you end up with.

Annual return after infla­tion in 65 20-year peri­ods -  1926 to 2009:

Pick­ing the right number

In rec­om­mend­ing  the expected return for the stock com­po­nent of clients’ invest­ments, you could pick the after infla­tion return that’s half way down the list – that would give you a return of 8.5%.  Despite this, given the price of falling short of the return assump­tion, few advi­sors would sug­gest assum­ing the his­tor­i­cal median of an 8.5% real return on stocks.

For most investors, assum­ing a real return on equi­ties of 3% to 5% will likely make sense; 5% was achieved two thirds of the time, 3% was exceeded 80% of the time.

To put these num­bers in per­spec­tive, the CPP Invest­ment Board assumes a real return of 4.2% for a port­fo­lio with a 60% stock weight­ing, reflect­ing equity returns of 5% or more. And a recent arti­cle in the Finan­cial Analyst’s Jour­nal fore­cast a real return of 4% for U.S. stocks.

Finally, for clients who want to be really cau­tious, you could pick 2%; 1.8% was deliv­ered 95% of the time, in 62 out of 65 twenty year periods.

Of note, the worst after infla­tion returns all occurred dur­ing the high infla­tion years in the 1970s. As a result, your rec­om­men­da­tion on the return assump­tion for the stock com­po­nent of clients’ sav­ings will be heav­ily influ­enced by your con­cern about a return to inflation.

Pick­ing the return assump­tion to rec­om­mend for equi­ties will vary with your own and your clients’ atti­tude towards risk – there clearly is no one right number.

How­ever, by focus­ing on after infla­tion returns, tak­ing a long term view and dig­ging deep into the range of his­tor­i­cal expe­ri­ence, you can help clients end up with a real­is­tic num­ber that strikes the right bal­ance between undue opti­mism and extreme pessimism.

To read the full col­umn in Invest­ment Exec­u­tive, click here:

http://​www​.invest​mentex​ec​u​tive​.com/​c​l​i​e​n​t​/​e​n​/​N​e​w​s​/​D​e​t​a​i​l​N​e​w​s​.​a​s​p​?​I​d​P​u​b​=​1​9​4​&​a​m​p​;​I​d​=​5​3​0​1​6​&​a​m​p​;​c​a​t​=​3​0​&​a​m​p​;​I​d​S​e​c​t​i​o​n​=​3​0​&​a​m​p​;​P​a​g​e​M​e​m​=​&​a​m​p​;​n​b​N​ews

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Tags: Balanced Portfolio, Clarity, Compendium, Complacency, Conversations, Disappointment, Doom, Financial Choices, Industry Voices, Inflation, Market Turmoil, Media Coverage, Media Features, Pessimistic Assumptions, Retirement Plans, Return Assumptions, Return On Investments, Target, Term Stocks, Undue Stress
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Ten Steps to Boost Your Resiliency

Wednesday, July 21st, 2010

There are many qual­i­ties that are essen­tial for advi­sors to suc­ceed — focus, self dis­ci­pline, a strong work ethic and good lis­ten­ing and com­mu­ni­ca­tion skills to name just a few.

But there’s one other essen­tial qual­ity to suc­cess, espe­cially dur­ing tough mar­kets such as we’ve seen of late — that qual­ity is resiliency, the abil­ity to bounce back from dis­ap­point­ment and frustration.

While closely related, resiliency and self dis­ci­pline aren’t quite the same thing. Self-discipline is get­ting out of your com­fort zone and begin­ning to do what you need to do, not just what you feel com­fort­able and like doing. Resiliency is the abil­ity to con­tinue engag­ing in that “need to do” activ­ity, even in the face of fail­ure and dis­cour­age­ment; some­times, it’s the abil­ity to do any­thing at all when feel­ing beaten down by events.

Resiliency is espe­cially impor­tant in times when you tough con­ver­sa­tions and rejec­tion are the norm. Research at an out­bound call cen­ter for a tele­com mea­sured the nat­ural level of resiliency among employ­ees — those scor­ing in the top half of a resiliency mea­sure had more than twice the sales of those in the bot­tom half.

When start­ing out in the busi­ness and in the early stages of build­ing a client base, most advi­sors needed a cer­tain level of resiliency. The chal­lenge for many vet­eran advi­sors is that suc­cess has reduced the need for the “bounce back” abil­ity they had when they started — and many have lost the apti­tude to deal with a steady stream of tough con­ver­sa­tions such as we’re expe­ri­enc­ing today.

This can be espe­cially prob­lem­atic after con­ver­sa­tions with long time clients with whom we’ve built close rela­tion­ships and who now feel let down and dis­cour­aged. It’s one thing being rejected by some­one we hardly know, it’s quite another hav­ing a dis­cus­sion with a long stand­ing client about the poten­tial need to scale back their retire­ment plans.

And the chal­lenge of resiliency is even more pro­nounced for advi­sors who feel dis­cour­aged by the finan­cial rever­sals in their busi­ness and their own portfolios.

Like all traits, peo­ple start with nat­ural lev­els of resiliency that vary widely — but like most qual­i­ties, resiliency can be learned and devel­oped as well. Just to be clear, being resilient doesn’t mean we ignore tough con­ver­sa­tions (that would mean we had no con­science, the mark of a socio­pathic personality).

Rather, being resilient means we put in place cop­ing skills to enable us to oper­ate at a rea­son­able level of effec­tive­ness even after dis­ap­point­ment, so we can help our clients through the cur­rent period.

Some of the ways to build your resiliency:

1. Start by rec­og­niz­ing how crit­i­cally impor­tant a qual­ity resiliency is — when­ever you’re tempted to throw in the towel, remem­ber that the mea­sure of your suc­cess is not whether you fail, but how you respond to fail­ure. Bounc­ing back from rever­sal is the real test of your com­mit­ment; there’s an apt six word Japan­ese proverb that speaks to this point — “Fall seven times, get up eight.”

2. You need to fun­da­men­tally believe that we’re going to work through the cur­rent tough times — that we’ll nav­i­gate through the cur­rent eco­nomic and mar­ket chal­lenges and come out of the other end. Seek out pos­i­tive mes­sages in the media to rein­force this conviction.

3.  Under­stand that dis­ap­point­ment comes with the ter­ri­tory. Just as investors need to expect that we’ll run through rough patches in mar­kets, advi­sors need to antic­i­pate that we’re all going to have bad days, weeks, months, even occa­sion­ally bad years.

4. Develop the habit of pos­i­tive self talk (”I’m going to tough this out”, “I did every­thing right on that call — I was just talk­ing to the wrong per­son”) rather than neg­a­tive self talk (”I knew that would never work”, “Why does this always hap­pen to me?).

5. Don’t beat your­self up. Rather than focus­ing on what you did wrong on a call or in a meet­ing, focus on what you did right. Rather than fix­at­ing on the calls you didn’t make, focus on the ones you did.

6. Don’t let one tough con­ver­sa­tion throw you off course. We’re all going to have tough con­ver­sa­tions — the key is to refuse to allow one dif­fi­cult con­ver­sa­tion to affect our mood and throw us off course for the bal­ance of the day.

7. Focus on fram­ing events so that you see your­self as being in con­trol — not “That client dri­ves me crazy” but “I allow that client to drive me crazy.” And avoid “poor me”, victim-like think­ing at all costs — and stay away from any­one who engages in this. “I’m a vic­tim” think­ing sucks our energy and resilience and is poison.

8. Hard as it can be, focus on main­tain­ing a pos­i­tive out­look — and seek out oth­ers who main­tain a pos­i­tive out­look as well.

9. When going through a tough stretch, attempt to com­part­men­tal­ize the nat­ural dis­cour­age­ment you feel. Work on sep­a­rat­ing your work and per­sonal life and hard as it can be, try to avoid allow­ing it to cast a shadow over your mood when not at work.

10. Put strate­gies in place to increase your energy level — exer­cise, sun­shine and fresh air can all be great short-term ton­ics when you’re feel­ing down.

Make build­ing your resiliency a pri­or­ity. Not only will it help you emerge from the cur­rent period stronger, but boost­ing resiliency will help you rebuild your busi­ness when mar­kets turn.

For more infor­ma­tion, please visit http://​www​.get​keep​clients​.com.

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Tags: Aptitude, Close Relationships, Comfort Zone, Communication Skills, Conversations, Disappointment, Discouragement, Failure, Frustration, Long Time, Norm, Outbound Call Center, Rejection, Resiliency, Retirement Plans, Self Discipline, Steady Stream, Strong Work Ethic, Telecom, Time Clients
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Doctors’ retirement plans on life support

Monday, February 9th, 2009

Go to Source

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Tags: Doctors, Life Source, Retirement Plans
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