Key Takeaways
- Two-thirds of financial advisors are changing their retirement investment advice for clients due to a volatile market and economic uncertainty, according to a new report from Alliance for Lifetime Income.
- Financial advisors are changing their recommendations based on inflation, Social Security and Medicare uncertainty, and cost-of-living concerns.
- Advisors recommend considering their withdrawal strategy and evaluating assets they may not have incorporated.
A volatile market and economic uncertainty have led financial advisors to shift how they’re helping clients make decisions.
Two-thirds of financial advisors are changing their retirement investment advice for clients, according to a new report from Alliance for Lifetime Income released Thursday.
“Rising inflation, uncertainty around Social Security and Medicare, and overall cost-of-living concerns have led us to adjust both the conversations we’re having and the strategies we’re recommending,” said Nathan Sebesta, a certified financial planner.
Advisors say clients should consider their withdrawal strategy and look to create buffers against volatility. Sebesta said he has even encouraged his clients to consider a phased retirement or part-time work to create more stability amid all the uncertainty.
“In many cases, we’re helping clients rethink retirement altogether,” Sebesta said.
Sequence Risks Are Top of Mind
He also said he is having more conversations with clients about building cash buffers and revisiting allocation models to reduce sequence risk.
Sequence risk, or sequence-of-returns risk, is the risk that the timing of withdrawals from a retirement account can negatively impact an investor’s overall return. When you retire, you begin regularly withdrawing money instead of contributing new money to your account. In bull markets, these withdrawals are partly offset by new gains, but bear markets don’t see new gains.
While sequence risk is largely a matter of luck, it’s essential to remember these things when planning to retire, financial advisors said. Retirees who strictly rely on their portfolio to live off of in retirement might feel the brunt of a bear market, which could lead to making decisions to alter their retirement plan.
Because there is so much that isn’t predictable when it comes to retirement saving, Scott Bishop, another certified financial planner, said there isn’t one-size-fits-all advice. His advice has had to adjust, though. In order for them to create a sustainable plan, clients need to lock down two important details, he said.
“There is no ‘regiment number’ or ‘withdrawal rate’ that will be relevant if they don’t know how much they both need to spend and then want to spend on top of that,” said Bishop.
Different Assets Can Help Buffer Volatility
Bishop said he works with clients to create “safe buckets” in retirement that can help buffer market volatility. These buckets hold one to three years of income in cash or “near-cash” liquid assets, like savings accounts or certificates of deposit.
In Sebesta’s recent experience, more clients are interested in guaranteed income solutions like annuities. They are also looking for tax efficiencies, such as opening and utilizing income-producing tax-deferred accounts. Interest has also grown in flexible spending strategies, which utilize a flexible spending account (FSA) to pay for health care costs with pre-tax dollars.
Bishop said he is also looking into other changes that will best suit his clients’ wants and needs when it comes to retirement.
“[I’m] looking at things like private credit to enhance yields above and beyond publicly traded bonds, and also added private real estate and private equity [to clients’ plans] to add diversification and possibly more growth and income, versus stocks,” he said.
