SPECIAL ANNOUNCEMENT

Welcome to our new blog! The “Thought” this week may be controversial to some and we encourage your responses and additional comments….agree or disagree.

Thought for the day:

All investment strategies have the potential for profit or loss.  Changes in investment strategies, contributions, withdrawals and economic conditions may materially alter the performance, strategy and results of your portfolio.

One of seven disclaimers found on a random Financial Planner’s web site

THOUGHT FOR THE YEAR:

I fear that the way many planners approach their older clients’ financial issues involves a critical flaw.  For most clients, the objective of financial planning can no longer be focused on simply and growing their assets.  Things like retirement income, paying for health care and leaving a legacy are not just about ROI; because the issues are too complex to make portfolio decisions on that alone.  Consider the client who began her retirement in 2008 with a plan to take withdrawals from a managed portfolio that became severely diminished within a year; or at best, generated little or no return.  It will be extremely difficult for her to recover, unless she can cease taking income for several years while the portfolio rebuilds.  ROI is a function of the time period in which it is measured and the activities (adds and subtracts) that occur in the account along the way.

I submit that the best retirement plan is one that has a foundation of a pension account that provides a basic monthly income to cover fundamental expenses such as housing, transportation, insurances and the like.  If the client would require nothing less than $50k per year, her planner’s first responsibility is to provide the security that she will never receive less than $50k per year no matter what happens in the future, no matter how many 2008s there are.

Here is a good place to detour for a moment.  There will be several more 2008s (or similar) in our retiree’s future.  No one knows how mild or severe.  I assure you, however, as your client ages, his/her sensitivity to those financial incidents will increase…no matter how much money they have.  Not all, of course; but many clients will fall into this group.  More than ROI, they want predictability that their income will last as long as they do.  Predictability that there will be enough income to pay the increased cost of living due to long-term care needs.  A friend of mine is being cared for from 6:00 AM to 8:00PM in his home at a cost of $11,000 per month and his wife must continue paying the mortgage, the condo fees and her other living expenses.  That is a concern, especially since their ROI right now is nothing like it has been in the past.

The attached statement for another client just arrived while I am typing this.  This is a statement from his LTCi insurance policy that we helped his planner sell him over 10 years ago.  Imagine what this would do to the return in his managed portfolio if, for the past 6 years, he had to withdraw $7,300 per month while trying to re-grow it after 2009. 

Now that we have built your wealth, you can’t spend it!

It is interesting to me that we help our clients create wealth to provide income in retirement then, when retirement comes, we tell them that they cannot spend that money.  They can only spend the interest that it earns…even if that is not as much as they would like.  That makes absolutely no sense when it is so easy to contract with an insurance company to make that promise of lifetime income.  Annuities are the core to any retirement strategy.  They efficiently pay the client an income for life.

Are you able to guarantee your clients 6-8% income for as long as they live?  Will it also be substantially tax-free?  Does he really care what the ROI is if $500k of his portfolio is providing him with $3000 per month (80% tax-free) every month regardless of what the congress does or the economy does or what the terrorists do… for as long as he lives?  In light of that, how important is having some left over when he dies?  If the legacy is most important, he may not choose the pension (SPIA).  But if he needs more income, I’ll bet he will leave the rate of return calculation to the kids after he dies and take the money now.  I would.

You cannot guarantee success…only that you will do your best. 

Planners and investment advisors know how to manage a portfolio for growth, when ROI is an important measure of their value to the client.  But, when we are dealing with retirees, we are no longer talking about growing the portfolio as “job one”.  What about your fiduciary duty when you tell them your plan includes an 85% – 95% probability of success that their income will last as long as they do?  “So what happens if I end up in the 10% or 15%, Mr. Planner?”  “Oh, well, that will be on you, Mr. Client.”  Including annuity income in their portfolio increases the probability of success and is simply serving your client responsibly.

Not for everyone or for all the money.

Not all clients fit into my scenario as described above.  But we all must be sensitive to the perspective that we bring to the table; and understand that this perspective changes as we age.  Does the 50-year-old planner really know what a 75-year-old client feels?  That is the issue that we must deal with.  My 90-year-old mother is pretty sharp about money.  She has significant financial assets and pension income coming from Social Security and a private annuity.  Her expenses are $17,000 per year more than her pension income.  Even with zero ROI, I know that the annual shortfall can come out of her assets for the next 23 years when she will be 113.  Only when I explain that to her (every few months), does she relax.  Trust me.  She does not care about ROI unless it means “Reliability of Income”; and, I suppose, neither do I.