Roundtable: Retirement Plans in Peril?

Tracy Martin, CFP, Morgan Stanley, Fairfield, N.J. Dave Abbs, CFP, Abbs Retirement Planning Advisors, Linsco/Private Ledger, Saginaw, Mich. P. Jeffrey Christakos, CPA, PFS, CFP, CLU, Christakos Financial Group/First Union Securities Financial Network, Westfield, N.N. RR: How do you manage expectations now and keep people on track for retirement? Martin: I always tell my clients, Short term, markets


Tracy Martin, CFP,
Morgan Stanley,
Fairfield, N.J.

RR: How do you manage expectations now and keep people on track for retirement?

Martin: I always tell my clients, “Short term, markets are unknowable. But long term, they're inevitable.” Certainly our expectations have been falsely inflated during the bull market of the '90s. I don't need to tell you gentlemen that people were disappointed with 25% returns, which is ridiculous.

This market has taught everybody a lesson — that the markets are really two steps forward and one back. We should be very happy with the net result, although it's not comfortable being in the midst of the one step back.

Abbs: Somebody once said that when the markets are doing really well, we make a lot of money, but in times like these, we really earn our money. We've been doing about one client communication piece a week. We want to make sure we're staying in touch with folks and answering their concerns as they occur.

If you look at any long-term numbers on returns, realistically a 5%, 6% or sometimes even a 7% withdrawal from a retirement plan is reasonable for 20 years or so. But get much above that, and it doesn't work.

Martin: There are certain [software] programs that default to market averages and market norms over the past 75 years, but my projections are typically very conservative. I'll use 7% or 8%. I'll rarely go beyond that unless for illustration purposes. I'd rather surprise people on the upside than disappoint them on the downside.

Christakos: Some people I see were never informed about the potential volatility of their portfolios. They were given projections of 8%, 10% or 12% that were imbedded in various software programs.

Unfortunately, it wasn't explained to them that to get those returns there would be a certain standard deviation associated with the portfolio. When I explain to them that this is actually quite normal for the portfolio, then they will look at their real need for returns versus perceived opportunities, and they'll usually downsize their expectations.

RR: Are you finding that people's retirement plans are actually in peril now? Do they have to readjust?

Abbs: We haven't readjusted anything. We use a strategic asset allocation, not tactical. So we're invested using portfolio models that change with economics and a little bit with markets, but we're not chasing markets. I don't think we've done any redemptions in reaction to this market.

Christakos: We haven't changed allocations, but we've definitely encouraged people to re-examine their distributions. When the portfolio is depressed in value, it's obviously the worst time to draw money out, since the principal won't be available for the recovery. If we can encourage them to take one less vacation, then I think we've accomplished what we need to accomplish.

Martin: I'm a little leery about making any dramatic changes at the moment because we could very well be at or near a bottom.

RR: Tracy, when magazines start doing articles about dealing with bad markets, you know it's pretty much a bottom.

Martin: Absolutely. Magazines are lagging indicators.

RR: What about people who had planned to take early retirement. Those plans are off, aren't they?

Christakos: There are a lot of people who, if they had plans to retire early, would certainly postpone now. We always encourage people not to think of a complete retirement — hanging up your lunch box and no longer working. That's because we're unsure of what life expectancies will be like as we get older. I have a problem with my projections because I'm never comfortable with at what age I should stop projecting. With medical technology changing and the genetic code being broken, we don't know.

I always encourage people to have a blended life — find something they like to do and something they can make money at while in retirement. That way they can hedge against potential downturns in the portfolio and not be so dependent on a particular valuation of their portfolio at retirement.

In fact, if a prospect comes in with a particular date to retire by, we usually don't have a meeting of the minds and usually do not establish a relationship.

Abbs: We have a lot of folks who have taken early retirements at age 50 or 52, and they're faced with 72(t) withdrawals, which are irrevocable. So if they want to withdraw $3,000 instead of $5,000, they can't do it without penalty. That's a challenge.

Christakos: Hopefully, they are putting the extra $2,000 aside in an after-tax vehicle.

Abbs: That would be the best plan. They certainly don't have to spend it.

Martin: One of the biggest fears people have is “retiring from retirement,” that is, having to go back to work. I agree that it's critical to encourage prospects or clients to pursue something that — even if it just generates a minimal income every year — can act as a buffer during tough times like this.

Christakos: My clients who do best are the ones not watching CNBC and reading The Wall Street Journal. So a job in retirement comes in handy. It makes them tired, takes up their time and helps them not get in their own way.

RR: What kinds of tools do you use to keep people on track?

Abbs: I use anything that takes the client's focus away from yesterday and today, and puts it back 20 years and forward 20 years. We've been sending out a lot of things — historical charts, and comparison charts on previous catastrophes and how markets have reacted (see “U.S. Market Recovery After Tragedy,” Page 36).

Martin: I'm looking at a slide forwarded to us this morning on follow-ups to world catastrophes. In fact, I'm probably going to put this in my seminar presentation. These charts are very encouraging. Clients don't necessarily want to read something; they want to see it.

RR: Can you plan for a market like we had in the late '60s and into the '70s, when the market went nowhere for a decade?

Christakos: I never expect there to be a substantial bull market going forward. That's financial planning — realistic expectations based on historical returns.

Martin: Absolutely. It goes back to conservative projections. My projections are less than the historical averages. The numbers I look at — 7% or 8% — are very achievable.

Of course, as this market goes through its evolution, new and creative products are put forth. I incorporate managed futures into a certain portion of my clients' portfolios, for example. This is now a global economy rather than just a domestic economy.

Christakos: Even if there's no extraordinary bull market, the return on equity investments has to exceed by a reasonable percentage the return on cash investments because of the amount of risk. There has to be a return for risk. The question is, how much risk does the client have to take?

Abbs: Instead of having all stocks or all bonds, if you have some of each, you have less risk over the long term than either one of the two alone. I think that's in Ibbotson material.

Martin: As a matter of fact, we use that piece in our seminar. A lot of people think the minimum-risk portfolio is all bonds, but that's not the case.

Christakos: People are also surprised how introducing international equities in the right proportion also minimizes risk. They can't understand why adding a risky asset class would reduce risk.

RR: What other issues are you facing now?

Christakos: A side issue related to life expectancy is the expectations some people have regarding inheritances. Obviously, as the life cycle extends, the date for inheritances will extend as well. So in a lot of cases, people have unrealistic expectations for inheritances that would minimize their need to save.

I'm encouraging people to save for their own retirement and minimize that dependency. There are a lot of things that can reduce the inheritance, like a parent's illness.

Registered Representative welcomes your comments on this story. Contact Editor in Chief Dan Jamieson at [email protected] or call 800/621-0720.

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