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Re-Assessing Retirement Plans, Again.

Sure, retirement looks a bit different for many of your clients after last year’s market plunge. But with the recent equity market surge off of March lows, should you make new adjustments? And if so, what?

Sure, retirement looks a bit different for many of your clients after last year’s market plunge. But with the recent equity market surge off of March lows, should you make new adjustments? And if so, what?

According to a recent survey by The Financial Planning Association, four out of ten financial advisor respondents said their older clients were “forced to change their retirement plans in one or more ways over the past 12 months as a result of the economic turmoil.” Indeed, average sustainable withdrawal rates have fallen from a high of 5.3 percent a few years ago, to nearly 4 percent today, respondents said. But the market has been rallying now for nine months, with the Nasdaq up nearly 38 percent year-to-date, the Dow Industrials up 17 percent, and the S&P 500, nearly 21 percent. Does that mean the changes you made to clients’ retirement plans and withdrawal rates are worth another look?

So far, advisors are still relying on relatively conservative products despite the explosion of new product options available, says the FPA report. “Some of the more recent products include variable annuities with living benefits or managed pay out mutual funds,” the FPA writes. Yet, most advisors surveyed are still relying on things like “dividends and laddered CDs/bonds,” long-term-care insurance and Medigap policies.

“Clearly fund investors’ appetite for risk remains low,” says Avi Nachmany, director of research at Strategic Insight. “Search for income and low risk tolerance are likely to continue to dominate the fund landscape in early 2010 and maybe beyond. We expect little change to that dynamic until the employment and economic clouds start to clear.”

To hear most economists tell it, that may not happen for some time. Much of the commentary emanating from investment firms is a drumbeat of doom. The market has gotten ahead of itself, say analysts. The positive economic “green shoots” we have been seeing are just a head fake. Unemployment is the highest it has been in 26 years. Slow economic growth and chronically high-unemployment rates and interest rates are the way of the future. Some predict that commodity prices will resume their climb soon, and we’ll experience something like “stagflation.” Oh, and those recent, sexy home sales numbers? Those were pumped up via a government tax gimmick, say the bears.

But there are, of course, those who are bullish. They note that corporate earnings are recovering. Sure, the S&P 500 2009 p/e multiple sits at around 17, but it’s really only 14 based on calendar year 2010 forecasted earnings. And consensus estimates call for S&P 500 member company earnings growth of more than 200 percent for the fourth quarter of this year and another 26 percent profit growth in calendar year 2010. Other positive sign posts: The number of borrowers who have slipped behind on their mortgage payments is expected to fall in 2010, says the credit bureau TransUnion. And the Obama Administration is keeping its foot on the gas, saying Tuesday that it may repurpose unspent TARP funds to “create jobs.” It is estimated that about $200 billion of the original $787 billion set aside for TARP hasn’t been allocated. (Of course there is a vigorous debate about the usefulness, long term, of taking money out of the private economy and redistributing it to favored industries and projects—infrastructure and clean energy, for example; but that’s another story.)

Steve Leuthold, chief of fund manager the Leuthold Group and a well-known contrarian, is one of the bulls. In his own research, he looked at 23 bull market highs dating back to 1881 and found a median p/e multiple (based on normalized 5-year earnings, what he calls a full market cycle) of 19.4. But in the “modern era” (since 1950) that p/e multiple is closer to 22. If we use 22 as the benchmark for the current market, then a reasonable target for the S&P 500 is 1,300 to 1,350, wrote Leuthold in a research report released Tuesday. That’s a ways from the S&P 500’s Tuesday close of 1,091.94. If Leuthold is right, we can enjoy a 19 percent capital gain in 2010.

Still, Leuthold is reducing his exposure to equities from 70 percent (that’s his maximum allocation to stocks) down to 65 percent. Why? The bull market will suffer an early 2010 correction (down about 8 to 12 percent), he predicts. It will move “significantly lower by year end 2010 unless the administration, the Fed and Congress get serious about fiscal and monetary responsibility.”

If the health of the stock market hinges on whether Washington and local governments cut spending, we can expect a very bad year.

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