The investment broker who gets you to your golden years may not be the right one to get you through them. Let’s say you get a call from your financial salesperson who is concerned that markets are significantly overvalued and they have decided to move half of your portfolio to a cash position. They may be giving the same blanket advice to all of their clients approaching the end of their working years as well as those who are already taking an income from their nest egg. At first, your reaction might be, “OK, that might be a good move.” But, in fact, it might not be a such a good guess. If that’s the case, you might consider an income advisor.
Yes, even if you have a good relationship with your financial salesperson perhaps especially if you do, now is the time to consider: Is this person helping me to prepare for later in life really the best person to get you through that period? The answer often quite frankly, is no.
For the past 30 years, the majority of financial salespersons have been doing primarily one thing: helping millions of baby boomers build a nest egg. That’s good. We’ve needed that help.
Problem is, the distribution phase, the time when you withdraw funds, makes the accumulation part look like child’s play. When you’re working, your paycheck allows you to ride out periodic declines in your investments. But once you stop working, you can’t afford a portfolio or an advisor that asks you to ride out the corrections and bear markets.
Take our starting example of a nest egg with half of its holdings in cash. If you’re stopped working and were pulling a steady 4 percent from your nest egg each year (traditionally considered a safe withdrawal rate), and if the return on the cash portion of your portfolio is zero, you end up losing 4 percent on that chunk of nest egg. But if your financial salesperson invests that same money a fixed instrument and can get close to a 4 percent return you aren’t eating into your principal. It’s the difference between a total return manager and an income advisor.
The former, which best describes the bulk of financial salespersons today, puts your money in the markets, diversifies, shifts it around a little if they think they can get a better return, and waits. That "buy and hold" strategy works well if you have a long time horizon and don’t need the money. However, for the next 20 to 30 years, in the distribution phase, still growing your portfolio regardless of market conditions, reducing taxes, and producing an income...? Now, that's a tall order if not an impossible task considering the operating expenses, administrative fees, and commissions being withdrawn from your nest egg regardless of the rate of return.
Are there enough advisors with this type of income planning expertise? An obese possibility, most investors, no matter what stage of life they’re in, get the same old dead "buy and hold" financial strategies. We aren’t recommending you dump your advisor tomorrow, but if you are approaching the end of your working years you should be asking some serious questions like how can we create income when I stop working?
What you don’t want to from your financial salesperson is simply attaching an automatic four percent distribution strategy to your nest egg, adjusted annually for inflation. If you’re unlucky enough to stop working into a lengthy bear market, your nest egg could expire long before you do.
Experts recommend getting your financial salesperson to articulate their strategy for sheltering your money in worst case scenarios. Here is what you want to say to your advisor about potential sources of income for when the next economic calamity hits, when it does. What does my portfolio look like if markets fall 50 percent? How would I get distributions? What guaranteed streams of revenue are built in? These answers are not something to learn after the fact.
Have you put my portfolio through a stress test? As part of a recent study, two mutual funds were compared, each with a starting investment of $100,000. The two funds, over the course of a decade, had identical annualized returns of 5 percent, but when he applied a real world test to each withdrawing $5,000 at the end of each year the two funds they had very different ending balances: approximately $68,000 and $101,000, respectively. The former, as it turns out, had steep losses early in the 10 year period. The lesson?.. A nest egg can look quite good on paper, but when you subject it to stress (withdrawals, different levels of inflation, taxes), that’s when you see just how durable a portfolio really is.
Of course, whether you realize it or not, you’ve almost surely been down this road before. When you were young, a family pediatrician or, say, a high school coach provided the help you needed when it came to your health or developing your athletic skills. But once you moved beyond those years, you needed doctors and mentors with different, and sometimes more sophisticated, abilities. This same kind of thinking applies to your income when you stop working.