RETIREMENT PLANNING: Seeking right advice

A common theme I hear from seniors is that they don’t want to take any risks with their portfolio.

retirement

They have done some rudimentary math and feel pretty good about their income streams based on their current dollars: $X from social security, $X from a pension and $X from a portfolio, and all is well.

What they fail to account for, however, is the effect of inflation on their purchasing power over time. Those same dollars, five, 10 or 20 years out, will fail to purchase the same food, clothing, health care and entertainment as they once did.

The essence of retirement planning is simple. Take a pool of assets — the savings accumulated in IRAs, 401(k)s and other investments over a lifetime — and convert that pool of assets into an income stream that rises at least as fast as the rate of inflation, and that will last as long as necessary, to age 95 or 100. Easier said than done.

The issues are simple. A 67-year-old wants money for green fees or plane fare to visit the grandchildren, while an 87-year-old simply wants to avoid becoming dependent on loved ones for basic needs.

To create that income stream and solve the simple problem of providing adequate lifetime income, assets that grow over time and will help keep pace with inflation must be included in the income plan. This means stocks, which is where the disconnect occurs.

Too often new retirees — those making the transition away from a regular paycheck and into the world of relying on that pool of assets for income — want to remove market risk and the volatility associated with stocks. They pile into “safe” assets with fixed prices and income streams such as bonds, CDs and annuities. Fixed by definition can never go up, but seniors need assets and incomes that go up over time to keep up with the silent scourge of inflation, which is the biggest risk to any retiree’s retirement lifestyle.

While safe and guaranteed assets should always be a part of any plan, the mistake made by many financial advisers looking to land new business is allowing retirees to take the easy path by simply placing the entire portfolio into so-called safe assets and ignoring growth or risk assets.

A true adviser would stand firm to the principles and encourage the proper mix of assets by suggesting a prudent strategy designed to minimize all risks, including the risk of purchasing power, not just risk of market volatility or downturn. After all, isn’t that why clients seek out a professional?

If an adviser caves to objections about stocks in a retirement portfolio, why do you really need him? What value is that adviser delivering if he or she simply acquiesces to your fear? In reality, isn’t the adviser there to help you understand and protect you from risks you were not aware of, including inflation?

All advisers are not created equal. Seek out someone who specializes in retirement income planning, which is a distinct skill set that requires different tools and temperament.

In the accumulation phase (saving for retirement), one deals with probabilistic expectations. In the distribution phase of retirement, one has to deliver specific outcomes, specifically, a reliable income stream that keeps up with inflation and won’t be exhausted due to unforeseen circumstances.

Darren Vilardo is an independent financial adviser specializing in retirement income planning, and the owner of Inland Retirement Advisors in Rancho Cucamonga. Vilardo can be reached at 888-944-6266.