Help for the overly conservative retiree

AARP and the American Council of Life Insurers recently released a survey of 800 retirees between the ages 60 and 75 with investable assets of at least $50,000. It provides useful insight into retirees' financial management and decision-making. The first point that struck me is how much this group is sacrificing as a result of their investment and money management behavior. Many of today's retirees, and certainly a number of your clients, have a tendency to hold spending levels to conservative levels. Thirty-seven percent of retirees interviewed actually built up their asset levels in the past year; keeping spending lower than Social Security benefits and other sources of income. At the same time, many have a tendency to invest in ways that reduce the likelihood of solid overall returns. Only 41 percent had half of their investments in equities; the rest had a small proportion or none at all. These low levels of equity investments lead to lower rates of performance than can otherwise be achieved.

These findings coincide with comments made by most of the financial advisors I speak with. Many retired clients, they tell me, are living more frugally and investing more conservatively than needed. This frugality is not generally caused by a desire to leave an estate; this is simply not key driver for this generation of retirees. The AARP/ACLI study finds that only 22 percent state that leaving an estate is a very important goal; much lower, for example, than keeping enough money for needs later in life (which three in four state is very important). Their main driver is clear -- make sure there is enough for the later years.

It's easy to sympathize with these retirees. Many are concerned about the possibility of major health care costs in old age. The AARP/ACLI survey indicates that health care costs are the biggest financial concern among retirees. Further, they realize they'll most likely live longer, and as a result do not wish to run out of money. With these risks, they fear investment loss, which in turns leads to conservative investing that does not suit their needs.

I suggest two tactics designed to encourage these overly conservative people to take a little more investment risk.

First, many conservative retirees have asset-level goals that are not tied to a specific age. Retirees should have annual targets for the asset level they'll need, and these targets should depend on age. For example, a 65-year-old needs more money than a 95-year-old because the younger client has a likelihood of living for many more years. If you set a two year asset level goal for a client and the client exceeds that goal [which is likely with a number of these frugal retirees], I suggest you recommend the client invest more in equities. You can put a stop-loss on the investment and, if the market falls, enough money can be pulled to ensure piece of mind. Even with a market decline, the client will still have more than he needs. It's more likely that the entire portfolio will grow.

Second, I recommend that you raise the idea of an income annuity. These overly conservative clients are heavily invested in bonds, CDs and other fixed instruments that pay roughly 5 percent, if that. An income annuity guarantees payments for life, depending on age, of about 7.5 percent to 12 percent each year, although the client loses access to the principle invested. For overly conservative clients, the promise of income for life should have appeal. Importantly, the client will need much less money to produce the income necessary to live if he moves money from a bond or CD to a life annuity. For example, a couple, both age 70, requiring $500 a month must put $120,000 in a bond that pays 5 percent. But that same couple can get $500 a month for as long as either of them is alive for roughly $78,000. This frees the remaining $42,000 for equity investment (this approach may attract money out of CDs). This $42,000 can be built back up to the $78,000 well within the life expectancy of the couple.

Both of these ideas can encourage the overly conservative retiree to feel comfortable investing in equities. Thus, they'll have a chance for a better return and a more comfortable lifestyle. With each of these approaches, they should rightly feel that their financial security would not be impaired by more equity investing. In reality their financial security will be enhanced.

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