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The Retirement Risk Zone, Revisited

The Retirement Risk Zone, Revisited

The American College of Financial Services
February 4, 2020

As a financial advisor, you’re likely well-versed in the virtues of preparing for retirement. Encouraging your clients to think about their futures, asking the sometimes tough questions about how much income they’ll need and where it’s going to come from, and finding ways to maximize long-term growth in their investments while minimizing risk are all elements of proper planning that should be addressed when working to ensure a client’s retirement years are as comfortable and financially secure as possible. When clients finally reach that magic age, however, your job still might not be done. Contrary to what some may think, the years closer to your clients’ retirements, rather than the ones further away, could be the ones that make the biggest difference. It’s all because of something called the “retirement risk zone,” and it’s something you as an advisor need to be aware of so you can prepare your clients accordingly.


What is the “Retirement Risk Zone”?


Back in 2017, we shared with you some groundbreaking research in which two researchers at Australia’s Griffith School of Business examined the reasons for advisors experiencing problems in adequately planning and funding their clients’ retirements. In their paper on the subject, Michael Drew and Adam Walk found proper sequencing of investment allocation over time to be the key to success or failure in retirement planning. They discovered the biggest potential shifts in portfolio value fell within just a few years of a client’s retirement date rather than 20 or more years removed from the retirement date. They call this window the retirement risk zone.

Since then, many more studies have been done on the retirement risk zone: some experts disagree on its size and duration, with estimates ranging from five to 10 years before and after retirement, but all conclude the time frame around a client’s actual retirement date to be the most uncertain and present the biggest challenges in planning and stability.


Why is it Important?


Anyone who invests probably knows that every now and then, the stock market takes a dip (or sometimes a dive), and their return on investments gets lower. In time, the market gradually builds itself back up and sometimes even thrives, meaning that between high times and low times is usually a comfortable median average of investment value. Over years of careful planning, financial advisors work with their clients to ensure that average ends up as much on the positive side as it can be to build up the resources clients will have to draw from during retirement. Those who are versed in financial planning will usually encourage clients to stick with their investments, even if those investments aren’t doing so well right now, because the potential long-term benefits are worth a bit of short-term loss.

But all that conventional wisdom gets upended when we’re talking about the retirement risk zone. Drew and Walk’s research, along with more current studies that corroborate their findings, show that portfolios that take a shock in the window of years surrounding a client’s retirement are much less likely to recover than those taking shocks years removed from that window. That’s because in the retirement risk zone, clients are much more likely to be starting to withdraw from, rather than pay into, their saved assets and investments. There’s no more time for an investment to recover when things go bad if you’re already focused on cashing in on that asset, either because you want to or because you need to. As a consequence, financial advisors could give clients good advice the entire time they’re saving up for retirement and help them build a sizable nest egg, only to see all their hard work go to waste when the market unexpectedly dips a few years after their retirement and puts the clients in financial jeopardy.


What Can be Done About It?


Unfortunately, the problem of the retirement risk zone has no simple solutions. In the past, many advisors would rely on decreasing equity allocation as retirement approached for their clients, increase fixed income, and maintain a mix throughout the retirement years. But with interest rates near historic lows and retirement periods stretching longer as people live longer, this alone doesn’t guarantee enough growth to keep clients afloat over the long term.

The good news is there are strategies that work--it’s simply a matter of finding one that works best for advisor and client. One is to cultivate two portfolios: one of low-risk, fixed-income investments, and another of higher-yield equities to balance each other out, provide stability in a troubled market, and make sure there’s always annual income during retirement. A different strategy involves “bucketing” assets and planning to have a set amount as liquid, on-hand cash every few years, available through something like an annuity. Still other planning methods involve a mix of deterministic and dynamic investing, as proposed by Drew and Walk, altering the ratio of investments in stock to those in bonds and cash to adjust for current portfolio value, and increasing allocations to equities the further a client moves into the retirement phase.

To learn more about the retirement risk zone, strategies for overcoming it, and other ways to give clients the best possible planning for their golden years, consider the Retirement Income Certified Planner® (RICP®) designation from The American College of Financial Services. Advisors who earn the RICP® have the knowledge, skills, and competency to handle a wide range of issues in retirement planning, including sequencing, risk allocation, and more. Help clients plan their retirement and build a financially secure future with confidence.

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Baby Boomers are retiring at an unprecedented rate, meaning that more and more Americans are facing the challenge of using their investments to maintain their quality of life. For them, the usual investment advice no longer applies. They need the unique strategies you can learn through the three-course Retirement Income Certified Professional® (RICP®) designation program. Help your clients thrive while growing your career.

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