How top-ranked financial advisors are responding to near-retiree concerns about inflation, longevity

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Reaching retirement with a nest egg that you trust will last is a stressful endeavor even in the best of times.

These days, those nearing the end of their careers also have to contend with historic inflation, stubborn market volatility and the remnants of the coronavirus pandemic.

We asked four of the financial advisors who made CNBC’s FA 100 list in 2022 what they’re hearing from their older clients and how they’re responding.

Rising interest rates prompt pension concerns

“Many of the concerns today by near-retirees are like those of the past,” said Kyle W. Harlemert, a chartered financial analyst with Indianapolis-based Woodley Farra, which ranked No. 1 on CNBC’s FA 100 list. “‘Will I outlive my retirement accounts? Will I be able to maintain my current lifestyle? If I die, will my spouse be ok?'”

A new concern, Harlemert said, is the impact rising interest rates are having on people’s pensions.

The value of a pension is based, in part, on current interest rates, he explained. Specifically, as rates rise, some people may see their pension value dip because the formula is assuming their money could pick up more interest in low to no-risk investments.

“Clients are saying, ‘Last year, I pulled up my account and my lump sum was $1 million; today it’s worth $977, 000. Why is it going down?'” Harlemert said. “People worry, ‘Do I need to retire now before it goes down further?'”

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For the last 10 years, he said, they’ve seen their pensions mostly rise in value as interest rates have remained at historic lows. Harlemert said the firm has been explaining to clients why their value has gone down a bit and informed them of all their options to make up for it.

He said clients who choose to take the lump sum pension option can be invested in high-quality government and corporate bonds, and even in stocks.

“We strive to educate clients that even though they are getting a lower lump sum, we can invest in assets that can most likely generate higher rates of return to offset that lower balance,” Harlemert said.

‘Inflation is at the top of mind’

“Inflation is at the top of mind for clients that are considering retirement or the transition phase,” said JC Abusaid, president and CEO of Halbert Hargrove in Long Beach, California, which ranked No. 8 on the FA 100 list.

Other questions the firm’s been getting from this group concern how far the market will go down and when it will recover.

The current combination of rising prices and market volatility can be difficult to address at once because they tend to require opposite solutions: People want sufficient cash on hand to ride out a downturn in stocks, but it’s increased equity exposure that can typically most help soften the pain of inflation.

Abusaid said his firm has been trying to strike a balance with these goals.

“We came into 2022 with a 10% cash position for most clients, and that has been the wind in our sails,” Abusaid said. “It allows us to calm clients that their essential needs are more than covered for the time being.”

At the same time, he said, the firm makes sure clients, including near-retirees, still have plenty of their money in stocks. “This exposure has the benefit to keep pace with inflation long term,” he said.

The pandemic made some ‘rethink their longevity’

Among near-retirees, “I think the most common concern is always, ‘Do I have enough money?'” said Mark R. Mirsberger, CEO of Dana Investment Advisors in Waukesha, Wisconsin. The firm is ranked at No. 2 on this year’s FA 100 list.

“What’s new is [that] Covid risks and restrictions made some retirees rethink their longevity and desire to accelerate their spending and enjoyment of life.”

The pandemic has “heightened the reality of our mortality,” he added, and led to older clients taking more expensive trips and not deferring certain experiences or expenses to the distant future.

Despite rising interest rates and appealing opportunities in the bond market, Mirsberger said, the firm expects equities to provide higher returns than bonds over the next decade, “and therefore we think an allocation with 50% to 70% stocks is ideal for most retirees with over 10-year time horizons.”

‘The current environment is challenging’

“One benefit of the Federal Reserve’s war on inflation has been a dramatic shift higher in interest rates,” said Kip Keener, chief compliance and operations officer at Salem Investment Counselors in Winston-Salem, North Carolina, which ranked No. 6 on the FA 100. “For the first time in several years, investors can earn a return in the 4% to 5% range in fixed income investments.”

That change is allowing older clients to generate larger returns during retirement without more risk, Keener said.

Many retirees and near-retirees are also getting spooked by new projections on how long their nest egg will last, he said. That’s because these formulas are accounting for the current high inflation and expecting a prolonged need for increased spending. For example, the popular 4% rule increases each year with the cost of living.

Yet much of this fear is overblown, Keener said.

“Both investment returns and rates of inflation are typically compounded at a set rate, but the reality of the world is that there is a lot of year-over-year variability in both,” Kenner said. “Although the current environment is challenging for both investment returns and inflation rates, we should not use outlier data as the new base case for assumptions.”

Sophie Tremblay

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