W. Scott Dixon, executive VP and financial advisor channel manager of SunTrust Investment Services, and Mark Davis, senior VP of Retirement Solutions at the Wealth Solutions Group at SunTrust Wealth & Investment Management help hundreds of advisors keep clients from losing sleep while planning for their later years. On average, retirees might depend on their investments for 20 or more years after the traditional retirement age of 65. And Dixon and Davis advise a slow, steady and rational way of helping clients invest a sufficient amount to meet their post-retirement financial needs.
What are the most common misconceptions about retirement needs?
SD: Misunderstanding what average means. For example, life expectancy. Do clients understand that at age 65, there is a 63% chance they could life to age 90? Clients also think that there will be a significant decrease in financial needs once they retire. Not so. [There's] healthcare, travel and social activities. You spend more on Saturday and Sunday than you do on Monday to Friday.
MD: Another misconception is that more conservative investments means lower risk. If you sit on the sidelines of the markets you might think you are at less risk with your retirement plans. But really you're at a greater risk since you might have missed out when the markets recovered. You may have losses today, but you miss out on breaking even or even accumulating.
Should clients be more concerned about wealth preservation or growth?
SD: There is a generational shift toward fixed instruments. If you're 72 years old and put your assets in a 1% instrument, it'll take another 72 years for the money to double. The preservation mode will cause you to draw down the principal pretty fast.
MD: You have to ask clients what is the expected time frame. The idea that at retirement you have to be in a preservation mode is too simplified. You have to look at the longevity risk. If you are retiring at 65, you may have 20 years of retirement, and that's two to three market cycles to grow investments or recoup what you might have lost. There are more long-term growth opportunities. But if you are only looking five years out, you may want to keep in a preservation mode.
What about the 40-year-old-what's his biggest concern?
MD: You have to back into what a 40-year-old can put away, understanding that at age 70 they might want to reasonably withdraw 4% from their retirement savings.
SD: There might not be Social Security to depend on, and many 40-year-olds don't have company pension plans or defined benefit plans to depend on.
How do you help clients differentiate between what they need in retirement and what they want?
SD: You can't tell clients; you can only show them. You have to chart for them during the preretirement phase what is going to be the impact of inflation on certain intangibles, such as healthcare. And you're going to see more growth in costs than the CPI.
MD: I look at the process of breaking expenses into essential and nonessential categories and take a full inventory. Utilities, gas for the car-those are essentials. For some, golf is an essential. Then you need a plan to incorporate the nonessentials, such as travel. If you've had a good market year, you can make two or three trips up North to visit the kids. If it's a down year, you may go only once. Putting things on paper is essential.
What about Generations X and Y? What are their needs?
SD: They have to start now. Time is such a powerful tool when you look at rates of return and compounding.
MD: It's hard to get to that place and talk about retirement. It's hard in your twenties and thirties to forgo current spending with retirement in mind. That's why social media is so important. It speaks to the younger group.
With rates so low and the stock market so strong right now, what's your best investment advice?
SD: There is no cookie-cutter allocation. You have to discuss risk tolerance. Clients are very concerned about the downside and this is causing them to be overly conservative. After the turmoil of the last couple of years, people have become conservative [due to the fear] of not having enough income at retirement.
The old adage of buy- and-hold is hard to follow in volatile markets. Is this still a wise strategy?
MD: You see most markets return to the level seen at the beginning of the financial crisis. The winners are those who stuck it out. Of course you always need a balance of securities, bonds and go-nowhere savings like CDs. For the younger ones, they will encounter ups and downs, but [they'll] have time to catch the wave of higher returns.
Looking forward, what financial products will take off in the next years?
SD: What we see now, and will continue to see, are instruments that have guard-rails on upside and downside moves. In the last couple of years we've seen hybrid solutions based on the need for long-term care. I'd say it's less a product than an advice solution based on the best way to draw down assets.
MD: You'll see more products that put caps on ups and downs. As taxes creep up, investments will arise that reduce taxes.
A survey was done by our sister publication, On Wall Street, that showed more people are afraid of running out of money before they die than death itself. What do you think?
SD: People don't want to be a burden on family.
MD: There's much more fear of running out of money than dying. Being in the Southeast, a lot of people come here to retire, and [they] think about that. So do we.