How to Help Clients Sleep Better

Seniors are becoming increasingly jittery about affording longer retirements in volatile markets.

By Thomas Salvino

There is no doubt that Americans are living longer. In 1900, life expectancy in the U.S. was only 47 years. By 1935, the year the newly enacted Social Security Act set the full retirement age at 65, life expectancy was, ironically, 61.7. According to a recent report by the Centers for Disease Control and Prevention (CDC), life expectancy in the U.S. has now risen to 77.5. It’s the first increase since the onset of the Covid pandemic, and lifespans exceeding 100 years are no longer uncommon.

As Americans live longer, this brings home the importance of preparing clients for a long life in retirement. And since retirement planning is a long-term proposition, most forward-looking advisors have implemented strategies that allow their clients to enjoy peace of mind regardless of market turmoil. But client’s fears and expectations often get in the way of carrying out those strategies.

Here are some suggestions on how to help calm investor jitters.

Facts Over Feelings

To help keep clients on track, advisors should stress how markets have historically trended upward over time. This has usually occurred at a high enough rate to counter inflation. Current market volatility is just another iteration of that pattern.

Unfortunately, understanding that on an intellectual level may not be enough to calm a nervous client’s jitters. To counter our clients’ unease with the markets, we stress the importance of facts over feelings.

For example, for more than 100 years, equity markets have averaged 8% to 10% annually. That has been through World War I, the Great Depression and World War II, as well as different economic cycles and presidential administrations. Events like those affect people emotionally, but when it comes to investing, it is the fundamentals that matter.

We also note that many people are afraid to fly; they would much rather drive to a vacation destination because they “feel” that it is safer. Yet according to research by Harvard University, the probability of dying in a car crash is more than 200,000 times higher than that of an airplane fatality. It may not feel that way, but flying is a lot safer than driving. And staying invested has proven to be safer over time than jumping in and out of the markets, or worse, not investing at all.

Tax Planning

Preparing for retirement also entails careful tax planning, especially for entrepreneurs and small business owners. This means coordinating with estate and tax planners.

A client selling a business could potentially give up millions of dollars because they have not properly classified their business. Without careful planning, they may wind up paying tax on money that had already been taxed. Whether the company is set up as a C corporation, an S corporation, or an LLC, each of which has different tax benefits, we work with their accountants to help them find the best structure.

In one recent case, a relatively new client’s company was set up as a C-corp, but it looked to us that an S-corp would be a better fit. The primary difference between the two is that a C-corp — the default designation for a new corporation — is subject to corporate tax rates. An S-corp is a pass-through entity whose profits are allocated to the owner’s personal income.

It had never occurred to our client’s or their accountants to investigate further. We conferred with their team and ultimately our client switched the registration to an S-corp. This significantly reduced the tax burden on the business.

Risk Tolerance

The most important thing for an advisor is to deeply understand each client’s tolerance for risk, coupled with their long-term objectives. I have found that it pays to ask the tough questions, like, “How much are you willing to lose?” when discussing risk with clients. If you just ask generally, the answer will very often be something like, “I don’t mind the risk,” which usually means that they just want high returns and are not considering the potential downside.

To counter this, we stress to clients that volatility comes with investing. When seeking a 10% or 20% return, you have to accept that sometimes your portfolio balance will decline. Over time, equities have returned on average 8% to 10% annually, but it is not a straight line. In some years, the return might be 12% and in others, it might be a negative figure. But nobody should be investing for a single year. It is over time that investing pays off.

We like to say that investing is like a boat. The purpose of a boat is to go places, not just sit in the harbor. If you want to go anywhere, you have to accept the ups and downs that come from waves and weather. Investing is the same. To get where you want to go, you have to be willing to sail through choppy waters. If you stay in the safe harbor of a savings account that delivers 2% to 3% while inflation is running around 4%, you are never going to get anywhere and you are likely to be swamped by the rising tide. Volatility is a risk, but so is doing nothing.

Everybody likes the upside, but without professional advice, many investors are ill-equipped to handle the reverse. That is why, regardless of what strategy underlies the client’s portfolio, it is a good idea to counsel clients to set aside sufficient liquid reserves to meet their cash needs for several years. This is especially important for retirees. They do not have the same income stream as someone still working, nor sufficient time to recover from market losses as a younger person does. Those reserves could be in short-term bonds, cash, or Treasuries.

My firm’s clients tend to approach investing conservatively, which matches neatly with our investment philosophy. We try to follow Warren Buffett’s two cardinal rules for investing: “The first rule of an investment is don’t lose [money]. And the second rule of an investment is don’t forget the first rule. And that’s all the rules there are.”

That is why when preparing retirement strategies, the advisor’s primary goal should always be to protect what the client already has and then grow those assets into substantially more wealth.

It really depends on where the client is starting from and what their goal is. For a client who comes to us with $5 million or more in investable assets, we can easily come up with a plan that will provide them with an annual return of 4% to 5%. This would give them a nice income for life.

For a client with $1 million to $2 million, our goal is to help them get to that $5 million figure, so we would take a more growth-oriented approach. We see that $5 million-and-above figure as the sweet spot that will allow clients to realize their dreams, whatever they might be.

Happier with Fixed Income

Despite the current uncertain environment, we’ve noticed that people are feeling much better about their fixed income investments as interest rates have risen and yields have returned. But we caution that the upside of rising interest rates can be illusory if inflation is running at a higher rate.

If a client is getting a 5% yield from their fixed-income portfolio and inflation is 7%, they may have made money on paper, but it will have less buying power. That was not a concern when yields were at 1%, and inflation was lower. But when inflation outpaces yields, fixed income cannot help but underperform.

Keeping up with inflation is better than losing ground, but the real goal of investing is to make money. For investors who need to generate income now, portfolios are likely to be heavily weighted toward equities because the returns can significantly outpace what is available from bonds, despite the heightened volatility.

Clients right now are worried about a lot of things — inflation, the geopolitical situation, the upcoming election cycle and countless other concerns. Many of these situations are beyond our control. It is our job as advisors to assuage some of those worries about finances and do what we can to help our clients sleep well at night.

Thomas Salvino is the CEO and a wealth manager with Performance Wealth, an independent registered investment advisor with offices in the Chicago suburb of Hinsdale, Ill., Naples, Fla., and San Diego, Calif.

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