4 Things Financial Advisers Hear That Give Them Chills

Whenever somebody comes out with a new list of the Top 10 Scariest Things Ever — usually just in time for Halloween — you see the same old stuff. Death. Clowns. Spiders. Heights.

I never find retirement planning on those lists, which is kind of surprising, considering that most people seem so determined to avoid it — even those who hope to leave their jobs in the next few years.

You may hear your neighbor brag about the growing fortune in his 401(k). Or a co-worker might talk endlessly about the house she wants to build near the beach someday. But you seldom hear anyone mention having a comprehensive plan in place to meet their goals. Or how, exactly, they expect to have enough money to live comfortably for 20 years or more without a paycheck.

Now that’s scary.

Indeed, financial advisers hear things every day that give us chills — from clients, prospective clients and people on the street. Here are a few:

• “I don’t have a plan, and I don’t need one. The way things are going, I’ll be fine.” If only the market could keep going up and up and up — then every investor would be fine (and my job would be a lot easier). Unfortunately, it doesn’t work that way. If the market drops when you’re close to or in retirement, you won’t have time to recoup your losses the way you could when you were working, and a bear market could significantly impact your nest egg. Think you can time the market? Probably not. History shows us time and again that emotions get the better of people, and fear can lead to inertia or panic selling.
• “I have a plan, but I’m not going to follow it. I want to make more money!” This time, the emotion is greed — and greed is not good. When someone who comes to our office has more than enough money to retire with the lifestyle they want, we’ll usually talk with them about shifting to more conservative products, annuities, for example. That means their portfolio isn’t 100% correlated to the market — and they know it. But then they see the news or talk to a buddy and hear about returns of 7% or more, and they want to know why that isn’t happening for them. The answer, of course, is that if you get big returns, you also could see big losses — and in retirement, when you’re using that money to live on, you can’t afford to go down 20% or more. You have to stick to the fundamentals of your plan; you can’t chase returns anymore.
• “Why do you keep talking to me about risk? I’m doing great.” Retirement planning is more about managing risk than returns (see above), so that’s where most financial advisers who specialize in retirement put their attention. We know the market can overvalue things sometimes, which makes discipline key. Our job is to make sure that if there is a pullback, a correction or a crash, you still have money. When you’re working, you can focus all you want on accumulation, but in retirement, your No. 1 priority should be preservation.
• “I’m just going to stick with the old retirement-planning rules of thumb. It worked for my parents, and it will work for me.” Those old rules — the 4% withdrawal rule, the 60% stocks/40% bonds rule, etc., were developed at a different time, when people didn’t live as long, our economy wasn’t global, the news wasn’t 24/7 and the markets didn’t take the big swings we see today. In a market like we’ve experienced for the past seven years, you could probably make anything work. But those rules have their limits — they always have — and every investor should have a plan designed for his or her individual needs and goals.

Back in 1996, then-Fed Chair Alan Greenspan coined the term “irrational exuberance” during a speech in which he cautioned that the market might be overvalued and there could be consequences. In 2000, Nobel Prize-winning economist Robert Shiller made the term the title of a book and alerted readers to the possibility of an upcoming tech crisis. He was right.

In 2005, Shiller updated that book and warned investors about a housing bubble. Right again.

His third edition, published in 2015, says “irrational exuberance” has only increased since the last financial crisis. And Greenspan used the term again in August, in an interview with CNBC’s Squawk Box about today’s market environment and the three-decades-long bond bull market.

Don’t let the current market euphoria mask the threat to your retirement.

I know it’s tempting to overindulge when the market is being so generous with its treats. But remember, it’s full of tricks, too. If you’re close to or in retirement, it’s best to err on the side of caution.

Kim Franke-Folstad contributed to this article.

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