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A refresher on how an advisor should approach the needs of clients as they near retirement

The new norm is changing and it requires a mix of new thinking and old-fashioned conservative strategies

Monday, January 9, 2012 – 4:39 AM by Guest Columnist Scott Kubie
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Scott Kubie: Forty-five percent of today’s households are headed by an individual in his or her 50’s that still have a child living in the household.

The definition of retirement is changing.

It can no longer be assumed that people are going to retire at 65, move to Florida, and spend the rest of their lives on a golf course. That is not the norm. Today’s pre-retirees, those with a retirement date in mind that is generally within the next 10 years, are viewing retirement differently — many are choosing a second career, staying active in charities, and remaining involved in community and service. See: RIAs grapple with a rising threat to retirement: Adult kids that move back in with mom and dad.

In addition, they face several challenges on their way to retirement, such as other obligations. Sudden losses in retirement accounts, minor children living at home, high debt, poor planning, illness, needs of elderly parents, and boomerang kids (adult children who live at home) may provide additional roadblocks to attaining an ideal nest egg.

Many retirees will readily admit that they misjudged the challenges that have come along with retirement. In fact, one recent poll conducted by NPR, the Robert Wood Johnson Foundation and the Harvard School of Public Health found that 25% of retirees actually preferred life before retirement over life in retirement. Along with personal trials, the rising costs for healthcare, energy, food and everyday living have given pre-retirees much to worry about when thinking about their future.

Consider these facts, as found by Prudential Financial, Inc., showing how investors’ attitudes have changed in the wake of the recent economic recession:

• 73% of investors believe the investments they have today are not enough to make up for the losses they experienced over the past few years
• Over 66% state that the financial crisis and subsequent recession created challenges that were far different than anything they had previously experienced
• Around 72% of Americans recognize that they need to start planning smarter for retirement, savings, and retirement income

Shrinking time horizon

It is evident that pre-retirees need to make saving for retirement a priority, rebuild neglected retirement accounts, and re-evaluate well-planned investments in order to give them the best shot at a secure retirement. The fact that there are a large number of investors within this market segment provides a great opportunity for financial advisors. In fact, nearly 6,000 Americans turn 65 every day. And, by 2020, 36% of the population is expected to be 50 and older (up from 28% in 2001). It is important for financial advisors to understand today’s pre-retirees in order to better serve this growing market. Moreover, they must recognize appropriate strategies and portfolios for this group.

When planning for retirement, advisors should first and foremost consider the investor’s time horizon. As the investor’s retirement date nears, the risk characteristics of the portfolio should change. Placing the portfolio into more conservative investments is especially critical during the pre-retirement stage. By lowering the risk of the portfolio, losses can be mitigated in order to offset the shorter time period available to recover from losses. By decreasing risk, the investor is given more opportunities to withdraw funds in retirement without selling investments at a significant loss.

Pre-retirees may also benefit from adding protection to their portfolio. While these investors want and know they need growth, protection is at the forefront of their minds, with 60% of investors stating they are looking for guarantees to protect their financial future. Protection helps to reduce the risk of a large market decline impacting the portfolio beyond the client’s ability to adjust. Because pre-retirees are making plans about how they will spend retirement, the life impact of market volatility is great.

More growth, less risk

With my firm’s pre-retirement strategy, the client’s exposure to portfolio risk decreases each year as his or her retirement date nears. At the same time, allocation to a protection fund is increased as the retirement date nears. All in all, the strategy allows portfolios to seek growth opportunities while gradually taking less risk, as investors are in the final stages of preparing for retirement.

By having a solid understanding of the pre-retirement market and devising appropriate strategies and portfolios for the segment; financial advisors may find great opportunities within this growing market, while helping investors achieve their retirement goals.

Scott Kubie, MBA, CFA, is the Chief Investment Strategist at CLS Investments, LLC. Mr. Kubie joined CLS as Portfolio Manager in 1995 and was given additional responsibilities in 2002. He was named CLS’ Chief Investment Strategist in 2005. Mr. Kubie is also an adjunct professor at the University of Nebraska in Omaha, and holds FINRA Series 6 and NASAA Series 66 registrations, as well as the Chartered Financial Analyst (“CFA”) designation.

About CLS: CLS Investments, LLC (“CLS”) is one of the largest independent third party money managers in the United States. Founded in 1989 by W. Patrick Clarke, the firm manages individual, qualified plan, and variable annuity portfolios of mutual funds, exchange traded funds, and individual stocks and bonds. CLS serves over 40,000 individual investors and holds more than $6.5 billion in assets under management. The company professionally manages money using the principles of risk budgeting and tactical asset allocation, and maintains an experienced team of portfolio managers and analysts. CLS offers a pre-retirement strategy that is designed for investors who are within 10 years of retirement, have a definite retirement date, need an increasingly conservative portfolio to retain savings, and pursue portfolio growth. To learn more, visit https://www.clsinvest.com.

Mentioned in this article:

CLS Investments, LLC
Top Executive: Todd Clarke

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