By Brett M. Gersack, CFP®, AIF®, Senior Wealth Advisor at Halbert Hargrove

Working with clients and making sure their financial picture is solid and investments are managed properly is not just about how old they are and their risk tolerance but should be looked at more holistically and factor in their own specific risks and financial goals. Many advisors determine how to invest funds based on an outdated belief that the investment allocation should be constructed looking at a person’s age and a generic risk questionnaire. At Halbert Hargrove, constructing the proper portfolio allocation and taking the right amount of risk is the staple of any financial plan and that starts with fearless conversations with each and every one of our clients.

A financial advisor helps people make decisions that will impact their lives today and that could change what their retirement looks like in the future. They work with families in looking at their situation holistically and advise them on their investments, financial planning, insurance, estate planning – anything that touches their financial lives – to make sure they stay on track with their goals.

To make sure I have a great understanding of my clients’ situations, I need to ask the right questions, and sometimes, those right questions can be difficult ones. As their fiduciary, I must always act in their best interest. At times, this involves having a fearless conversation.

What are fearless conversations? For us at Halbert Hargrove, it means delving into topics about clients’ finances with them that may occasionally feel somewhat uncomfortable, but are critical to gaining clarity about their entire financial situation – their worries and struggles along with their aspirations and what gives them joy. Basically, these are the questions that every advisor should be asking their clients to avoid potential pitfalls along the way. Depending on the LifePhase they are in, and their own unique circumstances, the questions – and answers – can be very different.

Halbert Hargrove’s LifePhases

Some years ago, our investment professionals began the process of rethinking how to construct the most efficient investment portfolios for each client’s life circumstances. Our ultimate solution? We select investments based on a client’s phase in life and a host of other unique factors – not just their age and risk tolerance. Depending on where they are in life’s journey, the risks they face will vary. These risks need to be addressed to keep their financial life on a solid footing.
Halbert Hargrove’s LifePhase Investing® is designed to help our clients achieve well-lived todays and tomorrows. LifePhase Investing® is a disciplined, transparent process that refines a clients financial plans in concert with their life’s economic phases. Relying on this ongoing process helps them course-correct their current economic reality to align with their real-life goals. Our three LifePhases are called Build & Grow, Transition, and Distribute & Deploy; I’ll discuss these, along with some challenges that we frequently see that are fairly typical for each.

1. Build & Grow

In this phase of life,  people are likely on the younger side of the spectrum, and the most important asset that they have is their potential earnings over the next 30 to 40 years. People in this stage are typically in their 20s, 30s, and 40s. They’re concentrating on their careers and dealing with issues such as credit card debt, house purchases, children, and student debt. They are being pulled in a million different directions and at some point, they can feel overwhelmed and not know where to start.
One of the most important things I tell my clients in this phase is to start saving – or “paying yourself” –early because there are few things in this world that are more powerful than compounding. As shown in the chart below, it’s important not only to invest early, but also to invest more aggressively when someone is younger. When they have decades until they will be using these invested funds, volatility is their friend. When the markets are volatile, they will be consistently investing in the markets on a monthly basis through dollar cost averaging.

Sometimes it can be difficult for younger persons to think about investing money for 20, 30, or even 40 years. They’re starting to make money for the first time in their lives and the last thing they’re thinking about is retirement. I let them know how important this investing is to their overall financial lives. If they can start early, even if they consistently put in a relatively small dollar amount, this will have a huge impact on their overall financial success.

When they are in the Build & Grow phase of life, they need to focus on taking an appropriate amount of risk. The money they are saving today is intended for long-term growth and should be invested more aggressively. It may feel uncomfortable to see the fluctuations in the market, but this money is not meant to be spent today – it’s intended for a bigger goal in the future. They will also want to balance saving for retirement with their lifestyle and living life today. Maximizing tax-advantaged plans such as a 401k or 403b will be an important piece of the retirement puzzle during this stage. Small decisions in this phase will have lasting ramifications.

2.  Transition

In this LifePhase people are anywhere from one to five years from retirement. To reach their retirement goals, they’ve worked hard and have been disciplined in their savings. Some of the major decisions they need to focus on at this point are retirement planning, healthcare, Social Security and Medicare. At this stage in life, they will need to start thinking about optimizing their distribution strategy in retirement to make sure they are as tax efficient as possible when creating a paycheck in retirement.

This is a very important stage in a person’s life. After working for decades, they’re getting closer to the time they’ll no longer have a steady paycheck and will need to live off their assets. Many times, clients who come to me for help in building and constructing a sold financial plan for retirement are far too aggressive with their investments: They don’t realize the risks they’re taking. The last thing a client wants to deal with if they are too aggressive with their investments as they approach retirement is a down market. If their portfolio significantly decreases right before retirement because they are not invested properly, they typically have two options: 1. Retire and plan on living off a lot less then they had budgeted for or 2. Hold off on retiring and work longer than expected so that you are not pulling from your investments and allowing the portfolio to grow. I can tell you that no one likes either of these options, so it is imperative that they look at their investments holistically and understand all the risks.

This can be one of the most difficult conversations I have with clients – explaining to them that they need to be very aware of the current investment environment, and that they need to secure the most efficient allocation based on their goals. They have been in the growth stage for the last 20 to 30 years and never had to worry about Sequence of Returns Risk. To be fair, almost no one I work with has ever even heard of this risk, let alone understands why they should care. Sequence of Returns Risk is the risk of receiving low or negative returns early in retirement when withdrawals are made from an investment portfolio. This can significantly reduce the longevity of a portfolio.



Sequence of Returns Risk: An Example

The chart above shows actual S&P 500 returns over two different decades: 2000-2009 and 2010-2019. It also shows the impact of taking a distribution of 5% ($50,000) on $1,000,000 over that specific decade. If you remember, at the turn of the century (2000-2002), the market started very poorly with the dotcom bubble, which was caused by speculation of internet-based businesses. For the first three years of this century, the S&P 500 produced negative returns (2000: -9.10%; 2001: -11.89%; 2002: -22.10%).

If someone decided to retire then and were overly aggressive with their investing, this would have had a very big impact on their financial future. As you can see, if they get those bad returns at the beginning of their retirement when they were taking distributions of $50,000 a year, their $1,000,0000 investment in the S&P 500 would have been worth less than $500,000 10 years later.

Fast forward to 2010. What if they had retired then? If they were taking the same $50,000 of income based on their investment in the S&P 500, that $1,000,000 would now be worth approximately  $2,500,000.

Why? Investors who retired in 2010 and invested in the S&P 500 got great returns at the beginning of their retirement. The question I always ask my clients as they approach retirement is this: What does the next decade look like for the markets? Are they willing to be overly aggressive and hope they have a decade like 2010-2019? Or will it look like 2000-2009? If they are taking too much risk with their investments, they will either have to adjust their income – and no one wants to do this – or their money may end up going to $0 in the future.

3. Distribute & Deploy

This phase begins when people start taking distributions from their retirement accounts and other resources. Solidifying plans for their legacy is a dominant concern. Strategically investing and optimizing withdrawals are key to ensuring that their life and goals continue on a solid financial footing.

A key risk in this phase of life is longevity. Longevity risk is the chance that life expectancies exceed expectations, resulting in greater-than-anticipated income needs for retirees. However, this risk can be managed to a certain degree by actively monitoring and adjusting both their investments and the level of cashflow drawn out of the portfolio each year.

Most people either don’t consider longevity a risk to their overall financial plan or haven’t given it much thought. Longevity is a real concern and something I discuss with all of my clients so they understand the importance and impact it can have on their plan. Obviously, this discussion deals with a person’s own mortality and how long they might live; every individual has a different outlook and for some, this can be a difficult conversation. But as their fiduciary advisor, if I am not having this discussion with my clients, I am doing them a huge disservice – and could be potentially putting their financial lives at risk.

At this point in a person’s life, there a few major decisions to think about. Once people have confidence in their own retirement plan and know they can live the life they want, they need to start to think about wealth transfer strategies, as well as tax-efficient philanthropy should this be of value to them. Once a client has “over funded” their retirement – which means they will leave a sizeable amount at the end of their lives – they can focus on gifting to family members and charities that are important to them. By doing this, they not only can help reduce the amount of taxes their estate will pay at death, but they also get to enjoy the benefits of these gifts while they are living. Whether it’s helping a child purchase their first house or making a sizeable donation to their favorite charity, many clients find true enjoyment making these gifts throughout their retirement.

Other decisions to make at this point include: Who will be their Successor Trustee, Power of Attorney, Healthcare Power of Attorney? It’s a good idea to make sure their wills and trusts are updated and educate family members or anyone else who is an important part of your estate plan about their wishes and directives.

As you can see, depending on which life phase they are in, there are different risks each person should be concerned with. At times, these risks, and the conversations we have about them, are not necessarily easy to talk through. Yet having these fearless conversations from the very start will only help their financial lives – giving them a better chance of successfully reaching their goals. By asking these difficult questions on the front end, this gives people clarity on their financial and life goals which helps them feel confident and supported. These discussions are important and not only do they help them meet and even exceed their goals, it gives them peace of mind that they have thought about and taken the correct steps in their financial lives.