RETIREMENT

Empty Nest

Has retirement funding lost its feathers?

By Mark J. Gilbert, CPA/PFS

The last 18 months have left the investing public scared, worried and angry. Many more people now recognize the uncertainty of their financial futures. Their nest eggs are smaller and they’ve got far less job security than before the economic crisis hit. The Great Recession has seen the highest unemployment rates in a generation, meaning that workers are contributing less to their 401(k)-type accounts. What’s more, retirement accounts have been tapped by pre-retirees who’ve lost their jobs or are under-employed and have no other option.

The downside of a smaller nest egg isn’t simply less money at retirement. Many investors now have a lower investment risk tolerance and a stronger desire to hold large amounts of low-yielding cash. These people may be investing too conservatively in order to accomplish their long-term goals. Even worse, they may have given up on investing in the markets altogether.

True enough, virtually every major investment asset class—stocks, bonds, commodities, real estate—is well under the highs of 2007 and earlier. Only short-term treasuries and cash equivalents like money market funds have kept investors from losing money. But strong global market returns in 2009 have recovered some of the earlier losses, which should convince most investors of a place for at least some equities in their portfolios.

The brighter side of smaller retirement accounts here in the United States is that personal savings apparently are up. Through August, in fact, 2009 monthly savings rates varied from 3 to 6 percent, compared to 1 to 3 percent between 2005 and 2008. It seems that the average consumer is making a conscious effort to reduce spending. In addition, people seem to be pursuing more realistic retirement goals, expect to retire later, spend less once retired, work part-time rather than retiring completely, or find supplemental work.

For CPAs, working with these clients poses obvious challenges. For one, it’s increasingly difficult to reconcile what an investor needs with what an investor is willing to do. In other words, clients will tend to want to invest more conservatively because of their concerns over stock market volatility, but may face low returns that don’t meet their financial goals. Many will have to leave their investment comfort zones and take on more risk.

Communication is absolutely key to the advisor-client relationship. When investment returns are high, clients won’t feel as much need for their CPA advisor’s feedback. But when returns fall, clients will want expert advice to help them make sense of the conflicting financial and economic reports they’re hearing, and to plot the right course towards their financial goals. On the other end of the spectrum, however, clients’ efforts to scale back on expenses may mean that they are, in fact, less engaged with their advisors.

Either way, a growing number of clients will seek out investment products that carry some type of guaranteed return or income stream. While insurance products that offer security have been around for years, mutual fund companies are now developing their own line of guaranteed products.

How should a CPA advisor handle the challenges of these recession-hit clients? First, prepare them for a much different financial and economic environment than they’ve experienced in the past—an environment that involves lower growth, higher income taxes, and possibly higher inflation. In my opinion, to enjoy both growth and lower portfolio volatility, US-based investors will need to diversify away from predominantly US-based stocks and towards foreign equities, foreign and US bonds, and commodities.

Also encourage clients to set more realistic lifestyle and retirement goals, and discourage them from investing too conservatively. The fact is simply that they will need investment growth to overcome price inflation. Most people will benefit from investing in growth-andincome- oriented portfolios, or in portfolios balanced between equity and fixed income investments.

Finally, expand your professional network. In particular, get to know some qualified personal CPA financial advisors to whom you can refer clients if they need more hands-on or ongoing attention than you’re willing to give.

Editor's Note: Read the first in a series of new columns on the topic of retirement, authored by ICPAS member and personal financial planning expert Mark J. Gilbert.

Mark J. Gilbert, CPA/PFS is a principal in the financial advisory firm of Reason Financial Advisors, Inc. His 25-plus years of finance and accounting experience includes 13 years in personal financial planning. A member of the Illinois CPA Society since 1982, Mark currently serves in the Society’s IA/PFP Member Forum Group and on its Committee on Structure and Volunteerism. He can be reached at mgilbert@reasonfinancial.com.