Another planner who feels recent events point to the need for a more conservative approach is Andy Berg, a partner with Homrich & Berg Inc. advisors in Atlanta. Berg says he has always used 7% or 8% as a pretax returns assumption in building retirement plans. Yet he argues it was too common to see retirement plans configured with assumptions of 10% or more. "That needs to be ratcheted down," he says.
Berg says he's been bearish with client portfolios through all types of market conditions, and made good use of REITs and alternative investments such as hedge funds during the bear market. During the three-year downturn, he says, his firm's clients were down about 4% overall.
Hedge funds, most of them market-neutral, make up about 20% of the average client portfolio, he says. Private equity and commodities, through the use of the MLM Index Fund, are also used for a small portion of assets, he says.
Rebalancing is ongoing, he says, noting that the firm has brought its REIT holdings down to almost zero because of what he fears are poor fundamentals in that sector. "We're looking at REITs trading above net book value," he says. "A little bit of that money went to hedge funds, a little went to commodities."
There are other ways in which planners need to be more conservative, Berg believes. The notion that people require less income in retirement is shaky, he says. Most clients, he finds, spend more than they say they will. That's why the firm usually tacks an extra 10% to 15% on what clients project as their required income.
Another reason to overestimate income needs: health care costs.
"Lengthening lifespans and the increasing cost of health care are potentially a double-edged sword," he says.
Some planners have adopted other methods to add some security to their clients' portfolios. Paul S. Seibert Jr., president of AMA Asset Management Associates in Sandwich, Mass., started integrating more fixed annuities into portfolios a couple of years ago. "For people who don't have pensions, it's like buying a pension or a partial pension," he says.
He notes the strategy isn't for everyone, particularly those who have one or more pensions supporting their retirement income stream. But for many clients it is an alternative to Treasury bonds, which currently provide lower yields for identical cash outlays. "It also has another impact that is somewhat desirable: It allows you to deploy the remainder of the portfolio in a somewhat more aggressive fashion," he says.
Not all advisors feel a low-return environment demands a more conservative approach. Eric Linger, owner of Sherwood Investment Services in Redwood, Wash., feels the soundest retirement planning is one driven by client objectives rather than age. "The rule of thumb is your strategy gets more conservative as you get older," he says. "I don't agree with that." Linger also prefers dividend-paying stocks as opposed to bonds, reasoning they provide a better return in the long term.