The stock market’s recent rollercoaster ride provides an opportunity for financial professionals to prepare their clients for the pops and drops of everyday life in retirement. Just as markets twist and turn through normal economic and business cycles, life itself has its own bull and bear markets, contractions, expansions and range-bound trading activity.

By drawing valuable life lessons from challenging market scenarios, advisors can reduce clients’ emotional decision making relative to both their portfolio and their personal lives while, at the same time, helping them strengthen their relationships and improve their overall well-being.

Over time, the role of a financial advisor has grown significantly. People trust us with their livelihood and very often turn to us for personal advice and support. Clients also expect us to be on top of things, capable of explaining what is going on in the world, and then translating it into financial strategies.

When you think about it, much of the information we gather and interpret can also be applied to an individual’s (or couple’s) everyday life in retirement. Having the ability to frame individual life-planning issues within a financial context can be especially helpful if you have market-savvy clients who find it more difficult to engage in these more personal conversations.   

Spill Over

Over the past year, the price of a barrel of oil has dropped 70 percent, pushing both gas prices and the stock market down. Consumers may be paying less at the pump, but their 401(k)s and IRAs are paying a higher price in terms of losses due to market uncertainty. While oil only represents a small portion of the overall economy (comprising just 8 percent of the S&P 500), the troubles within that sector are spilling over to other areas.  

Spill over often happens to clients in retirement as well. The loss of a regular work schedule can spill over into weight gain, alcohol dependency or addiction. A change in household roles can leak into and, thus, weaken relationships. Health complications can be like nagging drips, constantly reminding one of routine tasks that can no longer be done. While it’s difficult to forecast the outcomes of problems in the market, predicting the arise of potential problems in retirement doesn’t take a crystal ball; they become clear once clients understand the risks associated with the mental, social and physical aspects of retirement.

To illustrate, consider when you build a client’s portfolio. You probably use a risk-tolerance questionnaire that includes factors such as timing, asset value, comfort with losses and preferences for gains. You match up their responses with an asset-allocation model that provides the best risk-to-return ratio. Clients should be taking similar steps in their non-financial life.

You help them accomplish this via a series of non-financial questions that illuminate such key factors as identity, social networking, relationships and physical health.

 

Answering these questions will allow both clients and advisors to anticipate potential problems and make sure a client doesn’t walk into retirement thinking it will provide a 10 percent annual return with no risk of losing out. 

Performance Measurement

A key part of every advisor/client relationship is how performance will be measured. Will portfolio progress be measured by average gains and losses? Will it be compared to an index or other benchmark?

Whatever the method, measurements allow clients to gauge whether things are going as planned or need to be adjusted. The other benefit of employing a consistent measurement tool is that it helps weed out some of the emotional decision making. 

Similarly, clients need a way to measure their transition into retirement. People who retire often tend to take the standards of excellence and success they knew from their work world and apply them to their next, very different phase of life. I’m not saying that’s bad necessarily but, rather, that it may be misplaced, which can open a door to disappointment and regret.

To put this in context, how do you measure vacation success? The answer, of course, depends on how you approach it. Some people go on vacation and cram in as many activities as possible. They have a detailed schedule, follow it diligently and, in the process, check off as many as they can. Typically, they return home more exhausted than when they left…but for them that’s a big win, while others would consider it a loss.

The other side of that coin is that some people prefer to lounge on the beach or at poolside, consume a couple umbrella drinks and do as little as possible on vacation. They come home relaxed and rejuvenated. Again, to some this is a major win, but others see it as falling short of what a vacation is for.

The performance measurement for your clients entering retirement (and for at least for the first few years) should be to first stop and identify what their style and approach will be and then determine how they will measure success. Will they try to do as many things as possible or sit back and relax after decades of diligent working and saving? Either way, it’s important to specify the measurement tools and benchmarks they will use, and to understand that, as times goes by, thewhat and how of measurement will change, just as a traditional asset allocation does. 

Hedge

Hedges are among the most valuable investment tools one can have during a market meltdown or black swan event. Things that zig when the markets zag can provide a needed boost when everything else in a client’s portfolio is down. Whether it’s done through gold or silver or other low correlation investment, hedges provide both client and advisor with a psychological edge when things just seem to be getting worse and worse. 

Historically, we know market corrections of 10 percent can be expected almost every year, while steeper declines of 20 percent or more happen on average only every 2 ½ – 3 years. Therefore, we teach clients to focus on the long-term, and that declines are temporary and not a good time to sell everything.  

Similarly, life in retirement can come with a series of assaults. The natural aging process, and time itself, impact relationships, oftentimes bringing more jolts than one expects. Whether it’s a divorce, the loss of a loved one, challenges with an adult child or aging parent, medical diagnosis or feeling alone and isolated, many clients face difficult situations and need people and places to help them hedge or offset trying circumstances. 

That’s why I encourage clients to develop a personal rainy day fund for their life in retirement. Just as clients need to set aside enough portfolio cash to live on during an extended bear market, they also need a list of family, friends, professionals, organizations and things to rely on for help and support when experiencing unexpected slings and arrows.

 

With a support network in place to help them manage their emotions during tough times, clients can avoid costly mistakes while they sort through their options. One way to help clients hedge against naturally occurring retirement downers is to answer the following questions:

Overall, helping clients avoid a crash or extended downturn in their personal life during retirement starts with teaching that a successful retirement isn’t one without problems; it’s one in which they’ve learned to overcome. Furthermore, by using market-downturn metaphors to counsel clients on the non-financial aspects of retirement, advisors can help retirees manage spill over, develop a processes for measuring their overall success in retirement and use those closest to them as a hedge against any tough times that may come.

Robert Laura is the president of SYNERGOS Financial Group, the founder of RetirementProject.org and the creator of the Retirement Wellness Report and DividendPaycheck.org. He can be reached at [email protected].