Some advisors and retirees are basing their retirement plans on myths, according to Rod Greenshields, consulting director for Russell Investments U.S. advisor-sold business.
Those myths can lead to disaster in retirement, Greenshields says. He tells advisors they should examine their clients’ thinking about retirement and be ready to counter any myths the clients are placing their faith in.
“Many pre-retirees and retirees falsely believe that shooting for a magic number in retirement savings will ensure their needed retirement income,” Greenshields says. Instead, Russell says advisors should look at their clients' "funded ratio," which compares assets to liabilities in retirement and can be different for each person.
Another myth that people still believe is that, if they are overspending in retirement, they should increase their allocation to equities. In reality, that can put the entire portfolio in danger and can have catastrophic results if the market turns bad, Greenshields says.
“Advisors should use customized retirement income projections to illustrate the results of various asset allocations, and then help clients choose allocations that fit their spending habits, as well as their risk profiles,” Russell says.
On the opposite end of the spectrem from those who want to spend too much are the many retirees who believe they should never touch the principal of their investments and should live off of the interest and dividends. “That approach completely neglects the spending desires of individuals and encourages yield chasing,” Russell says. Instead, advisors should do more detailed examination of the client’s lifestyle and determine what spending level can be supported, Russell says.
“There are two prongs of planning that an advisor should follow,” Greenshields says. Before trying to dispel a myth, the advisor needs to give the client a more workable idea, he says. A client won’t let go of one belief without having something else to believe in, he says.