To hear some advisors tell it, they have hundreds of clients and all enjoy a fabulous, worry-free retirement. Even if all their clients have assets and income that cover their spending needs, life presents all of us with our own unique set of problems.

The most honest advisors I’ve known are candid about clients whose retirement spending strays off course. People are human and life throws you curveballs no one anticipated.

In this month’s cover story, the advisor who conceived the 4.5% rule, Bill Bengen, examines how to fix a broken retirement plan. Bill begins by examining three historical distressed portfolios in different inflation environments.
As he notes, inflation has not been a major concern for advisors or retirees for the better part of three decades. But if retiring right before a bear market begins is challenging, doing so just before inflation accelerates leaves a retiree slammed on both the asset and spending or liability sides.

That cruel fate is what happened to retirees in the 1970s, when the drawdown in their portfolios was exacerbated by the erosion of purchasing power. Assuming such a scenario couldn’t materialize in the future is dangerous, as Bengen notes.
Advisors have understandably focused more intensely on sequence-of-returns risk, given what happened to clients who retired in 2000 or 2008 only to watch equities lose half their value. But all evidence indicates that clients who stayed the course with diversified portfolios survived just fine. 

A major reason individuals use advisors is to cushion themselves against short-term swings. It’s easy to see why. If one goes back to January 2000, the S&P 500 has returned only 5.3% with dividends reinvested, pedestrian indeed. But since March 2009, that return has been 15.2%. As Bill notes, the vital signs of many recent retirees’ portfolios are improving, as they should be.

Which brings us to the present. The second half of the baby boom generation, people born between 1955 and 1964, will soon start retiring in waves.

Many people have surmised that the post-2009 bull market has borrowed against future returns and brought them forward, increasing the likelihood that equities could flatline for several years. At some point, they are certain to be right.

But it is the other unexpected scenarios, possibly a return of inflation or maybe something more improbable, that advisors need to think about.

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