Even in times when the only certainty is uncertainty, financial advisors are still tasked with creating rock-solid plans for a client’s retirement.

Now that another inflation report has shown clients what a lot of financial experts already know—that taming inflation is probably going to take several quarters, not a couple of months, in concert with a bit of a recession—more clients are more concerned about their retirements than they’ve been in a long time, advisors say.

“This is one of the most financially complex phases of someone’s life, and the stakes are so high,” said Larry Pershing, a CFP with Optimum Retirement Planning in Chicago, a firm that specializes in clients age 55 and over.

Preparing clients for retirement, especially in this environment, he said, means advisors should control what they can and have some frank conversations about what they can’t control, like a recession, lower returns, and ongoing volatility that makes it hard to feel like a winner.

“We know that we can’t predict how things are going to turn out 10, 15, 20 years in the future, but we do need to talk about the future with our clients. So it’s important to focus on what clients need,” Pershing continued. “What do you need your portfolio to do? If you need 10% a year, you probably won’t get that from your portfolio. But if you only need to counter inflation, you could get that.”

One trend Pershing says he’s seen among his clients is a certain level of disbelief that quick bounce-backs aren’t the norm.

“I’ve been trying to dial back peoples’ expectations. I’m telling them the stock market won’t be performing in the future like it has been in the past. But they’re not too concerned,” he said, describing his clients as “the millionaire next door,” with anywhere from $500,000 to $3 million in assets. “They say ‘I’ve seen this before.’ Well, not really.”

Be Tax-Smart When Possible
Pershing said he’ll first talk to clients about having an income plan that does not rely on stock market returns in any one year so they’ll never worry a down market will deplete their assets.

He said he likes to pull together the complete income picture, including retirement work if clients are planning on that, rental properties, annuities, pensions, 401(k) and Social Security.

“Gather them up and see how they look together,” he said. “And since most people want to spend the same each year in retirement, I’ll do a long-term projection of level spending through retirement.”

Being tax-smart about where money will come from (or where it will continue to grow throughout the retirement years) is one of Pershing’s primary concerns, he said.

“What tax-smart moves are there to reduce that client’s tax burden that year?” he said. “What’s the withdrawal strategy? Because the order in which you pull money and the type of investment you’re pulling from will have a major impact on the taxes the clients has to pay.”

Pershing looks at the big three account types—IRA, Roth and brokerage—when creating that strategy.

“If you do have two or three of these types of accounts, it’s usually better to withdraw from the taxable first and then from the IRA, which is usually a tax-deferred rollover from employment,” he said. “Similar is a Roth conversion strategy. You’re legally allowed to do it, and for a lot of people when they retire they’re facing the lowest tax rate ever and for the rest of their lives. It’s better to pay 12% now than 28% later.”

One aspect of the new economy that is a double-edged sword for retirees is rising interest rates.

On the one hand, retirees should be happy about the rise because it can make fixed-income investing more profitable as long as their holdings are structured so they don’t need to sell their longer-term bonds.

“But now the bonds will generate more income over their lifetime, and that income will totally make up for the temporary loss of income this year,” he said, adding that I Series bonds, for example, are an easy way to profit from higher interest rates. While there’s a $10,000 limit per person per year, a married couple can put in $20,000. But a trust can also put in $10,000, as can a business.

On the other hand, retirees who were planning on moving and taking out a low-interest mortgage may have to rethink part of that plan.

Strategies For Sidestepping Losses
Anthea Perkinson, a CFP and EA along with founding Principal Monterey Associates in Pelham, NY, said many retirees are being forced to realize losses in their IRA portfolios because of required minimum distributions.

“Those people are pretty uptight this year,” she said. “For them, where we can, what we’re doing is taking the RMD but moving the shares, not selling them.”

Clients who don’t need the money to live on right now can take those shares of stocks and mutual funds and move them from the IRA to a taxable account, she said.

“We’re doing right by the IRS, but the client hasn’t sold the shares,” she said. “They’ll pay the tax, of course, but the value of those equities can bounce back before being sold.”

Lucas Minton, with Minton Wealth Strategies in Cabot, Arkansas, said he also beats a drum of sidestepping these losses when at all possible.

“Maintain your equity positions. Don’t sell at a loss. Don’t sit on cash,” he said. “We need to have you in something. But above all, don’t take on more risk to support an income level. If you have to, lower your income.”

On the investment side, he suggests keeping most clients in a balanced portfolio, and if he’s going to tip one way, it’s going to be toward blue chips.

“We’re in a hard place right now. I’m not anti-growth stock, just contrarian by nature. That carries across to planning and management,” he said. “I’ve had plenty of growth stocks in portfolios. But now I beat the drum that the blue chips are when you want to be. The stock might be down, but you’ll still make income.”

Going even further, Tonny Navarro, a CFA at The Erdmann Group, a Merrill Private Wealth Management team in Greenwich, Conn., said his group has been completely rethinking the 60/40 or 70/30 model for their clients who typically are multigenerational families with $50 million in assets or more.

“Today as we’re reviewing the street, recession is inevitable. We need economic retraction,” he said. The question is when. “Are we going to get the recession next year? Until we get better visibility, for the next three to six months most likely we’re remain range-bound.”

Navarro said his team has “torn up the playbook” in the way it has been integrating alternatives into their client portfolios. 

“We want income from multiple layers. We’ve looked at the 40% that would have been fixed income and also looked at private credit and private real estate,” he said. “Private real estate is up 7% for the year, private credit up a quarter of a percent. Seen against the negative numbers of other investments, that’s great diversification playing out in real time.”

Municipal bonds also now are look better than they did before, Navarro said, though he cautioned that he’s still positioned on the short-duration end of the curve and building short-term ladders where they’re “getting 80% of the curve” in AAA bonds with one- to 10-year maturities. “We’re still getting paid, no need to go further than that.”

On the equities side, Navarro said he wants both income and growth in the portfolio because it’s impossible to time which will be more profitable at any given moment.

“If you were a growth manager you could have just bought the Qs and gone to the beach,” he said of the prior bull market. “We don’t necessarily want to buy high dividend, but those companies that are growing their dividends. The companies that are buying back stock, returning 5% to 10% on an annual basis, and investing in acquisitions and R&D. It’s not just an income play, but a long-term strategy.”

Trade High Dividends For Growing Dividends
To this point, Maddi Dessner, who heads global asset class services at Capital Group, said her team has seen a significant uptick in financial advisors looking for advice on portfolio construction so they can identify weaknesses they may not be aware of.

For example, Capital Group's investment team, she said, has successfully managed dividend-oriented equities for some time, and they are able to assess the health and future expectations of a company not just in delivering income but also in growing that income. These kinds of insights, she says, can help advisors avoid buying the company that currently has the highest dividend as opposed to the one that has the best ability to grow that dividend.

“We’re looking not just at payout, but also details like the ability to withstand the leverage on their balance sheet,” she said. “And we do this not just for companies, but also for mutual funds and ETFs, which can give advisors a sense of whether there’s truly sustainable income in their strategy.”

The group is equally able to look at a company’s individual revenue streams to identify the exposure to underlying economies one gets by buying that company’s stock. This X-ray of a portfolio goes beyond where the company files its paperwork she said.

“An advisor believes they have a fairly well diversified portfolio across different geographies, but when we look at the geographies by revenue, we can see it’s actually overweight in developed markets, especially in the U.S. So, for example, a phone manufacturer may sit in South Korea, but all their phones are bought in the U.S.,” she said. “If you want to truly diversify, you need to make sure you’re diversifying across other economies.”

On the fixed-income side, Dessner said her group thinks that advisors should be very intentional about the role they want fixed income to play in a portfolio.

“Duration and credit quality is where an advisor typically will begin and end,” she said. “It brings down risk, delivers income and can provide other benefits. Do you want it to be a diversifier? Produce income? Protect against inflation? Are you looking for capital preservation with reduced risk?”

In the first half of this year, Dessner said more than 1,500 advisors sought her group’s expertise, putting her client flow on the same level as 2020, when the effects of the global pandemic and social unrest upended business as usual. This year, she said, it’s the geopolitical eruptions and the movements of the Fed that are creating the uncertainty.

“Advisors are engaging with us now as they did in 2020 with that serious question of ‘What do I do now?’” she said.