By: Don Ezra
Don Ezra is a former co-chairman of Russell Investments global consulting and the creator of the retirement website www.donezra.com.
Over a long career, I’ve been the ultimate financial geek, well-versed in the language of Wall Street, with a long career advising pension funds in countries from the US to Australia and the Netherlands. Now that I’m retired, I’m finding that my wife and I are engaging in different financial conversations with our advisors than we did earlier in life. I believe that this new perspective should drive how a successful advisor talks to us, as well as many other older couples and individuals.
First, we need a richer conversation – not merely about financial goals, but about lifestyle risks and rewards.
Instead of dwelling on a specific numeric investment return target (such as a percentage return on assets), we now have a more holistic aim: how to preserve our lifestyle when facing the vagaries that life can bring. We’ve already made arrangements for our kids, giving with a warm hand rather than a cold one.
So instead of asking us about our investment risk tolerance, we want to enrich the conversation – taking into account the chance that our lifestyle will be disrupted. How much we withdraw from our assets each year need not exactly replicate the ups and downs of our asset value; rather, we can smooth out our withdrawals. Moreover, our spending need not exactly track the variability of our withdrawals; instead, we keep a reserve to even out our spending. If necessary, we can cut our desired spending in times of need. While that would be a difficult conversation, we’re aware of the possibility and can control it. Accordingly, short-term investment performance is hardly relevant.
And while we’re at it, the notion of asset allocation has become an overly complicated concept at our life stage. For us, assets either have safe returns or long-term growth potential. We need some of each. We can even tell you how much safe income we want and for how long, with the rest being used for growth. So when advising us on how to invest our money, we ask you to explain how any given asset allocation gives us our desired safety, and what’s the resulting growth potential.
Second, we need you to understand what financial success means to us.
We will judge your value to us in terms of how well you support our desired standard of living, and this is our only expectation. Keep your eye on this instead of telling us about your investment performance, and we’ll appreciate your work enormously.
Third, we ask you to report to us in the same way.
One implication of this request is that we don’t want you to just look backward, telling us: “Here’s what you now have, here’s your return for the past x months, and here’s how it compares with the markets or with other investors.” That’s just a data dump to us.
Instead, talk to us about the concept of our “personal funded ratio.” This idea which I came up with several years ago takes what we have and compares it with what we require to support our lifestyle over the relevant horizon. What we want to hear from you is something like: “Your personal funded ratio is now 120% (or 80%, or whatever). That’s changed from our previous report by 10% (or whatever), and for the following reasons.” OK, now you’re offering us some useful information. “As a result of this change, you could consider increasing your spending by 20% (or cutting it 20%). But you don’t need to make that big a change, because gradual adjustments will probably even out the fluctuations over time.”
Of course technical stuff like market returns are of some interest, but they’re merely an input into the overall assessment of where we stand, and not the final result. After all, we care about the impact on our lifestyle.
Last, focus on what’s valuable to us.
Never mind “alpha” and “active management;” these buzzwords have precious little influence on how we manage our money. Instead, a helpful advisor would talk to us about taxes and their management. We also need a discussion of how to protect against the financial impact of living longer than average, which could present a much bigger financial risk to us than investing in equities. Healthcare costs and long-term care expenses: what do we need to know and how can we protect against these shocks?
We’ll age, and we’ll need your help to manage this process. Perhaps when the elder of us reaches age 85 or the younger reaches age 80, we’ll want to lock everything in at that point. I imagine we may be well into the “slow-go” phase of our lives, so further asset growth won’t achieve anything we desire. Moreover, we don’t want to burden our children by worrying about our finances. We might have suffered cognitive decline. If we’re at least in average health, locking in a predictable income stream for the rest of our lives will likely imply buying annuities.
While our asset management story at that point may not be very interesting, we’ll thank you for your help and hope you’ll stay our friend. You’ll have shared our life stories, helped us achieve happiness, and kept us calm when we may have been inclined to panic. We’ll be very grateful and tell all our friends about your excellent work!
This piece was originally posted on December 30, 2017, on the Pension Research Council’s curated Forbes blog. To view the original posting, click here.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.