Preparing for and transitioning to retirement is never going to be easy, but according to Mike Lynch, managing director of Applied Insights at Hartford Funds, it is clear that 2023 represents a particularly unnerving moment for late-career workers and retirees.
While the COVID-19 crisis presented severe challenges, Lynch says, these were relatively short-lived for late-career workers preparing for retirement, given that the associated recession was one of the shortest on record.
One probably has to think back to the Great Recession to find a time when there was more uncertainty for those contemplating retirement than the present moment.
"Retirees and pre-retirees just have so much to think about," Lynch says. "From inflation to the lingering effects of the pandemic to the Russian invasion in Ukraine. It all leaves people feeling very uncertain about what their future holds."
The essential realization for success in this moment, Lynch argues, is understanding that there is no auto-pilot setting for retirement. Achieving retirement goals, he adds, requires regular reviews and reassessment — as well as the ability to make adjustments to one's approach and expectations.
This is true even for those who have accumulated significant amounts of wealth for their golden years, Lynch says, but even more so for those who are uncertain whether they have saved enough to leave the workforce for good.
Another essential element of retirement success, in Lynch's experience, is preparation for the social and behavioral aspects of life after work. Many Americans fail to realize how much they rely on the day-to-day and week-to-week routine of a 9-to-5 job to give their life a sense of direction and structure.
In the end, Lynch says, this is a moment when financial advisors can provide a tremendous amount of value to their clients by engaging in more dynamic planning discussions that go beyond the portfolio and truly tie together all the different aspects of a real retirement plan.
The Financial Picture
Reflecting on his recent discussions with advisors and investors, Lynch says sentiments are somewhat more positive than they were in 2022, though there remains a lot of concern about inflation and the potential for a recession.
Amid the uncertainty, Lynch says, advisors are helping their clients grapple with the frightening prospect of negative sequence of returns risk and to right-size the amount of investment risk they are taking to match their retirement income and legacy giving goals. To address such issues, Lynch says, advisors can consider traditional bucketing strategies and improving diversification in the overall portfolio.
"Making sure that your clients are well diversified is something that is often talked about, but it is more important right now than ever," Lynch proposes. "This is especially true once you are in retirement, because the portfolio and the plan can be so sensitive to big losses."
Lynch suggests advisors should be prepared to have three distinct types of conversations with clients when it comes to their portfolio and its ability to fund their anticipated income needs in retirement.
The easiest of the three arises when a client has saved sufficiently and has a clear understanding of what they can expect to draw annually from their portfolio and for how long. In that case, the advisor's job is relatively straightforward and it involves helping the client stick to the well-tested plan once they actually make the decision to retire.
The more difficult conversations arise when a client either significantly overestimates or underestimates their preparedness for retirement, and in Lynch's experience, both are common.
In the former case, the advisor must help the client see their need to stay in the workforce longer or consider cutting back their lifestyle expectations. In the latter case, the advisor can encourage greater freedom in spending and help the client focus on legacy goals and community impact.
