Among my many conversations with clients this past week, three of them were with people roughly my age who were contemplating what the next 10 years will look like for them. All three had essentially the same thought and wanted to bounce some ideas off our team. The conversations went in the direction of discussing risk tolerance and asset allocation for a pre-retiree. All three of these clients had similar personal financial situations – they had been working and saving for 35 years or more, had been good savers and built a comfortable sized retirement nest egg, had put their kids through college and paid off their mortgage. All three indicated that they wanted to work around 10 more years.
Conventional wisdom and practice in terms of asset allocation is that as one approaches retirement, the percentage of fixed income in a portfolio increases and conversely the percentage of equities decreases. In doing so, an individual or household can reduce volatility as they approach retirement and mitigate what is known as sequence of return risk. The less time one has to recover from market sell offs, the more a portfolio should be structured to protect the downside. The conundrum, however, is that many of the conventional thoughts and practices about a glide path of increasing bond allocations over time is that these practices were studied and put into place when bond interest rates were much higher than they are today.
All three of these clients wanted to challenge the thought of that conventional glide path in their own household. They were thinking that in their case, the next 10 years might be a time to increase their risk profile and equity exposure. The reason being twofold: 1. They had “checked the boxes” in financial preparedness a little earlier than they thought, making the income that they’d be earning and saving over the next 10 years an additional buffer in their financial plan. 2. Fixed income rates are likely to continue to stay low for the remainder of their working years.
Of course, there are many additional complexities to consider – pensions, future social security income, expected extra financial commitments and the like. There is also the consideration of whether some form of an annuity should be considered to create a guaranteed source of income in the place of where bond interest might have previously filled this need.
Financial planning is not a one size fits all practice or solution. Every individual and household is unique. Helping answer these questions is what we aim to do for our clients. There will be many follow up conversations and many new individuals who will have similar questions as they look forward to their retirement. We welcome the opportunity to have this conversation with you if it is something that you wish.