Effects of the fiduciary rule on retirement planning

March 14, 2016 by Tom Burmeister

about the author:

Tom Burmeister

Vice president, financial planning

As vice president of financial planning, Tom is an integral contributor to the strategic vision around our financial planning initiatives. Additionally, he is critically involved in all partner interactions, thought leadership contributions, and internal training programs.

Last week the Department of Labor (DOL) announced that it is planning to undertake a “long-term research study to develop a panel that will track U.S. households over several years in order to collect data and answer important research questions on how retirement planning strategies and decisions evolve over time.” In its request for comments published in the Federal Register, the DOL noted, “Relatively little is known about how people make planning and financial decisions before and during retirement.”

The announcement of the study drew the ire of some lawmakers who pointed out the irony in moving forward with the proposed fiduciary rule without adequate knowledge of how people make retirement planning decisions. While it is impossible to determine exactly what the DOL considers to be “relatively little” information, retirement seems to be an area that receives plenty of scholarly attention, especially in the years following the recent financial crisis. So what do we know about these recent or soon-to-be retirees?

Healthcare is the headliner

We know retirees can expect healthcare costs to be one of the largest, if not the largest expense during retirement. Unfortunately, however, this area of retirement planning is often overlooked when people nearing retirement estimate their expenses. Only 17 percent of pre-retirees have “calculated a specific estimate for what they may spend on out-of-pocket health care costs,” according to a recent Ameriprise study. Fortunately, more than half plan to discuss their retirement healthcare costs with a financial professional.

The continued shift toward more comprehensive financial planning as part of the impending fiduciary standard should arguably improve the deficiencies in retirement healthcare planning. As financial professionals take a more holistic approach to planning, healthcare will certainly play a greater role in retirement discussions. This should also bode well for the long-term care insurance industry. The American Association for Long-Term Care Insurance predicts that policy sales in 2016 will increase compared to years prior.

The game of risk

As investors move closer to retirement, their first inclination is usually to dial back the level of risk in their portfolio by moving most, if not all, of their savings into bonds, money market funds, or similar investments with lower historical risk. Unfortunately, low-risk investments in pre-retirement years can equate to a riskier retirement plan over the long run due to increased life spans of retirees.

A recent Merrill Lynch study points out that a 65-year-old couple has a 25 percent chance of one spouse living past 97 years old. The study’s conclusion on this topic is important, and often overlooked: “Funding a retirement that might last 30 years or more generally requires the higher long-run returns that equities have historically earned.”

So if no risk is risky, how much risk is too much? As with most things in life, there is always a fine line that needs to be straddled, and many Baby Boomers have actually taken the risk game a bit too far.  Fidelity recently pointed out that many Baby Boomers are “top heavy on stocks,” with nearly a fifth of Boomers holding equity positions more than 10 percent higher than recommended. This is likely an overcompensation for those worried that they will outlive their money.

The study points out two easy rules of thumb for pre-retirees to follow. For an approximate target equity allocation, subtract your age from 120 and investing that percentage of your portfolio in stocks.  More importantly, make it a point to rebalance your portfolio once a year. One clever advisor told me he gets the best results by reminding clients to rebalance every year on their birthday. Clients get a card wishing them a happy birthday along with a reallocation reminder. As he put it, “it’s one of the best and easiest gifts you can give yourself.”

One thing we know for sure

Retirement readiness has plenty of room for improvement. No one on either side of the aisle in Washington can disagree on that. Just up the street in Washington, the Federal Reserve broke the news that one in five people who are near retirement age have zero money saved. We know about the problem, but the question is: do we know enough about the solution to pass the fiduciary rule as proposed? The DOL says yes, some lawmakers say no, and many others are nervously awaiting the results.

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