Purse Strings: Advisors Dish on the Market, Nest Eggs and More

In uncertain times, people tend to clutch their purse strings a little tighter.

Arkansas Money & Politics spoke with three local financial advisors — Beckie Comstock, chartered retirement planning counselor and financial advisor at Brown Comstock Private Wealth Advisors in Hot Springs; Marshall Moon, principal at Meridian Investment Advisors in Little Rock; and Scott Daniel, accredited investment fiduciary and certified exit planning advisor, Little Rock-based managing director and investment advisor for WealthPath Advisors — for their thoughts about the current market, advice for pending retirees and young adults just starting to build their nest eggs, trends, and more.

Arkansas Money & Politics: In this market, what questions should clients and potential investors be asking, and what should be their biggest concerns?

Beckie Comstock

Beckie Comstock: In any market, I feel like the fundamental questions should remain consistent:

• What’s my time horizon? The longer you have until retirement, the better you can weather market volatility.

• Am I properly diversified? Changes in the economy and macroeconomic conditions might warrant periodic adjustments to your allocation.

• Do you have enough easily accessible cash for emergencies? Liquidating investments for emergencies is not always ideal, so it’s important that you have enough set aside to cover those immediate needs.

• Am I focusing on the bigger picture (retirement) rather than reacting to current headlines? Working with a professional financial advisor can help maintain perspective and avoid impulsive decisions.

Marshall Moon

Marshall Moon: In the current economic climate, the focus should be on understanding and mitigating risk and aligning their portfolio with their long-term financial plan. It’s important to understand not only their tolerance for risk, but also their capacity for risk, so not only do they need to understand how much risk they can handle from an emotional perspective but how much risk and volatility they can mathematically absorb according to their financial plan.

Questions that clients and potential investors should be asking are: How does my portfolio’s current allocation align with my risk tolerance and time horizon? How liquid are my investments? How can my portfolio be positioned to handle ongoing inflation? How are these investments going to support my retirement goals?

Scott Daniel: In today’s market, clients and potential investors should be asking questions and considering risks across several key areas — economic conditions, interest rates, geopolitical instability and emerging technologies. On biggest concerns, there’s a lot to digest: interest rate volatility, valuation risk in equities, credit and liquidity risk, geopolitical flashpoints, consumer weakness, climate and ESG risks.

AMP: What specific advice would you give someone getting close to retirement?

Moon: Meet with a financial professional and get a comprehensive financial plan in place. Retirement should be one of the most joyous parts of anyone’s life. It’s where ample time meets endless opportunity. At Meridian, our motto is “investing for a rich life, realizing what you value.” One of the greatest joys of what we do is giving people the confidence to retire and freeing up their time and emotions to live out their best days however they see fit. Even if you’re competent enough to handle your own investments, I’d encourage you to reconsider so that you can spend more time doing the things that give you meaning, purpose and joy.

Daniel: If someone is getting close to retirement — say, within five to seven years — their financial strategy needs to shift from accumulation to preservation and distribution. The focus should be on reducing risk, locking in income and building flexibility to handle uncertainty. Lots of options to review and discuss.

Comstock: Start by understanding how much you’re spending each month, separating needs from wants. Meet with your financial advisor early to start planning and making any necessary portfolio shifts. Also, we can help you plan for things such as tax-efficient withdrawal strategies, retirement plan rollover options and running projections tailored to your specific scenario. If you don’t have a trusted financial advisor, find one. Ask your friends or family for recommendations, and interview a few to see if they are a good fit. Most of the time, there is no cost to do so.

Scott Daniel

AMP: Same question, but for young adults just launching their careers.

Daniel: Great question. Starting young gives you the single biggest advantage in retirement planning — time for compounding.

Comstock: Time in the market beats timing the market, so start early. Take advantage of employer-sponsored retirement plans especially if they offer matching contributions. (That’s free money!) If they offer a Roth option, consider using it, especially if you’re young and early in your career. It can offer tax-free growth. It’s tough, but don’t panic when the market dips. Think long term. If you’re consistently contributing during these periods, you’re essentially buying in at a discount. Focus on building a diversified long-term portfolio, and avoid chasing fads or the latest “hot stock.” A trusted professional financial advisor can help guide you through this process.

Moon: For young adults, time is their single greatest asset. The advice is simple: Start now, be consistent, and leverage the power of compounding. Make saving for retirement a nonnegotiable part of your budget.

Additionally, I’d encourage young adults to track their expenses closely. In the end, financial health comes down to how much comes in (income) versus how much goes out (expenses). Spending less than you make is a foundational piece of personal finance.

AMP: How much of a nest egg does one need to live comfortably in retirement?

Comstock: There’s not a magic number because there are many different factors to consider:

• Your expected expenses

• How long your money needs to last

• Whether you plan to relocate to another state or buy a
second home

• Whether you plan to leave money to heirs

These are just a few considerations that should be part of a personalized plan.

Moon: The answer to this question can vary widely, but I’ll give a baseline for how you can think about it, and then you can adjust based on your personal needs or beliefs.

In 1994, William Bengen published a study — now the famed 4 percent rule — in the Journal of Financial Planning that attempted to answer the question: How much of my savings can I spend each year without outliving my money? After studying financial data dating back to the 1920s and running hundreds of scenarios, he found that a balanced portfolio of stocks and bonds lasted at least 30 years under all historical scenarios tested. If he were to run the same study today, he would arrive at the same conclusion.

Given this information, you might consider a target nest egg of 25 times your projected annual retirement expenses. For example, you might need $2.5 million to support your retirement lifestyle if you expect your first-year retirement expenses to be $100,000 — 4 percent of $2.5 million. What this doesn’t consider is other income sources such as Social Security or pension income, which could greatly decrease the amount of savings needed.

Daniel: That’s one of the big retirement questions, and the answer depends on lifestyle, health and where you live. Most people need 70 to 80 percent of their preretirement income to live comfortably, since housing, commuting and work expenses may drop. We normally discuss taking 4 to 5 percent from retirement savings for retirement income. Therefore, if you have $1 million, you can draw $40,000 to $50,000 from your retirement “nest egg.” Need more at retirement to be closer to your working year’s income? Then, you will need to save more.

AMP: How much should young adults be putting away each month to ensure a comfortable retirement?

Moon: As a goal, young adults should target a savings rate of 10 to 15 percent of their annual income. This is also dependent on individual circumstances. The best and most effective way to do this is through their employers’ retirement plan. Now don’t forget that this 10 to 15 percent includes money put into their retirement plan by their employer, so if their employer is contributing 3 percent on their behalf, the employee might only need to contribute 7 to 12 percent of their own money.

Daniel: Great question — this is exactly where starting early really pays off. The “right” monthly amount depends on income, age and retirement goals, but we can work with some common guidelines. If you use the “Rule of 72,” then you have an idea of what dollar amount you might end up with at the end of each 10 years. This might be a little simplistic approach, but it’s a good starting point to see what kind of dollar amount you need to save per month. The earlier you start, the smaller amount you would need to save. I think compounding should be included in the Seven Natural Wonders of the World.

Comstock: As much as they can! Even small amounts can compound into significant savings over time. A general rule of thumb is 15 to 20 percent of your annual income if starting in your 20s. Lastly, I would recommend that you revisit your financial plan regularly. Life changes and your strategy should too. Even a 30-minute check in can make a big difference.

AMP: What trends are you seeing?

Comstock: A major trend in the financial services industry is a shift from commission-based transactions to fee-based advisory models. I believe it’s a positive development for everyone involved. Fee-based models are more transparent, which aligns more closely with the clients’ best interests. It gives the client predictability in cost, which, in turn, helps build trust with the advisor. For instance, instead of earning commission on a product sale, advisors are compensated for ongoing guidance. It puts us all on the same side of the table. When the client succeeds, we succeed.

Moon: A huge trend in wealth management right now is alternative investments. These are nontraditional investments that the everyday investor hasn’t had access to until recently (e.g. hedge funds, private equity, private real estate, etc.). This asset class has provided great returns over the last 15 years in an ever-expanding economy, but investors need to understand the risks associated with them. These risks include but are not limited to less liquidity, less regulation and higher complexity. Having exposure to this asset class could very well make sense, but it’s important that investors are well educated before allocating significant capital to it.