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Changing investment habits as people near retirement

After stocks leaped forward in 2013, the hangover in the early going of 2014, not surprisingly, took a toll on retirement savers’ risk tolerance.

The Retirement Advisor Confidence Index, a monthly poll of wealth managers, fell 4.2 points, to 52.5, in February, one of the steepest drops since Financial Planning magazine began tracking the measure.

Clients on the whole pulled money from stocks and bonds to put into cash accounts, and they cut back on retirement planning services and retirement-oriented investment products, according to the magazine. Still, readings in excess of 50 are considered expansionary.

Investors notoriously buy and sell at precisely the wrong time. But when they get near or into retirement, something even more alarming seems to occur, according to research in behavioral finance.

The aging process can derail clients’ original investment intentions, making their portfolios vulnerable to a counterintuitive mix of overconfidence and loss aversion, according to a new paper in the Retirement Management Journal.

“People change as they get older, and I wanted to investigate how aging changes the way people manage money and work with an adviser,” said Helen Simon, a financial adviser who also teaches classes on investments and risk management at Florida International University.

On that front, she says, there is ample room for improvement.

Advisers and clients alike often fail to bring up key issues that will affect the clients’ financial futures or focus too heavily on the wrong issues, she said.

Many retirees take lump-sum pension buyouts because they think they can manage the money to better returns than could be had with an annuity and out of fear of giving up control over the money to an insurance company, she said.

“Marketers play havoc with this behavioral flaw, encouraging retirees to take their lump sums and do it themselves; similar to the scenario of lottery winners, who overwhelmingly take the lump sum only to end up broke and often in debt,” Simon writes in her paper.

She said she understands how paralyzing all the retirement investing choices can be.

“I’m 57 myself now, and all of my friends are going through this stage of life. I kept feeling that if I’m perplexed about all this, how do they feel?” she said.

“A girlfriend of mine had an adviser who for 15 years just kept saying she’d be OK. Well, she’s not.”

To be sure, there are plenty of concerns about annuities.

They are complex financial instruments with particularly low returns in the current interest rate environment and have a history of aggressive sales tactics and high fees.

By the same token, the nonannuity investment world has had its own share of misdeeds toward investors, from fraud to fees.

Meanwhile, aging baby boomers are left to grapple with how to devise a spending strategy that keeps them from running out of money but also doesn’t force them to live too frugally, all while navigating the cognitive decline that can derail their best-laid plans, she said.

“As advisers we must recognize and acknowledge these flaws in both ourselves and our clients,” she writes in the paper.

“We must work to lessen their detrimental effects by actively listening and engaging the client in discussion about their feelings toward their retirement income, education and misconceptions, while sincerely sharing our clients concerns.