The warning signs continue to mount that Americans are not saving enough for retirement – a recent study predicted three in five retirees will outlive their money if they try to maintain their working standard of living, but one financial adviser says most of her colleagues are still doing all the wrong things to help clients avoid this fate.

 “The paradigm needs to shift: the whole idea of a balanced portfolio with asset allocation – modern portfolio theory – with systematic withdrawal is nuts,” says Erin Botsford, a financial planner and author of “The Big Retirement Risk: Running Out of Money Before You Run Out of Time.”

“That’s the way people have been doing business for 40 years. That all works when the markets go up, but it falls apart when the markets fall flat or go down. I think as financial advisers, we put our clients at huge risk when we continue to operate that way,” she said. The Frisco, Texas-based Botsford says advisers’ top priority should be securing income streams for clients. “Maybe the income streams we can secure today are not 8% or 9%, but they’re 5% or 6%.”

She accused most advisers of wearing rose-colored glasses; first, by clinging to the notion that the stock market must return to the bullish mode of the 1980s and 1990s, and second by refusing to recognize the $16 trillion in debt the United States  is shouldering, as well as other fiscal problems. They have lost sight of their primary job, she says.

She also charges advisers with another big fault, the failure to separate clients’ “non-negotiable” financial needs from their wants. “Quit lumping everything into one pie chart like it’s equal: all things are not equal,” she says, with a note of exasperation in her voice. In her book and with her own clients, she counsels building a “House of Security.” In this back-to-basics approach, she asks clients to list their non-negotiable expenses: housing, food, health care and utilities.

Everything else, from country-club memberships to manicures and pedicures, does not make the cut. She allows, however, that for wealthy clients, the non-negotiable list can be longer. “If they have $10 million, everything is non-negotiable.”

Once the needs are separated from the wants, she then plans for securing them differently. Botsford counsels matching the investment to the priority. She invests for the needs with what she considers secure investments: annuities, TIPs, muni bonds. (She notes that with annuities, the income is guaranteed. “The insurance companies have to set aside reserves. The government doesn’t,” she added.)

“Make sure that income is going to come in, no matter what.” Then, she says, “going up the food chain,” the “extras” can be funded with less secure investments, such as stocks.

Despite all the problems, she says the picture is not quite as grim as it first appears. She notes that many clients have pensions and Social Security that can be used off the top to fund some of the needs. “Sometimes the needs aren’t as big a problem. The problem is, most advisers take however much money the people have and throw it in a pie chart, and then you put your client at the risk of running out.”

Elizabeth Wine is a freelance writer for Financial Planning, a SourceMedia publication.

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