3 steps to mitigate financial risks in retirement

By Ruth Schau

High on many individuals’ wish list is the ability to enjoy their retirement years, including having more time to spend with family and friends and doing things they love. But retirement planning doesn’t always include discussion about post-retirement risks, especially the possibility of your client outliving assets due to unexpected early retirement, as well as how to allocate retirement funds properly and the potential for elder fraud.

To ensure your clients are financially prepared for the often-unpredictable world of aging and retirement, here are three actionable steps you can advise clients to take in order to mitigate their financial risk.

Start planning now for unexpected early retirement

Retirement planning is not a singular life event but rather a continuous process that should be revised frequently. Although many people have concrete ideas of when they will retire, deteriorating health and job insecurity often do not align with that timeline. To stay on track, I recommend setting aside time each quarter for clients to revisit their finances and reevaluate their employer’s retirement plans.

To begin, clients should ask themselves questions such as: How do I know what monthly expenditures I can afford once my paycheck ends? In which areas can I reduce spending to save more later? How will my spending habits change once I retire?

Whether someone is just starting their first full-time job or is nearing retirement, asking these questions is a crucial first step in being financially prepared.

Take advantage of retirement planning options

Retirement funds exist only once, so it’s critical to allocate them wisely. From my experience, having a portion of retirement savings locked into guaranteed lifetime income is a great way to stave off the need to access other funds in retirement. Referred to as “a license to spend,”[1] this income becomes your retirement paycheck to spend as you automatically receive it each month. Splitting retirement savings between guaranteed income and accessible income left in your retirement plan helps manage risk by mitigating your exposure to unhealthy investment markets, as well as providing clear direction on budgeting and spending.

A newer option is the qualifying lifetime annuity contract, or QLAC, which I like to jokingly call “Quest for Lifelong Access to Cash.” This option is deferred until later in retirement and is a great way to tackle longevity risk. I have found that many actuaries, including me, really like this option. The payments begin no later than age 85 and can be used as an increase for general spending, medical needs or other services that may be needed later in life.

Additionally, a QLAC is a form of safety net that will provide monthly income above and beyond Social Security benefits. If your client spends down their retirement savings due to a long life, this extra source of funds will exist for them later in retirement.

For example, my father – who unexpectedly retired early at age 57 – is experiencing the effects of not having adequate retirement savings and is now in an assisted living facility. Although he receives Social Security payments, they will not be enough to cover his current expenses. If he would have had the option to invest in a QLAC, he would have been much better prepared.

Elder fraud is real. When in doubt, check with a family member or friend

It’s no secret that fraud is a major issue in today’s connected world, but it’s important to recognize how fraud disproportionately affects the elderly. As we age, we become increasingly susceptible not only to physical decline but also cognitive decline. Defrauders know this and prey on elderly individuals to swindle them, sometimes for tens of thousands of dollars. Although this may not be a concern for some of your clients now, it’s imperative they have a trusted circle of friends and family to help protect them from financial fraud that could greatly – if not completely – derail their retirement plans.

I witnessed this first-hand with my own parents. My mom experienced a sharp decline in her cognitive abilities due to her cancer treatments. My father was hearing impaired and legally blind, which positioned them to be perfect targets for a defrauder claiming to be a sheriff and requesting bond to bail out their grandchild. Due to their vulnerable states, they were defrauded out of $5,000. While this situation could have been much worse, it’s an example of how important it is that your clients are aware of these risks. Help your clients understand the importance of verifying financial requests with a trusted individual before engaging in any seemingly suspicious transfer of funds, whether online, over the phone or in person.

Although these are only three recommendations to help protect your clients’ financial futures and prepare them for the unexpected twists and turns of retirement, I welcome you to check out a report conducted by The Society of Actuaries Research Institute—Managing Post-Retirement Risks: Strategies for a Secure Retirement—for a full scope of retirement risks and how you can best advise your clients to take meaningful action now.

Ruth Schau, FSA, EA, FCA, is a senior director of pension solutions at Pacific Life, partner of Retirement Engagement Solutions, and the chair of the Society of Actuaries’ Aging and Retirement Steering Committee. She may be contacted at [email protected].

In order for the contract to be eligible as a QLAC, certain requirements under Treasury regulations must be met, including limits on the total amount of purchase payments that can be made to the contract. Qualified contracts, including traditional IRAs, Roth IRAs, and QLACs, are eligible for favorable tax treatment under the Internal Revenue Code (IRC). Certain payout options and features may not comply with various requirements for qualified contracts, which include required minimum distributions. Therefore, certain product features, including the ability to change the annuity payment start date, accelerate payments, and to exercise withdrawal features or payout options, may not be available or may have additional restrictions.

[1] Blanchett, David and Finke, Michael S., Guaranteed Income: A License to Spend (June 28, 2021). Available at SSRN: https://ssrn.com/abstract=3875802 or http://dx.doi.org/10.2139/ssrn.3875802