By Dylan Huang
I know two different kinds of retirees.
George is living his best life, taking trips with his wife to see the grandkids, practicing yoga and not worrying about his expenses because he has guaranteed income from a pension and Social Security.
June on the other hand, also has Social Security but holds onto every penny, afraid to spend down her retirement assets in case of a major expense or stock market crash. She felt more secure in her working years when she could depend on her paycheck. Most likely, people fall somewhere in between George and June in terms of their retirement satisfaction.
The concept of retirement can be scary. Why? It’s a major life change, which means retirees need to break decades-long habits: They no longer have to wake up at a certain time, commute to work and, perhaps most important, continue to build a nest egg.
But retirement also means starting exciting new routines. Sleeping in. Feeling like every day is Saturday. Eating breakfast at a table. Taking a vacation without thinking about work email. Spending down their nest egg in retirement. It might be hard for retirees to wrap their heads around spending in retirement, but that’s exactly why they built their nest egg.
How can advisors ease retirees into this new mindset? Explore solutions to help them feel confident and in control of their retirement planning process. It all starts with minding the risk gap.
How much is too much risk? Risk tolerance is a personal question and varies depending on the individual, their target retirement age, their financial goals and other circumstances unique to their situation. The traditional thinking is that investors should de-risk into fixed investments as they age.
However, investments considered “safe,” such as bonds, may not provide enough growth to adequately support a fruitful retirement. So although choosing less equity exposure may feel like a safer option, it also means forgoing the opportunity to grow retirement assets. Striking the right balance requires some thought and planning.
While traditional assets may have worked well in the accumulation years, it’s crucial to explore other kinds of solutions. Consider financial products, such as annuities, which provide various guarantees that can give investors more confidence to enjoy retirement.
Balancing pre-retirees’ risk tolerance with their risk need. There appears to be a fundamental disconnect between pre-retirees’ risk tolerance and risk need. Their risk tolerance can be lower than their risk need. Pre-retirees may be missing out on potential market gains and not getting the growth they need to adequately fund their retirement years because they fear losing their hard-earned nest egg. As a result, pre-retirees might be underinvested in equities, causing them to fall short of their retirement goals.
A study from Greenwald and Associates and Diversified Services Group, “Retiree Insights 2018 Study of Advisors,” shows that financial advisors reported their clients were not adequately allocated in equities — in fact, roughly one in three advisors responded that 25% of their clients are insufficiently allocated in equities. Therefore, it’s essential to close the gap between what pre-retirees often think they want and the level of equity exposure that they may need to fund their desired lifestyle.
Pre-retirees are looking for growth and protection. Everyone wants to have their cake and eat it too. In today’s economic environment, investors want growth and guarantees. Long-term retirement investments such as variable annuities are one way to grow assets while gaining access to guarantees. With access to expertise across asset classes and investment styles, investors can build a diversified portfolio to meet their financial objectives — tapping into a wide variety of investment options.
Specifically, a variable annuity with an optional guaranteed minimum accumulation benefit rider or GMAB offers market participation with protection of principal in case of a market pullback for an additional fee. A variable annuity with a GMAB offers growth potential with a broad array of available investment options.
Of course, investors should consider fees, guidelines and risks with variable annuities and riders. Withdrawals or surrenders may be subject to a surrender charge, ordinary income taxes and, if made prior to age 59½, may be subject to a 10% IRS penalty. It is also important to keep in mind that guarantees are subject to the claims-paying ability of the issuing insurance company.
And your clients should consider the investment objectives, risks, charges and expenses of the investment carefully before investing. Remind them to carefully read the prospectuses, which contain information about the products and underlying investment options.
Ready for income? For those closer to retirement or already retired, having a guaranteed stream of income for life that covers retirement expenses is crucial. Income annuities, therefore, are attractive options because they offer a steady, predictable, “pension-like” income that is not subject to market volatility. They are an efficient way to generate retirement income from a lump sum.
With the uncertain future of Social Security and with traditional pensions becoming rarer, income annuities provide a guaranteed income, allowing individuals to invest a portion of their portfolio knowing their income needs are taken care of. It makes sense then that with a base of guaranteed lifetime income, people would generally be more willing to invest more aggressively with the rest of their portfolios.
The importance of addressing retirement risk concerns. Unlike the accumulation years, retirement carries risks that are more possibly more complex. It’s important for pre-retirees to understand the range of financial risks associated with retirement to adequately plan for them. Longevity concerns, sequence of returns and inflation risks can easily derail a poorly constructed plan and risk jeopardizing your client’s desired lifestyle.
In retirement, investors may need both growth and guarantees, with traditional and insured assets such as annuities. There are different ways to seek growth in retirement. The key is knowing the investor’s objective: tax deferral, growth opportunities and/or longevity protection?
Financial professionals play a key role in providing investors with assistance in retirement by implementing strategies with solutions designed to help grow and protect their retirement savings, while helping to address risk concerns in retirement. These solutions could include a combination of financial products. Your clients only retire once, so it’s important that advisors consider how these solutions might fit into a client’s strategy.
Dylan Huang is a senior vice president at New York Life and is registered with an affiliate, NYLIFE Distributors LLC(member FINRA/SIPC).Dylan may be contacted at [email protected].
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