Retire boom makes advice for golden years a top 2022 theme for advisors

With a record 700,000 boomers hitting retirement age in 2022 and another huge segment approaching the milestone, it shouldn’t come as a surprise that advice on retirement investment strategies dominated topics around financial advisors.

The risks, rewards, and complexities of new retirement investment products, along with deep concerns about how much money is enough to retire on, continued to be among the top subjects and most read advisor-related articles.

Save some time to dream

You’ll never win a $1billion lottery prize. But, then, someone did in 2022 and it’s always fun, and maybe a bit disheartening, to consider what steps would you take if you really cashed in a huge lottery ticket.

Nearly unanimously, financial advisers said, “don’t tell anyone” – if for no other reason to keep ambulance chasers like themselves from stalking you.

“You want to make it as difficult as possible for unwanted people to come out of the woodwork and find you,” one said.

Almost as common, advisors suggested opting for the all-cash payout versus the 30-year annuity, which significantly reduces the prize but we’re talking in hundreds of thousands of dollars here. And don’t rush to claim it.

“Maybe take a little vacation before making huge decisions,” said one advisor. “Lean on your professional financial advisor or multifamily office for guidance and to handle outside requests.”

Don’t worry, be happy, about retirement

Finance professor Moshe Milevsky thinks advisors can quell burgeoning fears about retirement by building portfolios that consider the biological age of clients and relying on annuities to provide solid income. Most important, he said, is that retirement simply be a time for dread and worry.

“There are some great things about being retired,” he said. “You have more time on your hands to do things that you enjoy. You get to spend time with family and loved ones. You no longer have the work stress.”

New rules and the mistakes they can cause

The new year began with the Dept. of Labor tweaking the rules governing sales of financial products with retirement dollars. The Investment Advice Rule had two main parts: a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the "five-part test" from 1975 to determine what constitutes investment advice.

The new rules naturally came with a scoop of confusion, and legal and consulting firm Faegre Drinker outlined the 11 most common mistakes financial advisers see clients making. From failure to recognize rollover options, to not making prudent efforts to obtain all relevant information, Faegre Drinker offered tips on avoiding the many potential missteps.

 

A perfect time to be in the retirement red zone

The economy might look bad, but Igor Zamkovsky, head of indexed annuities and insurance at Blackrock’s Retirement Insurance Group, said there couldn’t be a better time for retirees and budding retirees to add fixed indexed annuities to their portfolios.

With so many investment classes down, “having protected solutions is more important than ever,” he said. “We’re in an incredibly dynamic market environment. But the overall concepts surrounding the value of FIAs are still true.”

Blackrock’s research showed that FIAs can allow for consistent equity exposure in the retirement red zone to help capture upside potential while also mitigating downside sequence-of-return risk.

We’re worrying about the wrong things

Concern for our future in retirement is a natural phenomenon, most advisors agree, but a Center for Retirement Research at Boston College report found retirees aren’t really assessing the true risks they face.

The report found that objective risks include assessing longevity, followed by health and market risks, while retirees subjectively focus on market volatility.

“Perceived longevity risk and health risk rank lower, because retirees are pessimistic about their survival probabilities and often underestimate their health costs in late life,” the report concluded.

How to beat inflation

Inflation reared its ugly head in 2022, diminishing retiree purchasing power and wreaking nest eggs. One retirement fund manager pointed out that with just a moderate inflation rate of 3%, the $60,000 one might need for the first year of retirement would be worth less than $34,000 in 20 years. And at the time, the inflation rate was running at 8.6%.

But all is not lost, according to financial advisors, specialists, and managers. We rounded up a group that offered five key strategies for dealing with inflation pressures on retirement portfolios. They ranged from finding ways to hedge against rising prices, to switching from growth stock funds, which are interest rate sensitive, to value stocks, like grocery chains, tobacco, alcohol, cosmetics, and fast food.

Above all else, they said: “Don’t panic.”

The X-factor in Gen X

Research by the Society of Actuaries Research Institute found that Gen Xers, those between the ages of 40 and 56, are not well prepared as older generations for their golden years.

Gen Xers are in a different situation than the group before them because of high student loan debt, less access to defined benefit plans, and with many lacking savings.

“Generation X stands out as the first generation in the U.S. that will primarily need to be self-dependent on ensuring their own retirement security, the Anna Rappaport, past president of the Society of Actuaries. “Our study shows that only 33% of this generation is covered by traditional defined benefit pension plans. And we also know that self-funding of retirement means individuals must start saving early and must save consistently throughout their career to be able to accumulate an adequate retirement fund.”

She said advisors need to understand clients’ current retirement-savings levels and their ability to save for the future, help them understand and set realistic targets for a secure retirement, set a specific goal, and then quantify the level of savings needed to achieve that goal.

And then there’s volatility

Higher than normal market volatility in 2022 had investors and advisors searching for ways to dampen the whipsaws plaguing retirement accounts. One insurance advisor found that if a hypothetical client invested $1,000,000 in the year 2000 and took out $50,000 annual distributions during that 20-year time period, it would have ended end 2019 with $271,000 in their account.

Conversely, if the sequence of returns were reversed -- starting in 2019 and then working our way backward to 200, under that same withdrawal rate – the retiree would see an ending balance of $1,800,000.

Advisors should help clients mitigate risk to ensure they have alternative sources of funds to draw from in years where markets gyrate. Years such as 2000, 2001, 2002, and 2008 are great examples of years in which a client would have been well served by not withdrawing from their equity portfolios and instead drawing from one of their alternative sources of funds.

Closing the retirement gap

In the age of estimates prediction a $240 trillion retirement gap and a $160 trillion protection gap by 2030, an Ernst & Young analysis of retirement savings found integrating insurance products into the investment mix significantly boosts value to retirees, compared with investment-only strategies.

The paper explored how two products can be utilized to meet investors’ savings and protection needs: Permanent life insurance (PLI), and a deferred income annuity with increasing income potential (DIA with IIP), which represents deferred income annuities with persistency bonuses and non-guaranteed dividends.

Integrated strategies provide investors with flexibility to focus on financial outcomes most important to retirees: income, legacy, or a balance in between. Allocating up to 30% of annual savings to PLI and up to 30% of wealth at age 55 to DIA with IIP may be appropriate when optimizing retirement income and legacy value outcomes,” the paper concluded.

Forget simple, give me complex

Signs pointed to mass affluent investors, who typically opt for general or mutual funds for their investments, shifting to more complex financial products. This historically overlooked group no longer relies exclusively on exchange-traded funds and mutual funds. Instead, mass affluent investors are starting to branch out and opt for alternatives, structured products, even art and other non-bankable assets, all of which were traditionally the domain of high net worth and very high net worth investors. The study revealed that there is little difference between very high net worth investors and the mass affluent in their desire for increasing complex investments.

Demand for alternatives (69%), tax-exempt investments (59%), structured products (26%), and art (16%) among the mass affluent is, in fact, quite similar to that shown by VHNW investors.

 

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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