Ever had this happen to you? You were called in to meet an affluent couple in their mid-40s who have a healthy amount of investable assets and need advice on what to do with them.
The get-to-know-you part of the meeting was going well, and you felt the good rapport building as you navigated through this couple’s goals and concerns. As the conversation arrived at the point where you mentioned some potential options for them, you were stopped dead in your tracks when the husband said to you, “Oh, we heard annuities are really bad and we don’t ever want to buy them.”
Whether you’ve experienced that, or even something similar, it’s a common occurrence to have to navigate clients around so-called bad ideas and misconceptions. Tackling these can be challenging if you’re not sure how to address them.
There are many commonly held misconceptions about retirement planning that can make it hard to know what to do, and misconceptions can hold clients back from making important decisions.
Let’s tackle several of the most significant ones out there so you can dispel these myths!
1. Retirement means I can stop investing.
In the past, retirement was viewed as an “end” in many ways. These days, though, retirement is often seen as an opportunity to return to one’s passions, or it’s viewed as just another of life’s many chapters. That doesn’t mean your clients should stop investing, however. In fact, many retirees find this new season of life brings new opportunities that they want to invest for!
Not only that, but with Americans living longer, the need to potentially generate higher returns than what might be accomplished conservatively, for a longer period of time than previously anticipated, is far more a reality now than it has been in decades. The bottom line is, your clients might need more money and they might need it for longer.
2. My taxes will be lower.
Not necessarily. That depends on your client’s situation. Some may earn less in retirement. This could lower their tax bracket, which could reduce their overall taxes. On the other hand, some retirees may end up losing the tax breaks they enjoyed while working. It’s also virtually impossible to predict where tax brackets will be when we retire because these can change legislatively over time.
Remind clients not to assume too much about taxes being a certain way. And help them prepare for several tax-related scenarios. This can be an ideal time to build rapport with a CPA in the process!
3. I’ll live on less when I’m retired.
Maybe. This one depends on how your client approaches retirement. In the later phase of retirement, people often choose to live on less money. But for many, the first few years of retirement mean traveling and new adventures. In other words, taking a realistic look at where your clients would like to be in retirement makes all the difference when it comes to estimating their retirement costs.
Clients also may woefully underestimate medical and long-term care costs. Your best approach is to help clients be as honest and realistic as they can be so their chances of targeting the right number are good.
4. The “everyone needs to do it this way” myth.
I like to use an engaging story here that really works: Imagine picking up the newspaper and on the front page is an article titled, “Beloved doctor embroiled in massive malpractice scandal.”
You go on to read that a local family doctor is being investigated for malpractice for prescribing the same medication to all of his patients.
Investigators discovered that, regardless of the patient’s symptoms, health history, age or background, or whether they presented with headaches or broken arms, the doctor prescribed the same medication and dosage to everyone he saw over a period of several years. While some patients had no ill effects, several experienced negative reactions ranging from severe bowel discomfort to hives to internal bleeding, and in two cases, to death.
Shaking your head as you put the paper down, you can’t help but think, “That’s unbelievable. Who would do such a thing? The same prescription can’t work for everyone! He must be crazy!”
Although the article I described is fiction, its underlying point is apropos: There is no one-size-fits-all approach to retirement. While that logic should make sense, it’s hard to avoid the growing number of authors, journalists and television pundits who expound upon the virtues of some specific investment strategy, vehicle or method.
Remind your clients that the problem with sweeping generalizations when it comes to retirement planning is: Retirement is not general; it’s personal. What you need and what your neighbor needs are likely two very different things. And there’s no TV personality or journalist who knows your personal situation.
We understand why you can’t arbitrarily hand out the same prescription to everyone, nor can you take that approach with planning for retirement. The key is to determine what’s right for your clients, and conversely what isn’t. Empower them by saying, “You’re the only one who can set the right goals for yourself. You get to determine your risk appetite. You decide what investment vehicles make sense and what allocation strategy fits. None of that is arbitrary and there isn’t one right approach.” Help them understand your role is to lay out all the available tools to help them determine what’s right for them!
5. The “annuities are bad” myth.
I remember an interesting conversation I had with a friend that started when he sat down next to me and exclaimed, “I read that Ken Fisher hates annuities. He says they’re terrible and no one should ever use them. What do you think about that?” His comment caught me a bit off guard but made me laugh.
He quipped, “Why is that funny?” I responded, “It’s like saying coffee is bad. You can create a proof to support it that seems reasonable, but at the end of the day coffee may be bad for some but good for others. It all just depends.” He laughed a bit, we went on to have a nice lunch and ended up talking mostly about sports.
Like the myth that says there’s one right approach that everyone should follow, and the others are wrong, the myth here says some investment vehicles are “bad” while others are “good.” It’s a fallacy to think that way.
Be calm and clear with clients in telling them that financial instruments by themselves are not inherently good or bad. A hammer isn’t good while a nail is bad — each has a role to play in building a house. Each financial vehicle has its pros and cons. What’s important for clients is understanding what financial vehicle they are considering and how it works.
You can calmly say, “While one instrument, like an annuity for example, might be right for your uncle, it may not be appropriate for your situation. Your uncle isn’t bad or wrong for using an annuity, nor are you good or right for not using one. Each of you has your own needs, goals, risk tolerances and objectives.”
6. The “Line them up head-to-head to see who wins” myth.
Financial instruments are not inherently good or bad, nor do they compete against each other. Help clients recognize that saying one investment vehicle is better than another is also a fallacy. Stocks don’t compete against bonds. Neither do annuities compete against investment portfolios.
Each is unique with its own set of advantages and disadvantages.
Stocks can do things bonds can’t; annuities can do things that investment portfolios can’t. Tell clients that rankings and ratings do have their place in helping assess the individual vehicles themselves to see how they fare against their peers. Your job is to help your clients understand what a particular investment is designed to do, how it will achieve its objectives, what risks are associated with it, the drawbacks and limitations it may have, and what costs are associated with it.
I never fail to remind clients that my role as a professional is simple: I lay out all the instruments for them and help them understand what they do, what they don’t do, what they cost and how they may fit their situation. Once clients are aware of all the options, it should be easier to select the things they feel comfortable with. As advisors, we don’t need to get hung up when our clients do. These objectives are really opportunities in disguise! Win in two ways by addressing these myths logically and empowering your clients in the process!
COVID-19’s Impact On Retirement Planning
The Society of Actuaries published a report in April titled “Impact Of COVID-19 On Retirement Risks.” Some of the highlights:
1. Employees are concerned about managing their 401(k) plan investments, and those nearing retirement are wondering whether they need to work longer.
2. Some households may need to deplete their retirement savings to manage through the immediate period.
3. COVID-19 reinforces the need for rational distribution strategies and to help people think through their distribution options.
4. COVID-19 has prompted concerns about whether a 401(k) plan offers sufficient retirement security.
5. Loss of income through unemployment or reduction of hours may push people into claiming Social Security earlier.
SOURCE: Society of Actuaries