With time eating away their savings, many feel financially insecure
by John Grogan
Mr. Grogan is Senior Vice President, Planning & Sales, Northwestern Mutual. Connect with him by e-mail: johngrogan@northwesternmutual.com
Absent guidance from financial professionals who can focus on the bigger picture, many well-intentioned people get caught up in the treadmill of daily living and put off any serious long-term financial planning until it is too late. A recent study by my company shows that half of Americans don’t have a financial plan in place and 63 percent say their financial planning needs improvement. The lack of a financial safety net is worrisome, but it is also an opportunity for advisors to make a real difference.
How can advisors help? Our 2013 Planning & Progress Study found that Americans largely recognize that time is eating away at their money, and half admit to being less financially secure than they’d hoped at this point in their lives. Only 43 percent feel financially secure. Advisors need to initiate a dialogue with their clients about planning for long-term goals, and it has to focus equally on growth and protection.
We believe there are six key retirement risks to address – unplanned market losses, living longer than you planned, inflation and taxes, healthcare costs, long-term care risks and leaving a legacy. Each of these have to be factored into a long-term plan, alongside one’s financial goals, risk appetite and time horizons.
To initiate the dialogue, here are five good questions to discuss with clients:
What are your biggest concerns about retirement and longevity? What excites you about retirement?
They may seem like obvious questions, but too few financial advisors take the time to really listen for the answers. The best way to help clients is to actually listen to them. By listening, you’ll determine whether your clients have thought much about retirement, if their expectations are in line with their assets, and if they have financial worries keeping them up at night. For couples, you’ll learn whether they share the same retirement vision, or if they’ve talked to each other about retirement at all. In most cases, the constant juggle of day-to-day demands has sidetracked them from any serious discussion, and the questions will be a welcome opportunity to focus.
Whatever the initial response, advisors shouldn’t rush into problem-solving or quick fixes. Instead, advisors should continue asking probing questions to better understand the clients’ end game first, and then offer needs-based, long-term solutions that can weather the zigs and zags of market cycles.
What steps are you taking now to ensure you have an adequate amount saved for retirement?
Three quarters of the Americans we surveyed say that long-term planning is a priority over short-term performance, so there is a possibility that your clients are on their way to a comfortably secure retirement. Indeed, half of our respondents say their approach to money is to save and be careful, which is encouraging. The question then becomes: are these actions the right ones? For example, while nearly 40 percent of Americans plan to save more in the next year, only a careful analysis of the current size of the nest egg, savings rate, retirement goals and risk management measures can show whether they’re saving enough, or allocating the assets appropriately.
Early retirement isn’t always anticipated. What happens if you face an earlier-than-expected drop in income?
Although pre-retirees on average think they will work until they are 68, with one in ten expecting to work into their 80s, the reality is that many will end up retiring well before this. In fact, retirees from our study told us they retired on average by age 59. Changes in the economy, unexpected health issues and employer cutbacks can all play a role in determining whether an individual continues working at the income or salary level that they had counted on. Ideally, advisors will work with their clients on a plan that incorporates both wealth accumulation and risk mitigation throughout their lifetime. If income drops unexpectedly five-, 10 or 15-years away from planned retirement, goals and priorities can be reevaluated and adjusted if necessary.
Has the economic crunch of the last few years left you believing you have no choice but to select riskier investments in an attempt to make up for lost time/money?
More than two-thirds of Americans think the pace of society makes it hard to stick to long-term goals. In fact, the pressure to keep up has people playing a dangerous game of catch up with their finances. Twenty two percent of Americans have dipped into their retirement or long-term savings accounts in the past three years. Nearly one in four feels compelled to stay in investments that are above their risk tolerance level because they have a lot of catching up to do. While the thought of not having enough money to live out one’s retirement fantasy can be disappointing, gambling with the nest egg you do have invites more portfolio fluctuations than most people can comfortably stomach.
Advisors need to bring discipline about asset management and protection to their clients’ financial lives – perhaps by trimming exposure to high-risk investments and encouraging clients to focus on what’s most important to them in retirement. This may mean scaling back on risky ventures in favor of prudent investments offering potentially more modest gains, but also less erosion of principal. Conversely, advisors also need to watch out for younger clients with longer time horizons who may be doing their portfolios a disservice by not taking on enough risk.
Have you thought about what your financial needs will be at age 95?
Most people embrace the idea of living a long life, but as it turns out, few actually prepare for one. Only 35 percent of Americans surveyed are prepared to live to age 95, even though hitting 90 is a very real possibility. A 2011 U.S. Census Bureau report commissioned by the U.S. National Institute on Aging found that the number of people living into their 90s tripled to 1.9 million between 1980 and 2010.
So while there is a 50% chance that a 65-year-old man today will live beyond age 87 and that a 65-year-old woman will live beyond age 90, advisors should plan for their clients to live longer, as these numbers will only rise. By 2050, the 90+ set will make up 10 percent of the U.S. population that is 65 and older, according to the U.S. Census report.
If a person’s retirement plan does not extend far enough on the age spectrum, the ‘golden years’ can easily become tarnished by longevity and the associated costs for care that tend to accompany it. In fact, longevity, health care, and long-term care – together with the market, inflation and taxes – are among the key risks that can wreck havoc on a financial plan. Fortunately, insurance has evolved so that none of these need to become issues. For example, long-term care insurance can ease the burden of paying for expensive long-term health care and income annuity products are flexible enough to offer income streams that can cover basic living expenses, potentially freeing up other assets for discretionary spending.
As you know, financial planning is a discipline that yields results once implemented and followed diligently over time. This is why we are such strong advocates for having the retirement planning discussion with your clients now. The value of a prudent plan has never been more critical than it is today – the economy is uncertain, the savings rate is negative, the capital markets remain volatile, and people are living longer while health care costs are rising. Advisors who integrate both risk and investment solutions into their clients’ financial plans now are better able to help them manage their assets over the full arc of their lives.
About the Survey
Northwestern Mutual sponsored a study exploring the state of planning in America. The study surveyed more than 1,500 Americans age 25 or older (conducted 2013).
‘Northwestern Mutual’ is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI.