How advisors are helping young clients get a jump on the future
by Rod MimsMr. Mims is senior vice-president for distribution with Athene. Visit www.athene.com.
Today’s young adults may not put retirement planning at the top of their to-do list, especially when they are focused on other priorities like buying a home or starting a family. But in fact, getting started early is the key to a successful retirement.
There are tangible steps advisors can help young investors take right now to build future wealth and prepare for retirement.
Boosting financial literacy is one. Working with a trusted financial advisor is another. Finally, those young investors will want to explore annuities, products that are uniquely well-suited to help people cope with the challenges they will encounter, so advisors need to be prepared to have these conversations.
The Challenges Ahead
Americans are living longer. The Social Security Administration projects that one in three 65-year-olds today will make it to 90 and one in seven will reach 95. As medical technology advances, lifespans are likely to stretch further.
At the same time, some of the traditional sources of retirement income are eroding. Defined-benefit pensions, those that make fixed payments for life, are harder than ever to come by. While Social Security still makes regular monthly payments, the program’s finances have weakened, and the future of those payments is uncertain.
The upshot: more than ever, Americans must rely on their own savings and those savings need to be sufficient to pay the bills for retirements that last 20 or 30 years. By getting started early, advisors can help young investors take advantage of the power of compounding to build their nest eggs. For clients who invest in the stock market, making purchases over a long period of time makes it possible to dollar-cost average—effectively balancing the highs and lows of the market by buying at regular intervals.
How to Get Started
A good first step on the path to retirement planning is helping clients boost their financial literacy—after all, they can’t plan with tools they don’t understand. In fact, according to a recent survey from Athene, nearly one quarter of Americans (23%) do not even know what an annuity is. As we all know, better informed investors make wiser decisions, including decisions about which products best suit their needs.
Another good idea: help clients think long term. Investing over the long haul is a challenge. Inevitably there will be difficult markets along the way and difficult decisions to make. But a crucial part of an advisor’s role is keeping investors focused on their long-term goals and reinforcing the importance of steadily making contributions to retirement accounts. According to our research, 73 percent of US adults who currently have a financial advisor feel they are on track to reach their retirement savings goal. That compares to just 33 percent of US adults without an advisor who feel on track—quite the difference.
Interestingly, investors who work with financial advisors are also twice as likely to own annuities as those without advisors (40% versus 6%). Advisors understand that annuities can be an important piece of a good retirement portfolio.
Why Annuities Make Sense
Annuities have been around for centuries. There are references to their use in America going back to 1720. They have remained popular for one essential reason: by providing a steady stream of payments for a lifetime, they ensure that an individual will not outlive his money. Like Social Security and traditional pensions, they create a measure of certainty in an uncertain world.
Today, thanks to new companies that have brought new ideas and new products to the marketplace, annuities can do more than simply provide security. They can offer retirement savers a way to balance growth and safety. With the new products, advisors can help investors tap into opportunities to build their wealth while still insulating themselves against market downturns.
One very popular variation is called a fixed-index annuity, or FIA. FIAs are tied to equity indexes like the S&P 500. When the stock market climbs, the investor gets a portion of the gains. At the same time, they get some protection from market losses because their original principal is guaranteed. In effect, the investor gets to reap market gains, knowing there is a floor below which they cannot fall.
For those clients with a greater tolerance for risk, there is a product called a registered index-linked annuity or RILA. With this product, the investor gets a bigger slice of stock market gains than they would in an FIA. The tradeoff: the principal isn’t fully guaranteed.
When asked about annuities, older investors usually mention the security they provide, specifically the guaranteed income and the limits on risk. Younger savers appreciate those advantages but also like the flexible features and benefits annuities offer. Regardless, the benefits of variable, fixed, and indexed annuities resonate with investors, as Athene found guaranteed income (64%), favorable tax treatment (37%), and flexible features and benefits (37%) to be the most important features that savers seek in retirement savings products.
Today’s annuity investor has choices, which means they can find a product that matches their appetite for risk and blends well with other investments. A financial advisor can help figure out which annuity makes the most sense for each individual to bolster their portfolio.
Saving for retirement is difficult because it requires making decisions today that will affect what life will be like 20, 30, or even 40 years into the future. Since no one can say with confidence what will happen along the way, the best advice is to be prepared. Remind clients to start saving early, become an informed investor and help guide them on their paths forward. No single financial product will be the perfect answer, but annuities with their blend of growth, security, and flexibility can be part of the solution.