How can you help your clients get the most out of their financial planning?
by PE Kelley
Mr. Kelley is Managing Editor of Advisor Magazine. Connect with him by e-mail: pkelley@lifehealth.comFinding the right support, tools and strategies to shape a financial plan can feel daunting for many Americans. But putting those pieces together is critical as individuals work toward a more secure future.
Fortunately, people at every life stage can tap a number of resources for help. To that end, we’ve looked at TIAA’s 2016 surveys that focus on some of the questions that consumers are asking their advisors.
What is revealed are three key insights that, taken together, can help them pursue their goals:
- Learn how to get ‘income for life’
- Don’t wait to tap financial advice and
- Lifelong happiness begins with a good plan
We reached out to TIAA’s Dan Keady to glen from their research just what today’s consumers are thinming about their retirement planning, and what they might still need to know.
Keady is Senior Director of Advice and Planning at TIAA, a provider of retirement and wealth management services to academic, research, and cultural fields. His primary focus is supervising a team that provides advice on how to utilize participant’s retirement “nest eggs” to produce the income they need and deserve through retirement.
PEK: Generally speaking, how well do consumers understand the concept of ‘longevity risk’?
DK: Do they that appreciate ‘income for life’ is no longer a given for many, and that new planning strategies need to be developed? Where is the disconnect between what their current retirement plans provide and what they will actually need? With only 10% of Americans owning an annuity, how do you convey the value, and utility, of the annuity strategy? Why don’t consumers readily see this value?
The good news is that a 2015 survey from TIAA showed that Americans understand the importance of receiving guaranteed monthly income in retirement. However, their strategy for achieving that goal may be missing the mark: The vast majority of Americans (84 percent) said that having a guaranteed monthly paycheck in their post-career years is important, yet only 14 percent have taken steps to ensure lifetime income with the purchase of an annuity.
…fewer than half of Americans even know how much they have saved in their retirement savings accounts, and just 35 percent know how much monthly income they’ll have in retirement
We found that Millennials are the most unfamiliar with annuities: 20 percent said they are familiar, compared to 38 percent of Gen X and 41 percent of Baby Boomers.
Overall, these results underscore the need for more education about options that provide an income stream retirees can’t outlive.
So how can people change their mind-set from being worried to taking action? One way is to reframe the thinking away from “How much money do I need to save to retire?” to “What income will I need each month to live comfortably in retirement?” This approach helps people see their savings as a future source of income. It also can give them a better sense of how much money they may want to cover with guaranteed income sources.
TIAA participants are well aware of the value of having an annuity. In a recent survey we found that 70 percent of TIAA survey respondents have an annuity as a source of retirement income, and a powerful 92 percent say they are satisfied with their decision to annuitize.
PEK: You’ve identified 63% who believe they’ll only need less than 75% of their current income. How do you explain to them that they just might need 100%?
DK: Many financial advisors suggest that people need between 70 percent and 100 percent of their current pre-tax income to comfortably maintain their current lifestyle. That estimate assumes that they will spend less money on things such as retirement savings, transportation and parking, business clothing and work lunches. But depending on their plans, other items could go up substantially, like expenses for travel, entertainment and dining out, or a round of golf.
Most likely they will also have to continue to budget for healthcare, because Medicare doesn’t cover all of your retirement healthcare costs and healthcare costs may rise rapidly as you age.
PEK: How do you convey the value of ‘professional financial advice’?
DK: If you want to build a house, you would hire an architect. When you’re trying to build your financial future, you should meet with a financial advisor. After all, a professional financial advisor can offer expertise and insights that most people would find useful.
People can really benefit from professional financial advice: 61 percent of Americans surveyed who have received advice feel confident about their financial situation, compared to 37 percent of people who haven’t.
PEK: Where there are savings shortfalls, especially for those nearing retirement, what are the strategies available, aside from extending their working years? What does your research reveal about overall ‘retirement readiness’? Are there many who have serious savings shortfalls or is there a trend to start saving earlier?
DK: Today, people are living longer and spending more years in retirement, which can mean outliving their retirement savings if they don’t plan carefully for the years ahead. Saving is crucial, but it’s not enough.
Getting an early start on retirement planning can make a big difference: Among today’s TIAA retirees, those who began preparing before age 30 were more likely to retire before age 60. Ninety-seven percent of those early planners who were surveyed say they are satisfied with their retirement.
For all Americans who are 50 or older, no matter if they’ve been saving diligently for years, or if they’ve gotten off to a later start, there are many ways they can make catch-up contributions to their retirement savings.
The 2017 401(k) / 403(b) catch-up contribution are $6,000, allowing you to contribute up to $24,000 per year.
People can also contribute to their IRA or Roth IRA up to $5,500, plus a $1,000 catch-up.
If you’re age 50 or older, a public school teacher, hospital employee, welfare service social worker, church employee, or home health service agency worker—with the same employer for 15 years—you may qualify to save even more. Check with your plan provider. Planning for the future with a spouse or partner also can help individuals retire with ease: We found that 85 percent who had an easy transition to retirement shared a common vision with their partner.
Fortunately, many individuals can look to their employer as a partner in their retirement planning journey. Many employers are committed to helping employees achieve their retirement goals—and have added features some employees may not know about, including financial education and lifetime income options on their retirement plan’s investment menu.
