Revisiting Retirement Readiness

How Clients Perceive Risk

And how you can inspire them to open up and discuss some very hard topics

by Kelly LaVigne

Mr. LaVigne is vice president advanced markets, Allianz Life Insurance Company of North America. Visit www.allianzlife.com

As Americans adjust to the new norms of their financial situations in light of the COVID-19 pandemic, many may be assessing current and future risks to their portfolios, including their retirement savings. But while they are worried about some big risks – like market volatility, the rising cost of living, and what living longer could mean for their finances – few are actually talking about these concerns with their financial professionals.

These are the new findings from the Allianz Life Retirement Risk Readiness Study, which focuses on how financial professionals can work with clients to address some of the risks they aren’t talking about, but that can derail savings strategies.

So what did the study identify as things that that keep clients up at night, and how can financial professionals help encourage open conversations in order to better help clients achieve their financial goals?

The Longevity Risk

While clients may not refer to it as longevity risk, some of the financial questions about living longer are still on their minds. The study found that six in 10 people who are not yet retired said running out of money before they die is one of their biggest concerns, but only about a quarter (27%) of those who work with a financial professional have discussed this aspect of longevity risk. Further, less than 15% have shared their concerns that they won’t have enough money to do the things they want in retirement.

That’s a large group of people who are worried they won’t be able to do the things they want once they have finally achieved retirement – the time they theoretically should be enjoying those things. As a first step in the retirement planning discussion, it is critical we ask clients questions about the kind of retirement lifestyle they envision for themselves. Do they want to be able to travel with their grandkids, or maybe spend some quiet time at a new vacation home? Either way, clients need a plan. If they’re worried they won’t be able to afford the retirement they have dreamed of, it’s time to sit down and map out a strategy to find out what is reasonable based on their financial situation.

Interestingly, only 12% of people not yet retired say setting long-term financial goals is their top priority and just 6% identified developing a formal plan with a financial professional as their top priority. Setting objectives and developing a written retirement plan is so important, but especially for those who are worried they won’t have the money to do the things they want in retirement. It may be one way – beyond winning the lottery – that a client can actually seek anything close to their dream retirement.

Market Volatility

After the rollercoaster the market has been on the past few months, it should come as no surprise that many clients are worried about how this volatility is impacting their retirement savings. And the study found that nearly half (49%) of all respondents said a stock market drop is the greatest threat to their retirement income.

people have been living with everything getting more expensive their whole lives, so why would they need a specific strategy for addressing inflation in retirement?...

Despite this worry, less than 30% of Americans who work with a financial professional said they had discussed risks to their retirement arising from market drops. For clients who share this concern and experienced the drops in the market over the past few months due to volatility, now is the time to talk about it and make a strategy. No one knows when the next market plunge will happen, but talking about it while it is top of mind – and when a client may have time to prepare – can be most effective as you are responding to an expressed current concern of the client.

The Rising Cost Of Living

Addressing inflation within a retirement strategy can be difficult. But nearly half (48%) of Americans view inflation as a threat to their ability to afford basic expenses in retirement. An even greater percentage (59%) said they are worried that the rising cost of living will prevent them from enjoying their retirement.

Yet, among those who work with a financial professional, only around two in 10 are having discussions about addressing the effects of inflation and how it can prevent them from enjoying their retirement.

Why the disconnect here? Perhaps because it is complex and people have been living with everything getting more expensive their whole lives, so why would they need a specific strategy for addressing inflation in retirement? But annual Social Security cost of living increases only go so far – and often are eaten up by increases in Medicare, and clients will need to make sure their retirement income has a chance of addressing the effects of inflation. After all – even at a 3% inflation rate the cost of living will double in 24 years. So the benefit of living longer combined with inflation can cause a shortage in the later years of retirement.

The good news is that this risk is one that can be mitigated with proper planning, and exploring retirement income options that allow for the opportunity for increasing income available in some annuities (which may be available through a rider that could come at an additional cost).

Helping Clients Open Up

It is an understatement to say the past few months have had an unprecedented impact on so many people’s financial situations. While these are unprecedented times causing a lot of anxiety, there is an opportunity to use some of these negative events for good. Use recent market turmoil to probe and ask questions about how these events are impacting the way clients are thinking about retirement. Ask questions that provide an opportunity for clients to discuss their top concerns and then listen to what they have to say. Don’t hesitate to focus on the major risk factors. Chances are these worries have already crossed their minds, and they simply may not know how to develop a solution.

Letting clients voice their concerns- and listening to what keeps clients up at night can help financial professionals appreciate the client’s perspective. Not all concerns carry the same weight – and some may not fall into any of these general categories. However by letting clients articulate their top concerns, you can work together on a strategy that will address them in a thoughtful, strategic way.

 

 

*Allianz Life conducted an online survey, the 2020 Retirement Risk Readiness Study, in January 2020 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous USA with an annual household income of $50k+ (single) / $75k+ (married/partnered) OR investable assets of $150k.