The Burdens And Barriers Of Income Planning

When Helping Clients Prepare For Retirement…

Give them what they need and what they want

by Jean Statler and Tamiko Toland

Jean Statler is CEO of the Alliance for Lifetime Income, a nonprofit consumer education organization, and Tamiko Toland is director of retirement markets at CANNEX Financial Exchanges Ltd., a leading provider of pricing, data and research for retirement and savings products in North America.

The second installment of the Alliance for Lifetime Income and CANNEX’s Protected Retirement Income and Planning Study, which examines the retirement planning approaches of both consumers and financial professionals nationwide, offers valuable—and sometimes surprising—insights the latter should be using to better serve clients.

It reveals the need for financial professionals to give their clients what they need. This includes helping them to avoid biases and fears that can undermine the performance of their investment portfolios. Most critically, this also means giving them what they want – a retirement portfolio that grows, but is also protected with lifetime income from an annuity.

The Influence Of Behavioral Biases

The most recent study underscores the need for financial professionals to prevent their clients from inadvertently undermining their own financial security. Most investors admitted to being influenced by behavioral finance biases that could hinder their decision making and, therefore, undermine the strength of their retirement nest egg.

These common biases shape decisions for most investors. More than eight in 10 investors (81%) admit to familiarity bias, or a preference for investment opportunities in an area in which they have some prior understanding. The same goes for an emotional gap, which is a preference for investment opportunities in an area that they simply find interesting (81%).

Additionally, two-thirds of investors (66%) often make decisions based on herd mentality, reporting that they have a preference for investment opportunities that others are also interested in investing in.

These are universal biases and gaps that imperil the financial security of a great many Americans. Moreover, eight in ten investors fear losing money and three-quarters have experienced anxiety or indecisiveness when making long-term investment decisions. Because of their objectivity and expertise, financial professionals are best equipped to help their clients avoid these cognitive blind spots and fears. These results underscore that the need for them to do so is urgent and widespread.

The study also reveals a formidable gap between what investors want and what financial professionals think they want. Investors showed a clear interest in building a retirement portfolio that was protected with an annuity. No less than 85% of consumers are interested in owning or already own an annuity that guarantees lifetime income. Of investors who are interested in owning an annuity with lifetime income, almost half (49%) are extremely interested. The corollary study of financial professionals, however, finds a huge disconnect between financial professionals and their clients. Just 18% believe their clients are extremely interested in annuities with lifetime income. That’s a gap of more than 30%. It leaves clients without the protection they want and means far too many financial professionals are ignoring the opportunity to win and effectively serve clients.

More than eight in 10 investors (81%) admit to familiarity bias, or a preference for investment opportunities in an area in which they have some prior understanding...

If you’re looking for more evidence, consider this key finding in the research: investors who were asked to build their own hypothetical $1 million retirement portfolio clearly indicated that annuities and other income-producing assets rose above all other investment options. Specifically, investors allocated approximately 20% ($200,000) to dividend paying stocks, 14% (approximately $145,000) to real estate and 13% (approximately $136,000) to annuities. Bank CDs (11%) and bonds (10%), both safe investments, round out the top five asset category choices, while “trending” investment opportunities such as SPACs and cryptocurrency fell to the bottom, with just 3-4% of assets allocated to each.

Lifetime Income: What They Want And What They Need

At the intersection of what investors want and what they need is lifetime income—an essential component of many retirement portfolios and a replacement for pensions. However, only 15% of private sector workers have access to pensions today and more than 10,000 Baby Boomers turn 65 every day. To close that gap, protected income and annuities must be a central part of conversations between financial professionals and clients when it comes to retirement.

In response to the tectonic shifts facing investors and markets, 72% of financial professionals report changing their approach to retirement planning during the past year. Among those who made a shift, 68% say they’re putting more into stocks while 48% are putting more into annuities.

Financial professionals play a unique and indispensable role in helping Americans prepare for a financially secure retirement. By bringing up cognitive blind spots and fears—with the objective of developing and adhering to a long-term plan—they can help clients avoid pitfalls that can sap their financial security in retirement. Financial professionals need to recognize their clients’ desire for protected income, and educate them about how annuities and other investment products work to enhance the overall performance of their nest eggs. The bottom-line is that today, those that don’t at least consider annuities in retirement planning conversations are more likely to find their clients going elsewhere for advice.

Give clients what they need, but also what they want. Both are critical to helping Americans prepare for a financially secure and successful retirement.