How do you help clients prepare for retirement, when they aren’t sure when it will even begin?
by Kelly LaVigneMr. LaVigne is vice president advanced markets, Allianz Life Insurance Company of North America. Visit www.allianzlife.com
The road to retirement readiness is a long one, spanning decades of preparation and strategy development. It may have a few potholes or pit stops along the way, but ultimately, clients are cruising toward their golden years, and may even have a specific ETA in mind.
But what happens when they reach their destination sooner than anticipated? A recent study from Allianz Life found that a full 50% of retirees said they retired sooner than they had planned. For some, it might be because they are financially ready earlier than anticipated. However, the study found that the majority retired for unplanned reasons – like unexpected job loss, or health issues that prevented them from doing their jobs.
Unexpected Early Retirement
And if that was not concerning enough, keep in mind that this study was conducted before the coronavirus pandemic hit the U.S., so the number of people facing an unexpected early retirement is likely much higher now, given record numbers of people filing for unemployment. No doubt the financial implications of premature, forced retirement is a concern that is top of mind for many clients.
Clients are now facing the dual challenge of dealing with an early retirement while simultaneously trying to tweak their retirement strategy. Lack of planning, undersaving, unexpected large expenses, or a combination of these factors likely accounted for them working for more years, and spending a bit less time in retirement. This longevity risk to retirement – that can include figuring out how to make money last throughout a long retirement – is one that has been identified as a top fear among Americans and is now more important than ever.
Here are some key considerations when helping clients prepare for retirement, possibly earlier than expected, in these unpredictable times.
Build In Flexibility
If the current pandemic has taught us anything, it’s that being flexible is incredibly important. This means not only being able to adapt mentally when, as often as not, events don’t follow along with our plans. For instance, when clients find themselves entering into retirement before they were truly “ready.” However equally important, after adjusting to the shock is being able to pivot and change financial strategies if needed.
This is so important when it comes to retirement planning. Just a few short months ago, it would have been difficult to imagine the severe market turbulence, and subsequent skyrocketing unemployment numbers. But these black swan events do happen. Those that have flexible financial strategies are set up to best weather the storm.
This can include a diversified portfolio and saving strategy that can be scaled up or down, depending on current needs and financial situation. Now is the time to work with clients to assess their current risk exposure levels – especially in light of current market conditions – and adjust as necessary. It also means being prepared, and having an emergency fund that clients can tap into. This can help prevent the need to withdraw from retirement accounts – especially if a client would be selling at a loss (potentially with significant tax consequences). At top of mind is that during distribution in down markets, every time a client makes a withdrawal, it may create a permanent loss.
While these are great strategies to help prepare for the unexpected, those who are currently dealing with a forced early, unplanned retirement likely have a different mindset and need help with the here and now.
In the short term, these clients should explore applying for unemployment benefits, build out a budget plan with their new reality in mind, reduce spending and delay purchases if possible. If they are able to avoid tapping into retirement assets, it may give them a chance to recover some of the losses they likely suffered over the past few months.
In addition, if a client might be looking at Social Security earlier than planned as a way to receive income, it might be best to think again. Delaying the start of Social Security benefits can also help over the long term. If clients who are over 62 don’t need the cash now, it’s best to delay taking payments, as it reduces the amount of guaranteed inflation adjusted income they receive over their – and their spouses’ – lives.
Make An Income Plan
When preparing for retirement, one of the most important things you can help clients do is to create a written, formal income plan based on the client’s expenses and lifestyle. This helps clients understand how, when, and where the funding is coming from in order to live the retirement they have dreamed of.
In addition to using savings and retirement assets like a 401(k), IRA, and after-tax investment accounts to provide retirement income, clients might need to explore financial products that can help cover gaps in income to cover basic expenses. Guaranteed income products, like an annuity, can help. In addition to a guaranteed income stream, annuities can also provide tax-deferred accumulation potential and a death benefit for beneficiaries.
While guaranteed income products help cover the essential expense gap, the study found that less than one-third (30%) of people who have not yet retired say they currently have a source of guaranteed income in their portfolio to help them meet retirement goals. And while nearly four in 10 (39%) say they plan to purchase a guaranteed income product in the future, only 3% view it as a top priority. Circumstances, like today’s environment, create a compelling case to look more closely at guaranteed income products.
Creating an income plan can help clients prepare for retirement, but it can also be a powerful tool for those who are entering retirement before they anticipated. For clients who need to replace the lost income from their previous job, income planning will not only aid them financially by helping to fund the day-to-day expenses, but it can also provide a sense of stability and consistency – something many are struggling with in today’s uncertain world.
Income planning can also help address risks that longevity, volatility, taxes, and inflation can pose to retirement security. By outlining where money is coming from over the years, clients can have a better understanding of their income stream, and also have some reassurance their money won’t run out in retirement.
Changing Retirement Landscape
Planning for retirement in today’s uncertain world is challenging. Those who are finding themselves in an unexpected, early retirement face the challenges of adjusting to their newfound reality, while navigating big financial questions.
As a financial professional, you can assist clients who are facing a forced unplanned retirement by helping them navigate their new norm by building a strategy that fits their current situation and future needs. For clients who are still employed, encourage them to take the steps now to help mitigate the risks that an early unexpected retirement can have on their ability to attain their retirement financial goals.
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Products are issued by Allianz Life Insurance Company of North America
Allianz does not provide financial planning services
For financial professional use only – not for distribution to the general public