When the Social Security Administration originally set 65 as the retirement age for receiving full Social Security benefits, 65 became the de facto age at which many Americans expected to retire. But that hasn’t played out extraordinarily well for many people. We know from our latest survey of retirees that 46 percent actually retired sooner than they planned, and it’s not always because of the recession.
Among retirees who retired sooner than anticipated, 36 percent did so because they had lost their job or had been encouraged by their employer to take early retirement. The other top reasons cited by those who retired earlier were having saved more money than expected or having a financial plan that exceeded expectations, “did not want to work anymore” or health issues.
In fact, the median age of retirement is 62 and has remained relatively steady for the past 22 years, according to the Employee Benefit Research Institute (EBRI).
Unplanned early retirement obviously creates numerous financial planning challenges, stemming in large part from the fact that many Americans simply haven’t saved enough. Compounding the problem is that senior costs are rising at rates higher than average and people are living longer.
The experience of actual retirees demonstrates that these money concerns are well-justified. Genworth’s “Future of Retirement Income Survey” found that whereas 54 percent of pre-retirees expected expenses to go down in retirement, 64 percent of actual retirees found expenses increased or remained flat once they retired.
Part of the reason for this is that seniors consume a greater-than-average share of goods whose prices tend to rise more rapidly than average, particularly health care and housing. From medical services to nursing homes, costs are rising at a pace that challenges the financial wherewithal of most seniors.
Financial professionals who help their clients create a retirement plan with the flexibility to cover life’s curveballs will undoubtedly have the most satisfied clients. Because for half of us, it’s not a matter of whether our retirement plans will change; it’s a matter of how much they will change.
Challenging Your Clients’ Assumptions
Financial professionals can make a positive impact in their clients’ lives by starting to speak to clients sooner and having them write down their retirement expectations. Aggressively challenge their assumptions, and then insist on working with them to create a written plan that is flexible enough to adapt to the realities of life. Use data and graphics to bring this home to your clients.
When creating a plan for retirement, make sure the expenses for which your clients are planning also have some flexibility. For example, are they locking themselves into high essential expenses by virtue of where they plan to retire? Will those expenses be sustainable? Have they built into their plan costs they may not have now or that will rise, such as health care and housing?
Because the probability of retiring when planned is as unpredictable as a coin toss, it’s important to stress-test that plan – and you are in the best position to do that – to make sure it provides enough income should they indeed find themselves retiring earlier than planned.
Reducing Unknowable Risks
An extraordinary number of things must happen in order for a person’s retirement date to line up with having enough money to retire.
So much is out of our control that, as individuals, our plans can’t hope to take all of it into account and get it exactly right. In those cases, insurance solutions can help take some of the risk off the table, reducing some of those unknowable risks.
For clients who are on the fence about the value of insurance products, it helps to remind them that insurance products create value we can’t create ourselves as individuals. Pooling risks with others, as we do with homeowners or auto insurance, makes good coverage less expensive (and much less worrisome) than “self-insuring.”
Even people who are considered wealthy still buy auto insurance. That’s because it’s much cheaper to buy auto insurance and lay off the risk to an insurance company, which is in the business of managing that risk. Similarly, with respect to a “safe withdrawal rate” from your retirement savings, the amount of money you can withdraw from a portfolio is likely to be significantly lower when you are self-insuring than if you give that risk to an insurance company.
Not All Products Are Created Equal
You’re already aware that not all products are created equal. Annuities are a good example. Many popular annuities only permit contract owners to begin receiving income or to increase their lifetime income benefit on a contract anniversary date.
Let’s look at a hypothetical situation to understand how important this is. Assume for a moment that the phone rings on July 1 and your client is on the line. Excitedly, she announces that she has decided to retire earlier than planned and now wants to begin taking lifetime income from her annuity. However, her contract anniversary date is not until January 5, meaning she must wait half a year before she can begin tapping into her income stream. Her excitement may well turn to anger as you inform her she must delay income payments for six months until her anniversary date.
Many times when comparing annuities, you may look at the illustrated income payable on the contract anniversary date. A good question to ask is, “What will the income be if my client needs it to start on a date other than the contract anniversary?” An annuity that does not restrict when income payments can begin offers a flexible solution for consumers who may retire earlier than expected.
As an additional measure of protection and value, look for annuities that also have a “daily roll-up” optional income rider. Together those features let you start taking income any day of the year and can help maximize the client’s lifetime income value at any given point in time.
Some types of annuities, such as fixed index annuities, also can provide the opportunity to accumulate greater growth while at the same time protect principal – an important benefit for clients who have been burned by various down markets and can’t bear the thought of losing another penny due to market declines.
Many clients who have been through the last 14 years of ups and downs in the stock market are now extraordinarily risk averse and have a cash position that is significantly above what most financial professionals would consider optimal. For example, many people in their late 40s and early 50s, in particular, have an inordinate amount of cash earning paltry interest because they are so fearful of losing money. This could be a terrific time to introduce the concept of a fixed index annuity.
With its ability to protect principal from losses due to downturns in the market, a fixed index annuity may provide the safety net that will encourage them to put their money to work, and can put them on a path to accumulate enough money to fund a comfortable retirement.
Planning Boosts Confidence, Satisfaction
As a financial professional, you are in the best position to help your clients stress-test their retirement plans against what we know can be far different than their actual experience. And because real life doesn’t always coincide with a contract anniversary date, you can help them see the value in insurance products that are designed to be part of a contingency plan.
Helping your clients develop retirement plans that are flexible enough to cover early retirement and other unexpected events will not only provide them with confidence in their futures, but will also increase their confidence in you.
There is no greater satisfaction than being able to tell your clients, when you get that panicky call, that because of the choices they made, they’re going to be OK.