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Retirement Income Planning Is More Than Hitting the Right Numbers

When an advisor meets with a client to discuss retirement income strategies, there’s more to the process than ascertaining the right numbers. Although it’s important to look at the percentage of income replacement and possible withdrawal rates, advisors also need to know their client’s money mindset. In order to devise a retirement income strategy that is “right” for someone, it’s important to understand their emotional attitude to their savings.

LIMRA Secure Retirement Institute (SRI) studied the preferences of 2,000 preretirees and retirees ages 50-70 with at least $100,000 in household assets. We asked which income product features they deemed most important. From their responses, we were able to identify three distinct money mindsets:

Guarantee Seekers want to know their income won’t disappear. They would be interested in converting additional savings to a pensionlike contractual guarantee. They do not want to worry about how long their money will last.

Asset Protectors have been saving money for a long time. They plan to live off the interest and dividends of their savings. They are not comfortable “invading principal” and do not want to see their account balances decrease.

Estate Planners are financially savvy. They know equity markets generally outperform risk-free fixed investments and can withstand volatility to maximize their upside potential. They believe their investment decisions will outperform those of most investment advisors. They want personal control over investment decisions and the flexibility to adjust income and spending as their needs change.

We asked people to choose from among 10 competing money attributes and rank the five that were most important to them. Based on their responses, we were able to better understand their money mindset.  

The people in each of these categories can look very similar on paper. They may even share the same demographic profile, wealth level and lifestyle ambitions. Because their attitudes toward money are so different, the real divergence among them appears in the product attributes they value most.

Understanding a client’s money mindset provides clues to recommending the right income solutions for them.

“Guarantee Seekers” will want certainty and peace of mind. They are not seeking maximum income potential, but rather a stable and predictable monthly income. According to LIMRA SRI research, this segment has the highest rate of ownership for deferred and immediate annuities (46 percent collectively). Guarantee Seekers are least likely to own individual stocks, mutual funds and corporate/municipal bonds.

“Estate Planners” will not be interested in converting savings to a guaranteed income stream.  Investment growth and control are important to them. According to our research, Estate Planners have the highest ownership rate of individual stocks (69 percent), mutual funds (75 percent) and exchange-traded funds (19 percent).

“Asset Protectors” are reluctant to take risks. They want guaranteed fixed rates of return without putting their principal at risk. This segment worries about running out of money in retirement and wants to hedge against unexpected future expenses.  Our research shows Asset Protectors have the highest rate of ownership of certificates of deposit (44 percent). Asset Protectors are likely to own other conservative assets such as annuities (31 percent) and government bonds/Treasury notes (30 percent).

We believe these findings can be applied to a simple questionnaire to help advisors develop a customized approach to address their clients’ emotional attitudes. This subjective assessment, combined with a thorough look at the numbers, can make for a more effective retirement income strategy.

So when an investor meets with a financial professional for the best advice, it should be framed in the context of the client’s emotional money mindset. And on this topic, one size definitely does not fit all.

Judy Zaiken, CLU, ChFC, is the corporate vice president and research director for LIMRA Secure Retirement Institute, covering both the institutional and retail businesses. Judy may be reached at [email protected] .

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