Will a full-fledged economic recession come to pass? It is yet to be seen. No matter what lies ahead, clients who are nearing retirement generally have more to lose and might not want to take any chances with their nest eggs. Economic downturns as one nears or enters retirement can be a major concern.
Perhaps your clients are watching rising interest rates and inflation or are feeling uneasy about global uncertainties and political issues. Let’s not forget market volatility and the cryptocurrency debacle.
The culmination of events probably isn’t helping to build confidence in your clients’ hearts and minds, especially for those who are more risk-averse. Both advisors and clients may benefit from taking a step back to assess the following areas as they relate to risk control.
Understand emotional influences to help determine risk tolerance
One of the first steps in establishing a client relationship is exploring their risk tolerance. A risk assessment helps to quantify a client's willingness to absorb loss and to what degree. Financial advisors often conduct such assessments during the onboarding process. After that, a perfunctory check-in regarding their appetite for risk might take place on occasion.
However, considering the current economic conditions, a deeper dive may be in order to truly assess a client’s underlying motivating factors, their fears about the future and where they stand in general. It’s also important to consider the impact of the COVID-19 pandemic on individuals’ tolerance for risk.
Granted, most of us want to put the pandemic behind us, but its emotional effects on some of your clients may be profound and lasting, skewing their outlook on retirement and how much risk they’re willing to take on. Job changes, illness, loss of loved ones and a host of other unexpected circumstances may have impacted some of your clients’ feelings and attitudes toward the future, let alone their finances. Notable events like those many experienced during the pandemic certainly can affect finances, but they also have a psychological impact that can’t be ignored.
Consider leveraging Behavioral Finance Approach (BFA)TM tools and techniques to help you and your clients better understand their risk tolerance and how they respond when life throws them curveballs.
Help establish updated retirement horizons
One of the fallouts of the pandemic was the seemingly large number of Baby Boomers who chose to retire early or accept an early retirement offer. Recently released data by the Census Bureau, however, suggests that the numbers aren’t quite as dire as previously thought. Only about 3% of adults ages 55–70 retired early or planned to retire early due to the pandemic. Another 2.3% said they planned to delay or did delay retirement for the same reason.1
Notably, those with a shorter retirement window were more likely to change their plans. More than one in 25 (4.6%) of those ages 62–65 said they retired early or planned to retire early and another 2.9% said they delayed or planned to delay retirement.1 The industry in which they were employed also made a difference. Those in the education sector were more likely to retire early than any other industry.1
Whether statistically significant or not, there’s a chance that some of your clients are rethinking their retirement horizon. Some may need to shift from accumulation to distribution earlier than they thought while others may feel it’s best to delay retirement in hopes of recapturing losses. Both scenarios will require a strategic look at their portfolios with an eye toward risk control.
Investors generally understand that a certain amount of risk is necessary if they want to grow their money. It’s the advisor’s job to help them determine a balance between calculated risk and their calculated retirement horizon. Younger investors typically are willing to take on more risk over the long term as bull and bear markets tend to smooth out over time. But those with a short window until retirement may not have the luxury of riding out the whims of the market.
Expand the definition of “diversification”
Previous investment experiences may cloud a client’s tolerance for risk, with some being unable to stomach any risk at all. A temptation for these types of clients may be to shift assets toward investment vehicles like traditional savings accounts, CDs, money markets and bonds which, until recently, generally delivered minimal gains. Even though their rates have risen, annual inflation rose in stride at around 8%, creating the potential for negative returns in the end.2
Traditional savings and other “safer” allocations have their pros and cons, but advisors generally don’t consider them a core part of most retirement strategies due to their limited growth potential. Traditional diversification may attempt to mitigate risks, but cannot control it. Those who cannot deal with the unknowns of how much investment loss they’ll experience may be ideal candidates for risk control accounts within a deferred annuity.
Risk control annuity products allow your clients to enjoy a Guaranteed Lifetime Withdrawal Benefit (GLWB) or protected income for life while also choosing how much loss they’re willing to tolerate. For example, a Zone IncomeTM annuity allows your clients to choose their comfort zone by participating in the market and setting a guaranteed floor, ranging from 0% to -10%. Yet they may also benefit from double-digit growth potential.
Clients are generally interested in diversifying their portfolios, but may not consider the role that annuities can play. You can help share the value of annuities as part of an overall investment strategy with our Risk Control Advisor Guide and Client Guide. These resources share hypothetical scenarios showing potential risk control account performance when setting a “comfort zone.”
Download these helpful resources below, and reach out to your wholesaler to talk through various scenarios and which type of annuities are best suited.