Today, another 10,000 Baby Boomers will turn age 65 — and tomorrow, and the next day…and again for many years to come, according to Forbes.1 With that large influx of people potentially entering retirement and exiting the workforce, the country’s composition is dramatically changing, and a larger number of people are beginning to draw on their retirement savings.
And therein lies the problem. According to a report from the U.S. Government Accountability Office, almost half of Americans approaching retirement have nothing saved in a 401(k) or other individual account.2 Those working to make up for their retirement savings shortages face additional risks, the greatest of which is outliving their assets as lifespans continue to increase.
As the economy strengthens, the risk of rising inflation also looms, and uncertainties about the future could tempt some to take risky, aggressive approaches to investing in an effort to make up for lost time.
The Danger Zone
Many Baby Boomers have entered what’s commonly referred to as the “Danger Zone” — the five years leading up to retirement and the first 10 years spent in retirement. A wrong move during this time could spell financial ruin without enough time to recover losses.
Investors are typically at their wealthiest point during this time and, consequently, at greater risk of losing large amounts of money. Future earnings are diminished, and your clients likely become more concerned with preservation instead of growth. Placing assets in high-risk equities during this time typically becomes less desirable, and your clients may seek products that offer absolute returns over short-term performance.
As you know, retirees typically categorize their spending into two basic levels: essential expenses (food, clothing and shelter — the must-haves), and discretionary spending (recreation and amenities that enhance a lifestyle — the nice-to-haves).
Discussing how to diversify a portfolio based on these two levels rather than simply going over pre-set platforms based on current assets can help your clients get a better grasp on how to prioritize which investments offer the greatest potential for a secure future. Consider the following approach:
Help your client calculate his or her expected monthly expenses for necessities. In addition to food, clothing and shelter, look at healthcare, transportation, utilities and any potential taxes. Work with your client to evaluate his or her ability to “make ends meet” with fixed income streams that can last a lifetime and aren’t exposed to market risk, such as Social Security or a pension plan. Is there money left over or a shortfall? That arms you with information to customize a portfolio mix that addresses their needs.
As you build your relationship with a client, you’ll get a sense of their lifestyle. Do they like to travel? Own a vacation home? Collect vintage cars? To sustain a lifestyle they’ve come accustomed to, some investors will likely need to rely on income sources that are exposed to market risks, including 401(k) disbursements, IRAs and other taxable accounts. That income is not guaranteed, however, so it’s important to establish a backup plan.
Closing the Gap
If fixed income streams aren’t enough to cover the essentials, and clients become uneasy about the market risks associated with their traditional accounts, there are ways to help them close the gap.
You may want to discuss liquidating some assets, downsizing a home or encouraging them to remain working longer. These days, it’s not uncommon. As of February 2019, more than 20% of adults age 65+ are either working or looking for work, compared with just 10% in 1985.3 While unappealing to some, it may need to be a serious consideration depending on an individual’s forecasted expenses.
Also seek ways to reduce exposure to equities and market risk by considering an annuity that guarantees some minimum income. It may offer just the level of security your clients are seeking and mitigate the risks of having too little to cover expenses. Choosing an annuity investment platform that combines growth potential and guaranteed, personalized limits on loss can help your clients navigate through the danger zone and emerge safely on the other side.
Want to better understand how your Boomer clients may be struggling with their financial complexities? Read our guide, The Great Wealth Transfer: Strategies for Strengthening and Expanding Client Relationships, which helps you connect with this generation’s different financial attitudes.
1Forbes, Social Security Feels Pinch As Baby Boomers Clock Out For Good, June 21, 2018
2Bloomberg, Half of Older Americans Have Nothing in Retirement Savings, March 26, 2019
3AARP, More Americans Working Past 65, April 22, 2019