How to help clients understand retirement risk

As life expectancy continues to rise, today’s retirees are more afraid of outliving their resources than they are of death.

Retiring clients should expect to find themsevles 20 years short in savings, according to the World Economic Forum’s Investing in (and for) Our Future report. By the middle of this century, the proportion of people over 60 in the world’s population is set to reach 22% — almost double the 2015 figure, according to figures from the United Nations.

Helping clients plan their retirement boils down to three unknowns: returns, consumption and life expectancy, Morningstar’s head of retirement research, says David Blanchett who spoke on a Financial Planning webinar.

“If you combine lower returns with longer life expectancy, it means that retirement has more than doubled in cost over the last 30 years,” he says.

The responsibility now falls on advisors to find better ways for clients to invest — which include mitigating risk in portfolios before it’s too late.

More often than not, clients will make the same behavioral mistakes. These errors can include buying high and selling low or solely choosing an investment based on past performance, says Chris Osmond, chief investment officer at Prime Capital Investment Advisors who also participated on the webinar.

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When asked whether their clients fully understood the role risk plays in investment decisions in a poll conducted during the webinar, 100% of attendees answered no.

“Controlling risk is imperative to driving superior wealth accumulation over time,” Osmond says.

It’s important to realize up and down markets are not symmetrical, he says. After a market drawdown it takes a larger upswing to get back on track. For example, if an investment loses 20% in value, a rebound of equal value will still leave clients 4% under.

While clients need need to earn a return on their money to reach their retirement goals, it’s imperative it goes “hand in hand” with risk mitigation, according to Osmond.

When asked about the aspect of helping clients plan for retirement they found the most challenging in a poll , 57.9% of listeners cited estimating health care costs.

Health care costs have been trending up for decades, according to the third webinar participant Aaren Strand, an advisor with Paracle Advisors. Expenditures have increased from 5% of GDP in 1960 to nearly 18% in 2017.

“[Advisors] need to know how to appropriately model and anticipate costs going forward,” Strand says.

While the Social Security Administration announced a 2020 cost-of-living increase of 1.6%, retirees will pay 5.6% more next year on average for health care insurance premiums alone, according to the National Active and Retired Federal Employees Association.

The cost of Medicare B will rise next year by an average of $8.80. Because the cost is automatically deducted from clients' benefits, the average retiree will only see an approximate $15 increase in benefits says Bill Meyer, managing principal of Social Security Solutions.

To facilitate the process of selecting a Medicare plan for clients, Strand says she often takes a step back and brings in an expert to talk with clients.

As income increases, there are additional premiums that may affect clients.

“This is one place where we can add some value,” Strand says. “Helping them be aware what those costs are beforehand, not bumping those premiums way up when we can take a smoother approach.”

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Client strategies Client communications Medicare Risk management Annuities Tax returns Retirement planning Retirement readiness Morningstar
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