Are Your Clients Adequately Prepared for Retirement?
Most Americans are in denial about their retirement; they see it as a problem far down the road or something they accept, yet have little idea how to solve it.
Nielsen, the market research firm has a specific demographic for 50 something executive couples “Diverting their high incomes into building up the long neglected nest eggs.” How do you quantify the problem for clients and get them to focus on solutions?
How Long Might Retirement Be?
People are living longer. In “Why Are You Not Dead Yet?” Slate shows life expectancy was 35-40 about 150 years ago. Today, it’s closer to 80.
Credit medical advances. According to the Centers for Disease Control and Prevention (CDC), US life expectancy is 78.8 years. It varies even more by county. If you are lucky enough to live in Summit, Pitkin or Eagle counties in Colorado, you might live past age 85. This has been described as having two lives, with retirement life often being longer than your working life.
Retirement – It’s Not What It Used to Be
Meanwhile, the nature of retirement has changed. Our parents and grandparents relied on defined benefit pensions and social security. Mitch McConnell famously said: “More young people believe they’ll see a UFO than that they will see their own Social Security benefits.”
As a financial services manager explained: “Retirement income will likely come from three sources: Social Security (and pensions), retirement savings and something extra from part time work.”
How Much Have Americans Saved for Retirement?
Fidelity Investments has done significant research on this subject. Their Retirement Preparedness Measure (RPM) shows 55% of Americans wouldn’t be able to cover essential expenses including housing, health care and food. On the other side of the scale, 33% of Americans are on track or comfortable.
Perhaps your younger clients feel this is a problem in the distant future. Fidelity breaks down retirement preparedness by generation:
• Baby Boomers – 48% have serious problems. 36% are comfortable.
• Gen X – 58% have serious problems. 29% are comfortable.
• Gen Y – 62% have serious problems. 33% are comfortable.
Let’s talk dollars: How much have Americans actually saved for retirement? CNBC reports the Economic Policy Institute shows the mean retirement savings for working families ages 32-61 at $ 95,776.
The article recognizes many Americans have zero retirement savings while others are supersavers. They feel the median is a more accurate measurement. That number is just $ 5,000.
But that doesn’t tell the whole story. What about families at an age where retirement should be their biggest priority? The study shows the following:
• Families 50-55: Mean retirement savings: $ 124,831. Median: $ 8,000.
• Families 56-61: Mean retirement savings: $ 163,577. Median: $ 17,000
How Much Should Americans Have Saved For Retirement?
The Washington Post looked at the question: “How Big Should Your Retirement Fund Be at Every Age?” They also reference research from Fidelity Investments. It’s been broken down into a simple table starting with savings equal to your salary by age 30, twice your salary at age 35 and up to eight times at age 60 and ten times at age 67. Obviously it’s also assumed you will be earning progressively more money as you get older.
This is an easy metric for a conversation with a client.
Can This Become an Immediate Concern?
Some clients may buy into the simple to understand ratio above. Your executive or professional clients may need more convincing. Engineers should have a category all to themselves!
Executives are very comfortable identifying a problem, reviewing several solutions and choosing one to implement. Monte Carlo analysis is an excellent tool for this situation. Many financial planning packages offer retirement planning tools.
In simple terms, the client takes stock of where they are now in terms of assets and future scheduled savings like retirement plan contributions. Other income sources such as Social Security and pensions are factored into the equation.
They indicate the income they would like to have in retirement based on a current number. If retirement is a decade or so away, it’s important to factor inflation into the picture.
Using historical rates of return for different asset classes, you can make a projection of the likelihood of reaching their goal, specifically accumulating enough assets to carry them through to a ripe old age as they spend their pile down. This type of analysis can also be modified to assume the stock market returns terrific or terrible results.
In many cases, the client runs out of money during their projected lifetime. However, there are potential solutions: One option is to reduce the amount of income they expect in retirement.
Can they work with an $ 80,000 instead of a $100,000 lifestyle? The second option is delaying retirement. This should increase Social Security benefits, give them more time to save and more time for their accumulated assets to grow.
The third option is to increase savings along the way. You rerun the numbers and compare the results.
This doesn’t address the question of asset allocation, which is tied to their risk tolerance. At two extremes, the client with 100% allocated to equities would expect a different result compared to a similar portfolio that’s 100% in cash equivalents.
You have succeeded in identifying a problem and proposing different solutions. The client’s next step is addressing potential solutions. This involves restructuring or adding to their investment portfolio.
This may be in the hands of their financial advisor(i.e. possibly, you). You might hold the appropriate licenses for this side of the business yourself.
The client might choose to manage their own portfolio online. There’s another area where you can add value: The periodic measurement of progress to goals.
Investors are often obsessed with “beating the market.” They only need to hit or exceed the return required to reach their own personal goal.
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Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.