For years, investment advisors and financial planning professionals have been aware of the looming wave of baby boomer retirees. The interest of advisors has been focused squarely on high-wealth boomers, as reflected in the significant expansion of wealth management offerings from both large institutions and independent service providers.
To date, however, a large and potentially profitable market segment has been overlooked. That segment is sometimes called the average, or middle-wealth boomer. Thanks to limited assets and a perceived inability to pay for traditional advisory services, these individuals have been underserved by the financial services industry. Today, it’s become clear that the size of this market opportunity is too substantial for institutions and advisors to ignore.
To convert this potential into strong and profitable relationships, the industry must come to terms with a number of critical issues and questions middle-wealth boomers face as they near retirement. Like their higher-wealth counterparts, the average boomer must confront the complexities and risks associated with longevity, inflation, market turbulence and the prospect of catastrophically high health care costs. However, unlike higher-wealth individuals and families, most boomers face a significant gap in their replacement incomes — one that advisors can help them bridge by finding the best answers to critical questions highlighted below. For advisors, there is a clear opportunity to help the average boomer navigate these decisions and develop strategies and action plans that can significantly improve outcomes.
The biggest risk faced by middle-market retirees is a significant gap in retirement income, which for most will be well below the recommended replacement ratio of 70–80 percent. There are ways to narrow the gap, however.
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To serve this market effectively (and cost-effectively), advisors and institutions must shift their thinking about the middle market and develop new operational approaches. Those approaches are likely to combine robust online advisory services, automated data analysis and traditional advisor-based delivery. More fundamentally, advisors must gain clearer insights and broader understanding of the needs of middle-wealth boomers.
The top five retirement questions for middle-wealth boomers
Based on EY’s analysis, effectively addressing these questions for many middle-market clients will positively affect their after-tax outcomes by between 70 percent and 155 percent, and will mean that their retirement plans will remain stable during periods of economic turmoil such as the recent global financial crisis.
1. When to retire?
First and foremost, boomers must decide when to retire, which is a decision with multiple impacts. For instance, by continuing to work until age 70 (either on a full-time or part-time basis), boomers can boost their retirement savings and acquire more liquid assets. A few extra years of working also reduces the number of years during which boomers will be spending down their assets. There are also implications relative to the timing of the receipt of Social Security benefits (see below). Many retirees lack the skills and knowledge to “run the numbers” or figure out the impact of a few years of extra income in their unique circumstances, which represents a clear opportunity for advisors to provide guidance.
2. When to begin Social Security benefits?
Retiring boomers must also decide when to start receiving these benefits. For a soon-to-retire boomer, delaying that moment may be beneficial from the perspective of long-term cash flow. The longer the delay, the higher the payout. The impact of a delay may be even larger, potentially, for couples and those receiving a spousal benefit.
To be clear, providing guidance can be time-intensive. Plus, advisors are not directly compensated for advising on Social Security. Some strategies may even reduce the assets they are being paid to manage. However, the trust-building and relationship-strengthening opportunity cannot be overlooked. Thus, advisors may think about these decision points in the context of broader relationships. In fact, many large banks and institutions see that they need to help advisors in this area and are investing in networks and tools to enable advisors to provide effective (and cost-effective) advice in this specific area.
3. Whether or not to purchase long-term care insurance?
Soaring health care costs — including those associated with assisted living and custodial care — are among the biggest risks faced by all types of retirees, but those of average means may feel the pinch more than high-wealth individuals and couples. Certainly, considerable planning is required. Most middle wealth boomers will not be able to self-insure these risks, so they will have to carefully consider the costs and benefits of long-term care (LTC) policies. Advisors can help retirees understand their options in this critical area.