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How to sell to seniors in 2016

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The entire financial industry is agog over the prospects the burgeoning millennial market brings to their business. According to a recent Forbes article, there are 80 million millennials in the U.S., and everyone from retailers to financial institutions are scrambling to capture their business.

However, there’s another segment of the population where the market, while at half the size, is a more willing participant in retirement and estate planning. In fact, they’re already retired, and many have estates.

According to the U.S. Census Bureau’s most recent figures (2010), there were 40.3 million people aged 65 and older in the U.S. That’s the largest the age group has ever been, according to Census Bureau research, and it’s a group that will continue to grow, with researchers estimating an over-65 population of 88.5 million by 2050.

Now is the time for selling to seniors. A myriad of events past and present are causing seniors more than enough anxiety: recession-related financial strain, chronic health concerns, even lapsed insurance policies. Economic uncertainty among the general populace is also contributing to the feeling of financial uncertainty, as evidenced by the C6 Real Misery Index, a six-factor model designed to provide a more realistic picture of “misery” in today’s economy, especially for the middle class.

Senior concerns

That economic uncertainty post-recession stems from a number of changes seniors had to face — decreased home values, a reduction in their investments, and an increased need to draw on savings accounts.

Those factors, says Michael Bapis, cause seniors the most concern. Bapis, managing director and partner at The Bapis Group at HighTower Advisors in New York, says common concerns for seniors are these: “Am I going to run out of money? Do I have enough money to live on?” Plus, he sees a more concentrated focus on long-term care. “Who’s going to take care of me and who’s going to have the money to do so?”

Not to mention the changes to Social Security that impact retirees. Changes that took effect in 2016 include a $24-per-month decline in monthly benefits. That, combined with the news that there are no cost-of-living adjustments and no change in the maximum amount of earnings subject to the Social Security tax, squeeze the income stream of the senior client even more.

Robert Steen, advice generation director of retirement & complex planning at USAA in San Antonio, says the news had brought the issue back to the forefront. “It raised the consciousness to ‘Is it going to be there for me?’ We’re not just talking about it now. We’re seeing budgets that are starting to change the landscape.”

Beyond Social Security, Steen says seniors are experiencing other changes that impact their income. President Obama’s proposed budget recommendations for fiscal year 2016-17 threaten to eliminate stretch provisions within the IRAs that apply to anyone but the owner. Further proposals attempting to simplify minimum required distribution rules for IRA account owners could require Roth IRAs to be drawn on at age 70 ½ while the owner is still alive.. Plus, there is inflation risk associated with the continued increasing longevity in this country, says Jeff Bogart, owner and registered investment advisor at Sila Wealth Advisory in Mayfield Heights, Ohio. “What we’re concerned about is mild inflation every year — two-and-a-half, three percent — and what that does to their purchasing power. Over a 30-year period it could reduce their spendable income by almost two-thirds to 90 percent. From an investment standpoint, do we choose investments that outpace inflation? Also, how much risk do they have and how much can they take?”

Overcoming mistakes

Perhaps some seniors make mistakes because they don’t fully understand the risks associated with some financial choices. Bogart says he’s seen seniors get into debt at a time when they least need it. Also, not accounting enough for inflation when they’re younger can haunt retirees later on, as can gambling or speculative investment options. Another common mistake Steen has seen involves the opposite side of the issue — retirees who are pinching pennies. “They’re not having the fulfilling lifestyle they could have because they’re worried about running out of money.”

That, Steen says, is because they most likely don’t understand their risk tolerance. “I like to ask the question, ‘What is your capacity if the market suddenly dropped 30 percent? Would that make you lose your house, or substantially eat into your essential expenses?’ We have people who are very risk tolerant, but their capacity for risk may be very low. The reverse is true, as well — we have people who are very risk averse, but their capacity for risk is much larger.”

Yet the mistakes are not one-sided: experts agree that advisors are taking some missteps that could be costing their seniors. Ajay Gupta, CEO of Gupta Wealth Management in San Diego, says advisors are letting their biases get in the way. Instead of sticking with the same tried-and true options, he thinks advisors need to look for alternatives. “As they’re building an equity portfolio, they need to have a bias toward not just dividend-paying companies, but also companies that have a track record of raising dividends consistently,” he says. “They may not be the companies that are highest-yielding, but they are consistently raising the dividend payment.”

Also, Gupta says advisors need to be more aggressive with the numbers they’re using for inflation, and look beyond the traditional measurements. “It’s not just about what the CPI (consumer price index) is, it’s not an inflation or a deflation — it’s a ‘me-flation.’ Me-flation means are the things I’m spending money on going up or down? They need to get seniors talking about what they’re spending their money on.”

More on this topic

Advisors are also skipping another important element: communication between advisors and clients. Steen says fear of having an uncomfortable or tough conversation causes advisors to skip the communication. “As advisors, most of us are technically trained. It’s much easier to show the balance sheet, show the cash flow and not have a discussion,” says Steen.

It’s something agents and advisors need to push themselves into, says Bogart. In fact, he believes the conversation itself needs to change. “Meet with them two to four times a year and don’t talk about the stock market and how their portfolio did, but how their life is going, how they’re doing. That’s essential to have that kind of relationship where they feel open to you — a nonjudgmental relationship.” Plus, Bogart says too many advisors skip building a relationship with the client’s family members. If something happens to the client, Bogart says it’s tough to know who to talk to. “Form a relationship with their children, their niece or nephew in case you need to bring that third party in.”

Spending down

Another way to strengthen client relations is to test the strength of the spend-down strategy. Bapis says assessing risk tolerance and testing the portfolio’s volatility helps alleviate client concerns. That’s an essential part of any spend-down strategy, say the experts. Bapis says creating the right mix for the clients starts with assessing risk tolerance, and testing the portfolio’s volatility.

Also an important factor: stress testing the plan. Gupta suggests advisors put the plan to the test to ensure it can survive a big market correction. And he says advisors should be forecasting higher spend rates. “Whatever they’re spending today, that dollar amount is going to be much higher 10 or 15 years from now.”

That’s where Steen says advisors need to start. He suggests creating a guaranteed income or floor for seniors. “For the essential expenses, we want to be sure that’s covered by stuff that is as close to guaranteed as possible — Social Security, pensions subject to the Pension Guaranty Benefit Corporation, Treasury securities, things that, when they mature, they’re going to pay out.” And like Gupta, Steen suggests a stress test. “If the stock market took at total crash tomorrow, would I still be able to cover my essential expenses? That’s what we should be doing for retirees. We should be setting them up for that.” Bogart thinks part of the plan should include talking with clients about defensive measures. Should a correction occur, advisors should be coaching seniors on how much income to keep in cash to allow the portfolio time to recover.

What about insurance?

All the experts say that insurance — in particular, life insurance — should be an important part of the review process. That’s if they still have it; a recent survey released by The Lifeline Program reveals that 55 percent of American seniors let their life insurance policies lapse, thinking the policy is now a liability rather than an asset.

That, according to the Life Insurance Settlement Association, represents a combined face value loss of over $57 billion. While Bapis says the conversation is one that should have started prior to retirement, it’s a conversation that should continue. Steen says insurance should be reviewed carefully, and advisors should caution seniors against selling or lapsing policies. “The old thinking is, ‘Once I retire I won’t need life insurance anymore.’ Guess what? People still have a mortgage, a dependent child and other liabilities. The need for keeping life insurance is more important,” says Steen.

What agents and advisors should do, adds Steen, is have a periodic review of the policy. “Is it still appropriate? Is it still adequate? Is it still cost-effective?” asks Steen. “I’ve seen people cash in policies that are earning four percent interest instead of going to the bank and cashing in a CD.”

Likewise, Steen says advisors should review all of the policy, in particular the designation of beneficiaries. With deaths and divorces, oftentimes the beneficiaries have not been changed.

Gupta believes that review should go beyond life insurance and encompass all insurance policies. Seniors, he says, need that full review of their risks and mitigation. Plus, advisors, he says, should be coaching seniors on the risks of each of their investment vehicles, how they’re allocated in each asset class, and how to react should a correction occur.

“The bigger part of our job is sustainability — to make sure their money can last them the rest of their lives,” says Bogart. “You’re trying to create an optimal formula for each client.”

Steen says that formula starts with a conversation that illustrates the risks that could disrupt retirement. Then the agent or advisor can work with the clients to eliminate those factors that don’t apply. “That leads to a more robust conversation about how you can start mitigating or managing these risks.”