The sustained low interest rate environment brought on by the financial crisis of the late-2000s has forced financial planners to revisit some of the broad assumptions we’ve made in the past for projecting portfolio returns. A new article in the Journal of Financial Planning, “Planning for a More Expensive Retirement,” takes this anecdotal reality to an empirical level by studying the implications of continued low returns on retirement plans.
The authors discovered that “a low-return environment would have a negative impact on client spending throughout their life cycle” and that — as a result – advisors “may need to modify expected returns in planning” that will provide their clients with more realistic projections for their retirement funds.
In fact, the Wall Street Journal recently reported that the historic drop in interest rates since the financial crisis cost U.S. savers almost $1 trillion in lost income from savings accounts, CDs and bonds from the start of 2008 through 2015. With these low rates squeezing retirees, some have opted for higher-risk investment strategies to make sure they obtain the returns needed, which of course raises the level of risk built into those portfolios.
This challenge of a low-return investing environment is just another unwelcome building block in the growing American retirement security crisis. Your clients generally depend upon three funding sources for their retirement income: pensions, assets (e.g., investments, homes, etc.) and Social Security.
Unfortunately, only one-third of Americans now receive income from pensions and just over half obtain income from assets, according to the Congressional Research Service. Due to reduced pension and home values, about half of all Americans are at risk of not having sufficient retirement income. That means Social Security is the main source of retirement income for most Americans. And of course, Social Security only replaces about 33% of your client’s average wage from the year prior to retirement.
So how can you help your clients afford a more expensive retirement, brought on by the sustained low interest rate environment and slow recovery in the prices of their other assets?
One strategy may be to take a fresh look at assets in their portfolios that may have hidden value. For example, would a reverse mortgage make sense for certain clients? Many retirees have found that a reverse mortgage can be a smart way to unlock cash flow from equity in their primary homes, especially if they are in their latter years of retirement.
Another place where you may be able to find hidden value in portfolios is with your clients’ life insurance policies. Many seniors and their trusted advisors are unaware that a life insurance policy is an asset that — like all other assets — has a strategic purpose, has costs and benefits, and may be sold by the client if the asset is no longer serving its purpose. Unfortunately, each year more than $100 billion face value of life insurance lapses by seniors over the age of 65 — mostly from a lack of knowledge that an unneeded or unaffordable policy may be sold.
A life settlement is a strategy for helping your client capture some of those benefits rather than forfeiting them back to the insurance companies. Studies have found that 90% of seniors who lapsed a life insurance policy would have considered a life settlement had they been aware of the possibility and 65% of financial advisors have never recommended a life settlement to a client but claim they would do so under the right circumstances.
The retirement security crisis in America is real and growing – but by carefully evaluating a client’s entire portfolio, including hidden assets such as life insurance policies, advisors can help retirees generate cash flow that can offset the more expensive retirement they may have encountered.
— Read 18 Scary Retirement Statistics on ThinkAdvisor.