The five to 10 years leading up to retirement can be a time of increased risk for savers.
During this time, clients are likely to have the largest 401(k), IRA, and savings balances of their lifetime. And external factors including market volatility and other investment risks can place increased pressure on your client’s portfolios.
Understanding these risks — and how to face them – can help you guide them to the “sweet spot” in retirement planning — the optimum mix of the right income strategy for a client’s retirement planning horizon.
- What Time has Taught Us
This year marks 10 years since the financial crisis – a time when consumer confidence levels hit their lowest point in a generation, and the emotional roller coaster of investing was again put into motion. A survey released this month by Lincoln finds that savers are concerned about the possibility of a future crisis – placing an increased demand on solutions that can offer protection for their portfolios.
If another major economic downturn were to occur, 40% of pre-retirees claim that they can’t afford to lose anything before needing to adjust their savings plan and retirement goals. In addition, more than half are very concerned about their money growing enough to provide a lasting income stream in retirement.
While we cannot predict when another crisis will hit, savers can take steps to prepare and ensure some of the same mistakes are not made twice.
If history has taught us anything, it’s that the markets move in cycles. Experts see patterns and make predictions, but no one knows for certain what the market will do next. Having a dependable income plan in place can help give pre-retirees more confidence along their journey through the various stages of saving and during all market cycles. As they consider where they stand against their retirement time horizon, here are some ways they can consider protection against risk.
- 25 Years to Go
For a client 25-years out, time is on their side. A long investment horizon is one of their primary risk-management tools at this stage. Typically, investors who are 25 years away from retirement can better tolerate risks like market volatility because their focus is on long-term growth. Having a long time horizon to accumulate assets gives portfolios a better chance to recover from any short-term dips.
But clients can still take steps during this time to ensure wealth accumulation is tempered with protection, for instance, against sequence of returns risk. Sequence of returns risk is the effect of random market returns on a portfolio. If not managed properly, the sequence in which clients receive returns could pose a risk to their retirement goals when they start taking income from savings. If a client experiences negative returns just before and during the first few years of retirement, they may be at a greater risk of running out of assets prematurely.
One way to help them feel more confident is to build a formal income plan with solutions that provide opportunities to grow their savings while also offering level of protection against the unexpected challenges that may come their way, both big and small.
- 10 Years Out
Investors with five to 10 years until retirement have a more complex set of factors to balance. On one hand, they have less time to accumulate and grow savings before they will need to start drawing income. But at the same time, they must plan to protect savings for 30 years or more — the approximate length of time their portfolio must provide for income during retirement.
At this stage, clients may feel torn between their desire to make a last push for accumulation and the need to manage risks that might diminish their savings, like market volatility and fluctuating interest rates. To complicate matters, traditional ways of generating income from interest-bearing investments, like bonds, has been a challenge in today’s historically-low interest rate environment. This leaves investors who in the past depended on income from treasury bonds and bills as lower-risk sources of income looking instead at other options, such as investing in relatively higher-risk stock dividends or selling their equity securities. The lack of traditional avenues for income can leave investors feeling adrift.
This presents advisors with an opportunity to develop strategies that balance growth and protection to guard against market losses, and to discuss alternatives in this low-interest rate environment with clients. Helping them to develop an income plan that addresses their concerns is a step in the right direction.
- The Home Stretch
Your client has made it to the end zone. Perhaps they have stopped working, or slowed down. This is the point when their retirement portfolio may likely be at its greatest value. Yet at the same time, the stakes are higher than ever before: they will need to begin drawing income just as they stop contributing to their savings. And the risks of market volatility, longer life spans, and more lie ahead.
As many witnessed in 2008, this is the point where the impact from market volatility can do the most damage. A big market drop at the time when you begin drawing retirement income from your savings can have a lasting impact on your assets – and on your lifestyle in retirement.
While improved life expectancy is one of the greatest achievements of modern health care and science, it means that your client’s savings must last for decades longer than their parents’ and grandparents’ income did. Today’s married couples at age 65 have a nearly 90% chance of living to age 85, and a 47% chance that one spouse will live to 95, according to an illustration tool developed by the American Academy of Actuaries and the Society of Actuaries.
Income solutions like annuities may play a particularly important role during this time, helping to ensure clients have a diversified retirement income plan that protects their lifestyle in different market conditions, no matter how long their retirement may last.
Last month, our industry highlighted the importance of planning for the future during National Retirement Planning Week. I hope you will use this unique time to talk with your clients about their “sweet spot” and find the right goals and strategies for their planning horizon. Once the process is started, clients will be able to handle the risks facing their portfolio with greater confidence, year-round.
John Kennedy is head of retirement solutions distribution sales for Lincoln Financial Distributors Inc. Before that, he was national sales manager for MetLife Investors.
— Read also, on ThinkAdvisor:
- Retirees Moving Less, in More Ways Than One
- The Advisor’s Guide to “Talking Boomer”
- On Risk Tolerance, Clients Don’t Always Mean What They Say