After nearly a decade of the stock market seeming to only go up, individuals saving and investing for retirement have been lulled into complacency. As a result, retirement savers, particularly those nearing retirement, are neglecting to protect their future income stream and keeping more money in equities as they look to ride out this bull market.
Concerningly, retirement savers’ ill-preparedness to weather the next market downturn appears to be on a collision course with a recession that could be just around the corner. And the recession may be closer than many retirement savers realize. Cautionary market signals flashed red in April as the Treasury yield curve continued to flatten — and could soon invert, a leading indicator of economic recessions, making these spreads some of the most closely watched by economists.
What happens when these two trends collide is predictable: Many investors will flee equities for the “safe harbors” of principal protection and investment income. But retirement savers that take the time to consider investing in annuities now will reap the benefits of income guarantees in all types of markets — downturns included.
In order to preserve the benefits of income guarantees for clients at today’s levels, advisors must act now to position individuals for the market’s next decade — and its inevitable downturn. There are many strategies and tactics advisors looking to position clients for this coming fundamental shift in the market can utilize to ensure they’re prepared.
Match future fixed expenses to income generating strategies.
Advisors report 80% of their clients are concerned with maintaining their lifestyle in retirement, according to our 2017 Nationwide Retirement Institute advisor survey. While it’s understandable that this is the top concern for clients, through proper financial planning, retirees can ensure they’re able to afford and maintain their day-to-day lives. A key piece in this financial equation is preparing for both fixed and variable costs in retirement.
By utilizing an annuity, clients can cover fixed expenses and ensure they’re able to maintain their current lifestyle, even in a market downturn. Annuities are uniquely suited to match retirement income with fixed costs, reducing the unknowns and risk for retirees, as well as making the planning process less daunting.
Advisors should also stress the importance of planning for future fixed expenses that may not be relevant — or even anticipated — today. For example, 30 years ago, few consumers were budgeting for monthly cell phone bills or subscription services like Amazon Prime. As new technologies and services are created, unanticipated expenses will inevitably arise over the coming decades. By leveraging an annuity, consumers can plan for future fixed costs that may not be on their radar today but will be prevalent tomorrow.
Get on your own payroll.
While many consumers associate an income with being employed, clients can benefit from and have a need for the concept of a salary even in retirement. Think of it this way: The only difference between a worker and retiree is that the former is being paid by their employer, while the latter is being paid by him or herself.
A smart way for clients to “get on their own payrolls” and ensure a guaranteed income in retirement is by leveraging an annuity. Given the flexibility in how annuity payments are handled, advisors should position this form of retirement income planning as a salary negotiation between a client and their future self — one where they’re able to make all the decisions. By doing so, future retirees can ensure their retirement income plan is personalized to meet their individual needs and goals.
Develop a decumulation strategy.
The current retirement savings conversation is almost entirely about accumulation strategies, but those that focus solely on accumulation are only solving for half of the equation. Advisors and their future retiree clients should be just as focused on developing a personal decumulation strategy to ensure individuals are able to successfully plan for and live in retirement.
As your clients transition into retirement, they need their savings to keep working for them. Decumulation does not mean that your accounts will no longer have market growth opportunities. Annuities can provide a guaranteed/stable income stream, as well as market growth opportunities if there is equity or equity-linked exposure.
The Nationwide Retirement Institute 2018 Health Care and Long-Term Care Survey reveals that while seven in 10 financial advisors report their clients are confident in their various plans, less than half of older adults working with a financial advisor say they are as confident in most of these same plans. Given the uncertainty and volatility in today’s market, advisors must work with clients to develop strategies that protect against down markets and offer income guarantees. By doing so, advisors may improve client confidence levels and secure a locked-in income that will ensure essential expenses are covered.
While no one can fully predict the stock market, key indicators show that a downturn is becoming more likely than not. It is crucial that advisors work with clients today to plan for market volatility and determine personal income needs in retirement. By providing retirement income strategies, advisors can ensure clients are prepared for fixed and unexpected costs in retirement, as well as financially able to maintain their lifestyle, regardless of the market’s performance.
Eric Henderson is senior vice president of Nationwide’s annuity and life insurance businesses.