Roth IRA 401(k)

The IRA market is the single largest sector of the retirement market, topping defined contribution plan and defined benefit markets assets and the fastest growing one, according to the research firm Cerulli Associates.

IRA assets total $9.2 trillion and they grew at a compounded 9.7% annual rate between 2012 and 2017, representing a “significant opportunity for financial advisors as well as asset managers and account providers,” according to Cerulli.

In two recent retirement reports, Cerulli analysts include several recommendations about how advisors, asset managers and IRA providers can best serve the IRA market.

1. Segment IRA clients by age.

“Age-based segmentation is a useful method to uncover trends among the broad population of IRA owners” and to help determine “the most effective engagement strategy,” such as email, social media or phone call, according to Cerulli.

As of year-end 2017, IRA investors 60 and older accounted for 70% of IRA assets, or nearly $6.5 trillion, and those 50 to 59 accounted for 20% of those assets. That leaves just 10% of assets, or less than $1 trillion, held by investors under age 50.

One part of that latter demographic, investors under 40, own just 2.7% of IRA assets, but they represents the biggest potential IRA market for advisors and others because unlike boomers, who will be withdrawing funds, these investors will be accumulating and growing assets.

“View the small balances of today as the potential large balances of tomorrow,” Cerulli analysts write.

2. Establish relationships with next generation of investors.

Advisors should target these investors not only to expand their client base but also because many young investors will be inheriting the wealth of their parents in the future, feeding into those potential large balances.

Moreover, more than 25% of IRA owners under age 30 and 40% of IRA owners between 30 and 39 who use a financial advisor work with one who has served their parents or other relatives.

One way to retain those younger clients is to connect them with younger advisors in the firm because like most clients, young IRA owners prefer to use an advisor who can relate to their life experience.

3. Learn about Social Security claiming strategies and health care expenses.

At the opposite end of the age spectrum are the older IRA account owners who will be collecting Social Security and paying an increasing amount of money for health-related expenses.

“Given the idiosyncratic nature of retirement income planning, investors generally require the assistance of a financial professional,” according to the Cerulli report.

Unfortunately, according to Cerulli, “some financial advisors are not necessarily well-versed on nuanced topics as Social Security claiming strategy or health expense,” which presents an opportunity for asset managers. It also presents an opportunity for advisors.

Close to half the 401(k) participants between ages 60 and 69 surveyed by Cerulli expect Social Security will be their primary source of retirement income.

4. Develop drawdown strategies for assets.

These strategies, too, relate to older clients. They represent a phase that is “far more complex than the accumulation phase” for assets because retirees often rely on a mosaic of sources such as IRA savings, 401(k) savings and Social Security, for retirement income,” according to Cerulli.

Advisors can play an important role in helping pre-retirees and retirees decide on drawdown strategies. About one-quarter of 401(k) participants age 45 and older surveyed by Cerulli  weren’t clear about what to do with their accounts once they retire. Another 25% said they expected to consult their current financial advisor for assistance, and 9% said they planned to engage an advisor for that purpose.

“This data highlights the role of advisors in supporting a thoughtful and sustainable drawdown strategy,” according to Cerulli.

The drawdown phase also has implications for taxes, the duration of income and lifestyle in retirement — issues clearly in advisors’ wheelhouse.

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