An issue that has found its way into political campaigns and dinner conversations for years is increasingly manifesting itself in retirement planning sessions with financial advisors and wealth managers: rising income inequality in America.
Data trends for the past several years have indicated that the rich are getting richer and the poor are getting poorer in the U.S., with the top 1% of families taking home an average of 26.3 times as much income as the bottom 99% last year, according to the non-partisan Economic Policy Institute. This trend, which has accelerated since 2009, is a reversal of what was seen during and after the Great Depression, where the gap between rich and poor narrowed.
So it is perhaps not surprising that a pair of recent studies confirm that the wealth disparity gap can now be measured when it comes to retirement planning and funding.
The 2018 Planning & Progress Study from Northwestern Mutual found a significant dichotomy. On the one hand, the study revealed that a shocking 21% of Americans have nothing at all saved for retirement and another 10% have less than $5,000 in savings. More broadly, 78% of Americans reported being “extremely” or “somewhat” concerned about not having enough money for retirement. On the other hand, roughly one in four respondents have at least $200,000 in savings and 22% report they are “not at all” concerned about having sufficient finances available for their golden years.
The August 2018 Financial Security Index from Bankrate found more evidence of this disparity. The survey discovered that 13% of Americans are saving less for retirement than they were last year, in spite of the strong year of economic growth in almost all regions and most industries. The most common reason cited (26 percent) was that their income hasn’t changed or has in fact decreased, which is consistent with federal data that shows re-al wages have hardly budged for many years. However, the survey also found that more than one in four Americans increased the amount they saved for retirement last year, the highest one-year increase seen since Bankrate began conducting the study back in 2011.
This retirement planning gap between the most economically successful in America and those are continuing to fall behind is going to create a more pressing challenge for financial advisors in the years ahead. How do we help seniors who were unable to keep pace with the accumulation of wealth enjoyed by their neighbors during the peak earning years of their lives? Where do we help them to turn when there are no more years left on the calendar for them to earn salaries and set aside funds?
As many insurance professionals and savvy advisors have discovered in recent years, one creative way for you to help these vulnerable clients is to evaluate all potential assets available to them, including the less-obvious and illiquid assets they might not even realize have potential cash value to them right now. One example of this is real estate — for seniors who own their home and wish to age in place, a reverse mortgage can be an excellent option to consider. Another example that is growing in popularity is life insurance — many of your clients would be surprised to learn that their life insurance policy is private property that has value, just like a house or a car, and can be sold for an immediate cash payment. Any qualified life settlement professional will be happy to review your client’s policy and provide you with a preliminary idea of whether you might be able to help them sell the asset for an amount that is much greater than its cash surrender value.
The challenge of rising income inequality creates plenty of important political de-bates and cultural implications, but it has now revealed itself in our world of retirement planning. Financial advisors, life insurance professionals and wealth managers have a unique opportunity to counsel those clients who were unable to keep pace with their more fortunate fellow citizens and find themselves with a shortfall in retirement funds. It just may re-quire some more creative thinking and a closer look at less-obvious assets that can generate cash for seniors.
Darwin M. Bayston, CFA, is the president and CEO of the Life Insurance Settlement Association (LISA).