6 Trends That Upend Past Thinking About Retirement Planning

Analysis

As noted by Pacific Life's Reed Lloyd in a recent conversation with ThinkAdvisor, it is a basic fact of life in the U.S. today that traditional defined benefit pension plans are in decline.

1. Americans Are Moving Beyond the Image of ‘Retirement Nirvana’

In McClanahan's experience working with clients and speaking with industry colleagues, a growing number of workers are simply not focused on the goal of "retirement" in the traditional sense of the word. This is especially true of younger clients, she said, but it is also true with older generations.

"Life is precarious, as the COVID-19 pandemic experience has shown us all," said McClanahan (pictured above.) "Over the past few years, many people in our client base have come to the conclusion that it is important to balance the enjoyment of life today and the need to save for the future and to save for financial resilience and freedom. For us as advisors, this means we need to set aside the retirement-first discussions and put the spotlight on this concept of financial resilience."

McClanahan said this trend is already having an impact in her discussions with clients, including those at and near retirement.

"Many of them have shifted their thinking away from trying to create a huge nest egg for a day they may never see," she explained.

Even those clients who have generated a substantial nest egg often do not simply want to flip a switch and totally disengage from the workforce in one go. They may instead prefer to cut back on working hours or transition into another role or industry.

This shift in thinking means many clients are eager to reorient their planning discussions around lifestyle and income stability, and this fact demands that advisors do the same. An advisory approach that only speaks to the needs of accumulation will not be a cornerstone for success in this emerging environment, McClanahan and the panel agreed.

2. Social Security Know-How Is Improving

3. The 4% Rule Is Still Dead

4. Uncertain Health Care Needs and Costs Complicate Planning Assumptions

McClanahan said the shifting health care environment in the U.S. is another major factor affecting the future of retirement planning, both in intuitive and unintuitive ways.

"One thing I point out to my clients who are concerned about health care costs going up forever is that, if health care costs do actually continue to inflate as they have over the last several decades, the entire system will become unsustainable at the societal level," she said.

"The numbers show us that we are going to need to see an overhaul that addresses the cost of care at some point in the not-too-distant future," she said. "In this environment, we have to be clear with our clients about how much uncertainty there is about health care costs in retirement, and we have to be responsive to their unique situations."

One basic reality of planning is that, if a client is in poor health and they refuse to make lifestyle changes, they are not going to have the same longevity as someone in much better health with a healthy lifestyle. This fact may be obvious, McClanahan said, but the planning implications stemming from it are not.

"One counterintuitive factor to point out, for example, pertains to those clients who have really strong life expectancy. This factor doesn't mean their overall health care costs are going to be lower for the lifetime," she pointed out. "Those who live much longer are at higher risk of eventually having conditions such as Alzheimer's and dementia, and this can entail great expense late in life. The picture will look very different for someone who, say, lives into their late 60s and then experiences significant health care problems on a shorter time frame."

The panel concluded that many people worry too much about trying to predict an unpredictable health care future, when instead they should focus on building overall financial resiliency and smart behaviors.

(Image: Adobe Stock)

5. The Annuity Market Is Evolving

Finally, Hopkins (above) and the other panelists pointed to the significant product development that has occurred in the annuity marketplace, with an emphasis on the point that annuity usage by no means precludes a client from remaining invested in the equity and bond markets.

"Determining how a client might want to use an annuity, and what type of annuity suits them, is a key consideration," Hopkins said. He noted that fixed indexed annuities, in particular, are enjoying a moment of substantial growth and proliferation.

In the current market environment, Hopkins pointed out, certain annuities might actually make more sense from a total return perspective than some of the bond categories that clients may traditionally rely on.

"For example, some of the fixed indexed annuities on the market today might be more attractive than some of the bond portfolios that are available, especially in the short-duration space," Hopkins said. "Even if your client is seeking total return, you may consider swapping out some of the bond products for certain types of annuity products. A growth-oriented approach and the purchase of annuities are not mutually exclusive, depending on what you are trying to accomplish."

The panel concluded that discussion about building a retirement income plan should start from a product-agnostic point of view.

"You shouldn't start your planning from the product types," Hopkins said. "You should start with the client needs and then backfill from there, based on options and costs. Then, the feasibility and usability aspect that needs to be considered. For example, while on paper it may be the best solution, it may be very hard for somebody to build a 30-year bond ladder in reality, especially older clients."

John Manganaro

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