INCREASED LONGEVITY AND the lack of traditional pensions are forcing clients to take more responsibility for their retirement, particularly when it comes managing financial resources after leaving work.
But too many people are poorly equipped for such a task, suggests consultant Anna Rappaport, a past president of the Society of Actuaries in the U.S., in her paper entitled Post-Retirement Risk Research: Findings and Messages for Advisors.
Most people merely guess at how much money they will need to accumulate for retirement rather than do a full needs analysis. Many people also underestimate longevity, the paper warns, and fail to understand portfolio variability.
This dilemma presents an excellent opportunity for you to help your clients get on the right track – provided both you and your clients focus on the correct issues.
First, many clients don’t understand the value of simply working longer and retiring later. Although they see immediate value in having employer-sponsored health insurance longer if working longer, clients often fail to grasp the value in receiving their government pension later, having a shorter period of retirement or having a bit more time to save.
Second, there is a very large difference between when people actually retire and when they say they expect to retire. Roughly five in 10 people end up leaving the workforce sooner than planned, the report notes, primarily because of poor health or because they were laid off or forced into early retirement by their employer.
You need to help your clients prepare for such unplanned early retirements, think through the realistic ages at which they may retire and just how long that retirement might last. According to the report, 49% of retirees and 37% of pre-retirees have a planning horizon of 10 years or less.
Although many clients find it difficult to think far into the future, one way of focusing their attention on long life, Rappaport’s report suggests, is simply to ask your clients if they know anyone who lived to a very old age.
At the same time, you need to remind couples of the importance of planning for the life of the longer-lived spouse. Most people believe that surviving partners will be at least as well off financially as they were before the death of their spouse.
But, particularly for women, this often is not the case. Women tend to live longer, and the problems of post-retirement risk management affect them greatly.
Although women’s participation in the labour market has increased sharply in recent decades, many women now in their 60s have worked at service or part-time jobs, which puts a big dent in their savings potential.
As a result, the economic status of many widows actually declines after the death of their husbands. Roughly four in 10 older women living alone, the report notes, have virtually no income other than government programs.
There are a variety of ways to help to protect surviving spouses and partners, the report suggests, including joint and survivor options for annuities, life insurance, retaining asset balances that can be transferred to the survivor and long-term care insurance.
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