The boomer generation has long been known as agents of change, and retirement is no exception. As boomers redefine what it means to retire, financial advisors are re-evaluating their strategies for helping clients achieve their retirement goals. In order to determine the new retirement trends, MainStay Investments surveyed a large group of primarily wirehouse financial advisors (conducted online in December by Harris Interactive) about the topic of retirement planning.
Catalyst for change
The survey indicates that investors nearing retirement are still shaken by unprecedented market events that occurred in late 2008. About half of financial advisors say a majority of their clients are delaying retirement.
However, one positive aspect resulting from the market crisis is that it forced many people to consider what is important to them in retirement, and contemplate if they are on track to reach their goals. Sixty one percent of financial advisors say that the majority of their clients are more concerned with having to give up luxuries when they retire, such as traveling and dining out, than covering basic needs. This represents a change in attitude from past generations, who were primarily concerned with covering basic expenses and willing to settle for a modest lifestyle in retirement.
New guaranteed income solutions
With clients focusing on maintaining or even improving their lifestyle in retirement, advisors are looking for new products and strategies for supplementing retirement income. According to our survey almost all financial advisors said they have already made changes to their clients' retirement portfolios as a result of the market crisis. The greater use of guaranteed lifetime income products is a major component of this change, with 60 percent of financial advisors incorporating these products as part of their new portfolio strategy. Risk seems to be what's on retirees' minds when it comes to retirement investments, which also explains the move towards guaranteed income products. In fact, "risk profile" was cited as the most important criteria for choosing an investment vehicle.
Playing by the new retirement rules
As you and your clients set out to navigate the new retirement landscape, keep in mind the following points:
- Retirees must evaluate "wants" versus "needs"
It is so important for financial advisors to engage in an honest dialogue with their clients to ensure they are on the same page when it comes to the type of discretionary expenses clients will incur in retirement. Discuss expectations for retirement lifestyle and agree upon a comprehensive and appropriate investment strategy. - Retirees need more income than previously recommended
Traditionally, a successful income strategy involved generating 70 percent to 80 percent of a client's pre-retirement income in retirement, but if boomers want to maintain the lifestyle that they've grown accustomed to, there may be a larger gap than advisors anticipated. Those percentages will simply not be enough. In order to cover both their "Basic Expenses" and "Discretionary Expenses," boomers will need to generate more income, with some needing as much as 100 percent of their pre-retirement income. - It is critical to understand withdrawal rates
Determining the proper withdrawal rates is essential to retirement success. Setting the rate too high may deplete assets too fast and make it difficult to recover after a market downturn. Set the rate too low, and some sacrifices will be necessary to manage expenses. Advisors we surveyed agreed that helping clients understand and determine withdrawal rates is a top priority. - New sources of guaranteed income are necessary
Unlike previous generations, boomers have fewer sources of guaranteed income. As a result, they will need to rely heavily on their personal savings to achieve the retirement they've envisioned. Supplementing your clients' portfolio with additional sources of guaranteed income to meet their basic needs can increase the probability of weathering out periods of volatility and not outliving their savings.
Financial advisors should view boomers who delay retirement as a tremendous opportunity. Now more than ever, boomers need and want financial advice, and advisors who can provide education and work with their clients to developed customized retirement strategies will surely earn their business. Finally, with clients in the accumulation phase longer, advisors have more time to build their asset base and cultivate strong relationships, increasing the likelihood that clients will consolidate their retirement assets with them.
Matthew Leung is director of Value-Add Programs and Product Marketing with MainStay Investments.
