Get clients to take ownership of retirement

Help them set goals, determine risk and create a plan on how to reach their financial objectives

Apr 27, 2014 @ 12:01 am

We have reached a critical juncture regarding retirement in this country. Recent research shows that the United States trails most developed nations in retirement security, as severe fiscal pressures and strained government resources are placing the bulk of the savings burden on individuals.

For advisory clients, this means their path to a secure retirement will be very different from the one that their parents or grandparents took. The days of signing up for a pension, putting in years of service — often with the same employer — and collecting a monthly check in old age are relics.

Instead, individuals will have to generate a larger share of their own income during retirement, a difficult task that will only grow more so as life spans continue to lengthen, traditional pensions fall by the wayside, and health and long-term-care costs rise. More to the point, this shift will require investors to view planning and saving for retirement as a more serious, strategic, continuous process, and financial advisers have a key role to play in helping to drive this behavior.

As this shift toward individual responsibility deepens, the stark reality is that too many people aren't prepared. More than half — 54% — don't have financial plans, and 45% don't have clear goals.

Making matters worse, many are underestimating the resources they will need during retirement.

CHART A COURSE

So how can advisers get investors to be more personally involved in retirement planning?

Encourage clients to set specific retirement goals. Work together with clients to build a plan based on their individual goals and encourage them to be as specific as possible about what retirement looks like for them.

Maybe a client wants to retire at 63, buy a big boat and travel the world. But to buy the boat, the client may need to work longer or possibly increase his or her exposure to income-producing assets.

Identify each goal, determine the rate of growth needed and discuss risks, rewards and trade-offs.

Change the conversation on risk and performance. Investors are looking for growth but are still acutely aware of volatility.

Focus on risk first during planning conversations, and remember that what one person sees as risky, another may not. Explain that risk is more manageable than performance and that one way to manage risk is to incorporate assets and strategies that aren't correlated to the broad market, including hedge fund strategies and private equity.

Also, have regular performance check-ins and frame progress around personal dimensions so that clients can clearly see how they are doing against their own personal benchmarks. Tethering clients to their goals instead of market moves will help them get more personally involved and may provide for a smoother journey.

Have a two-way dialogue on factors that could derail success. Information overload can be counterproductive, so be creative and share simple, digestible information that may strike a chord with your clients.

Ask them to list what they view as the top future threats to their overall retirement security. Show them a chart that illustrates increasing life expectancies and explain that at least one in four people who live to 65 can expect to celebrate their 90th birthday.

Ask them how much they think they will need to save for retirement, and compare that with the industry rule of thumb estimating that the average 65-year-old may need 70%-80% of his or her pre-retirement income. And reinforce the corrosive effect that health care and LTC costs can have on nest eggs.

One example: Show them a snapshot of the rising patient care costs associated with chronic illnesses such as heart disease, cancer or diabetes.

BOTTOM LINE

The bottom line is that the traditional approach to saving for retirement has been permanently altered by demographic and economic trends that show no signs of abating. People will have to pay more of their own freight, and many are ill-prepared to do so.

Absent help, many will be in jeopardy of running out of money later in life, which will have severe consequences for their overall well-being. Advisers can add enormous value by thinking of new ways to get people engaged and by encouraging them to take more ownership of their financial destinies.

Edward Farrington is executive vice president of U.S. distribution for Natixis Global Asset Management, and leads the firm's retirement and offshore-business units.

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