The importance of managing clients' 'life risks'

When it comes to retirement, new research underscores how health care, medical expenses and longevity risks are top concerns of investors.

Oct 3, 2017 @ 12:01 am

The following is an excerpt from a new research study, “The planning gap”, which was co-developed by InvestmentNews Research and Nationwide. The research is based on survey responses from 1,741 individual investors, as well as a companion survey of advisers that was completed by 343 advisers. To download the full report, click here.

Investors are aware that they will be largely responsible for funding their own retirement incomes. Just 21% of investors in our survey indicated that they are a participant in a defined benefit plan, while 76% indicated that they are currently contributing to a defined contribution plan, such as a 401(k) or 403(b) plan. These types of plans, along with personal savings and investments (such as Individual Retirement Accounts), are expected to fund the majority of participants' retirement incomes. At the same time, on average, investors indicate that just 18% of their total income during retirement will be funded by Social Security.

Figure 5 shows the sources of savings and retirement vehicles that individuals believe they will use to fund their retirements, broken out across the three primary income levels in our survey.  

Figure 5: Projected retirement income funding sources, by investor income
INVESTOR INCOME
$50,000 to $149,999 $150,000 to $299,999 $300,000 to $499,999
Your personal savings and investments 31.9% 33.9% 39.2%
Your employer plan(s) (e.g. 401(k) or pension) 37.7% 41.3% 36.3%
Social Security or other government benefits 21.6% 16.0% 13.1%
Other sources 8.9% 8.9% 11.4%
In addition to dedicated retirement savings vehicles, a large majority of investors in our survey believe that they will fund a portion of their retirement with equity from their current home, potentially leveraging strategies such as reverse mortgages or down-sizing. Figure 6 shows the most popular sources of additional retirement income, broken out across levels of investable assets:
Figure 6: Additional retirement resources, by investor income
With the responsibility of personally funding the majority of their own retirement income, investors presented mixed views on their expected standard of living during retirement. While 43% indicated that they believe their quality of living will not change during retirement, 46% believe that their standard of living will decline, while 11% anticipate it will actually improve, as noted in a more detailed breakdown in Figure 7.

Investors who work with advisers, however, are more confident that they will be able to maintain their current lifestyle in retirement: Of those currently using a financial adviser, 50% say their lifestyle will stay the same during retirement, 39% decrease. Among those who are not currently using an adviser, 35% say their lifestyle will stay the same, while 51% said it will decrease during retirement.

For advisers, an opportunity to deepen relationships and enhance value

The opportunity for advisers, we believe, is to place a greater emphasis on “life risks” – with longevity and healthcare at the top of the list – and integrate these variables more closely into the construction of financial plans. Many institutional investors, for example, have adopted liability-driven investment (LDI) strategies in recent years. While complex, at its core LDI is a strategy that aims to match income needs to an investor's future obligations, taking into account the effects of interest-rate changes and inflation. This is just one approach, among many, that could be embraced by financial advisers, especially as a way to address the pressing concerns of healthcare expenses and longevity risk.  

To download the full version of “The planning gap", click here.

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