Being underinvested can be a risky business for preretirees

Investors who've been burned need help rightsizing their risk

Jan 14, 2019 @ 11:54 am

By Philip E. Caminiti

Preretirees who suffered large portfolio losses in the economic collapse of 2008 may feel reluctant, or entirely too scared, to invest in the stock market and take the chance of getting burned again. Some may have experienced the double bubble of the tech and mortgage crises. But while it's understandable that those investors feel jittery, their decision to sit on the sidelines and be underweighted according to their risk tolerance may take them completely out of the game when it comes to reaching their retirement planning goals.

In fact, many preretirees are missing out on potential stock market gains and are not getting that growth opportunity that may be needed to adequately fund their retirement years because of their fears. In other words, their risk need is not in line with their risk tolerance.

According to a recent study by Greenwald and Associates and the Diversified Services Group, over half of investors aged 50-59 who are working with financial advisers are underinvested, and almost four in 10 investors aged 60-70 with advisers are underinvested.

Retirement solutions that provide investment protection may help clients invest more confidently by providing the opportunity for growth with important safeguards. More than three-quarters of investors said that they prefer a protection-focused portfolio versus a portfolio that seeks to outperform a stated benchmark, according to a Cerulli study.

Further, market volatility is a concern for many preretirees. In fact, 54% of retirees currently working with financial advisers report market volatility as a major pain point in retirement, according to the Cerulli research.

Clearly, there is an opportunity for advisers to address client concerns by explaining how various financial products can help one's ability to seek growth for retirement. In addition, discuss how increasing exposure to equities with principal protection may address your clients' goals for how they want to live in retirement.

Here is how you can help your clients get more comfortable with the appropriate level of equity exposure for their circumstances to enable them to realize their retirement vision.

1. Understand your clients' risk tolerance. To provide good advice to your clients, you need to know what level of risk (or equity exposure) they are willing to take. Their aversion to loss or their willingness to tolerate the potential for losses will shape your discussions, and your approach to identifying appropriate solutions to suit their behavioral inclinations. Also talk about their investment time horizon and when your clients anticipate needing to make withdrawals to cover retirement expenses.

2. Determine their risk need. Knowing how much risk your clients need to work toward their retirement goals will also shape your approach. Mortgage payments, educational or business expenses, and other financial needs must be considered in your planning process. It's important to note that assets traditionally considered "safe," like bonds and CDs, could have eroded value in a rising rate environment and normally don't have the growth potential that equities have.

3. Consider filling an equity exposure gap via protection features. We know that emotions influence investment decisions for retail investors. This need for safeguards is driving your clients' investment decisions.

One possibility is a long-term retirement product like a variable annuity with the purchase of an optional accumulation benefit rider which can provide equity exposure coupled with principal protection on the initial investment. This may be just the right fix to close the gap between the exposure they are willing to take and the exposure that may be needed to potentially grow their retirement nest eggs.

Of course, investors should consider fees, guidelines and risks with variable annuities and riders. Withdrawals or surrenders may be subject to a surrender charge, ordinary income taxes and, if made prior to age 59½, to a 10% IRS penalty.

And your clients should consider the investment objectives, risks, charges and expenses of the investment carefully before investing. Remind them to carefully read the prospectuses, which contain the information about the products and underlying investment options.

Aligning your clients' risk tolerance with their risk need may be just what they need to realize their retirement vision. Talk to your clients about solutions that enable them to participate in the market, but with the option of added protections.

(More: Why your 50-year-old clients may need you the most)

Phil Caminiti is a managing director at New York Life Insurance Co. and is registered with an affiliate, NYLIFE Distributors.


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