Risk Management And The Evolution Of Retirement Planning In 2020

For many financial professionals, retirement planning in 2020 has taken a different shape as they struggle to balance client concerns about current volatility with preparations meant to help secure their clients’ financial futures. Given everything that has happened so far this year related to the COVID-19 health and economic crises, it’s not surprising that many clients are more focused on the present and steps they can take in the short term rather than bolstering their long term financial security.

But it’s important to remind them that addressing risks to their portfolio today doesn’t mean future risks they may confront in retirement magically disappear. If 2020 has taught us anything, it’s to expect the unexpected and put an emphasis on helping clients understand how risk management fits into the larger financial planning process. Part of this education process is explaining how insured solutions—both life insurance and annuities—can be used to take the pressure off of their portfolios, strengthen a financial plan, and provide more security for the unknown. By incorporating these measures clients can gain confidence in their ability to do everything from managing rising costs to protecting their family’s financial stability.

As Americans evaluate their finances during these challenging times and potential steps they can take heading into 2021, financial professionals should be keen to discuss specific risks to their clients’ retirement security—including longevity risk, behavioral risk, market risk and inflation risk.

A recent study* provides a deep dive into how Americans view these risks, and how they may or may not be impacting the way people think about and plan for retirement. The study surveyed three categories of Americans to get different perspectives on retirement: Pre-retirees (those 10 years or more from retirement); near-retirees (those within 10 years of retirement); and those who are already retired.

A look at the key findings from the study can provide several discussion points you can use to help your clients start to think about retirement risks and how they can mitigate them by incorporating insured solutions that may be beneficial for their specific situations.

Americans are unprepared for early retirement
Perceptions from non-retired Americans about when their retirement will start and what it will look like are much different from people already in retirement. This disconnect is putting the financial security of those nearing retirement at significant risk, especially if they are without a solid plan for addressing retirement income.

Although many non-retirees believe they will retire on their own terms, either because they will be financially ready (46 percent) or they want to “have fun while they still can” (35 percent), most are in for a surprise as they may deal with an unexpected start to their golden years. Half of Americans said they retired earlier than expected, with the vast majority doing so for reasons outside of their control including unanticipated job loss (34 percent) and healthcare issues (25 percent).

Expectations about working in retirement are also vastly different than reality. Nearly two-thirds (65 percent) of non-retirees think it is likely they will work at least part time in retirement, but only seven percent of retirees are currently working at least part time.

In fact, the closer people are to retirement the less enthusiastic they are about the idea of extending their employment. When asked if they would rather retire at age 55 and have their basic expenses covered in retirement or work until age 75 and live more extravagantly in retirement, less than a quarter (23 percent) of retirees said they would prefer to work longer (versus 33 percent of near-retirees and 48 percent of pre-retirees).

Given individuals are starting retirement earlier, paired with uncertainty around jobs due to the COVID-19 pandemic, a lack of retirement income planning can be particularly troubling since a longer time in retirement means a longer time covering expenses. This can have a significant effect on retirement income and whether or not retirees’ money will last as long as they do. This is a concern shared by both pre- and near-retirees as more than half (55 percent) of non-retirees said they are worried they won’t have enough saved for retirement and six in 10 said running out of money before they die is one of their biggest worries.

But these worries aren’t translating into action. Forty-two percent of those within 10 years of retirement said they are currently unable to put away any money for retirement (versus 34 percent of pre-retirees), and almost one-third (32 percent) of near-retirees say they are way too far behind on retirement goals to be able to catch up in time (versus 30 percent of pre-retirees).

Furthermore, when asked about the top financial choices they are making or planning to make, less than a third (32 percent) said saving enough in a retirement account, 12 percent said setting long-term financial goals, and only six percent said making a formal financial plan with a financial professional.

This data on lack of action is certainly concerning, but it can be a useful way to open the discussion with your clients about their level of retirement readiness and whether or not insured solutions can help them feel better about achieving their retirement goals.

Missing the connection between aging and inflation risks
The rising cost of living is a particular concern to current and future retirees, since these costs can continue to creep up over a long retirement as lifespans increase. Even greater concerns exist about rising healthcare costs, which are projected to continue to outpace the inflation rate. Yet, although there are increasing income solutions that can help clients manage these risks in the future, worry about the effects of rising costs on retirement security remains high.

Over half (57 percent) of all Americans are worried inflation will make their basic retirement expenses unaffordable, and 59 percent believe that the rising cost of living will prevent them from enjoying their retirement.

In addition, more than half (52 percent) of retirees said they view rising healthcare costs as one of the greatest risks to their retirement security, with nearly 40 percent of non-retirees sharing that concern about their future expenses. Perhaps even more alarming, both groups seem to have a poor sense of what their healthcare costs are now or will be in the future. Nearly half (48 percent) of current retirees said they have no idea of how much they currently spend on healthcare costs and more than six in 10 (62 percent) of non-retirees said they have no idea of how much they will spend on healthcare in retirement.

This has the potential to be even more problematic. As mentioned earlier, a quarter of respondents who retired early said they did so due to healthcare issues and more than a third (34 percent) of those who have yet to retire say healthcare issues are one of the most likely reasons they may have to retire earlier than expected.

Yet, as costs of everyday items continue to escalate at a rapid pace, people are not preparing adequately and may find themselves living on a fixed income with many of their crucial expenses (food, clothing, housing, utilities, etc.) not covered throughout a long retirement. Less than a quarter (24 percent) are discussing the impact of inflation with their financial professional, and only about two in 10 (21 percent) say they will use a financial product that allows for the opportunity for increasing income as a way to help address inflation.

Whether this hesitancy to incorporate increasing income solutions is due to product bias or lack of awareness, the bottom line is many clients would benefit from more education on how to manage rising costs with innovative annuity solutions.

Lack of discussions about retirement risks
The retirement savings system that today’s retirees experienced during their working years (i.e., defined benefit plans and pensions) has largely gone away, placing a greater responsibility on non-retirees for sound retirement planning and saving. This means insured solutions offering risk mitigation should be a significant part of the ongoing conversations you have with your clients.

Yet despite this, non-retirees are putting their retirement goals in jeopardy by not discussing with their financial professional a number of significant risks to their retirement security.

Although people who have already retired are fairly confident about how long their money will last, six in 10 non-retirees said running out of money before they die is one of their biggest concerns. But unfortunately, only about a quarter (27 percent) of non-retirees who work with a financial professional have discussed this aspect of longevity risk and less than 15 percent have shared their concerns that they won’t have enough money to do the things they want in retirement.

As it pertains to saving for retirement, many non-retirees seem to understand steps they need to take but aren’t following through. More than half (55 percent) of non-retirees said they are worried they won’t have enough saved for retirement and nearly one-third (31 percent) say they are way too far behind on retirement goals to be able to catch up in time. Yet only 12 percent said setting long-term financial goals is their top priority and merely six percent identified developing a formal plan with a financial professional as their top priority.

Americans also have significant anxiety about the effects market volatility can have on their retirement savings. Even prior to recent market volatility, both retired and non-retired people noted market risk as a top concern with nearly half (49 percent) of all respondents identifying a stock market drop as the greatest threat to their retirement income.

Despite this fear of a market downturn that could damage their accounts, less than 30 percent of Americans who work with a financial professional said they had discussed risks to their retirement arising from market drops, including only 22 percent of those within 10 years of retirement. This means there is a big opportunity for financial professionals to help by making sure clients understand different product options that can offer market participation with downside protection.

As this year proved, it’s always best to plan for multiple scenarios—however unlikely some may seem. It’s those improbable situations that insured products were designed for, underscoring the value of a good risk management plan. Helping your clients build a solid financial strategy that considers many of the risks that can derail a strategy is a key way to help them achieve the retirement they have always dreamt about.

*Allianz Life conducted an online survey, the 2020 Retirement Risk Readiness Study, in January, 2020, with a nationally representative sample of 1,000 individuals age 25+ in the contiguous U.S. with an annual household income of $50k+ (single) / $75k+ (married/partnered) or investable assets of $150k. Access the survey results at https://www.allianzlife.com/for-financial-professionals/resources/addressing-and-mitigating-retirement-risks.

Allianz Life Insurance Company of North America does not offer financial planning services or provide fiduciary, tax, social security or legal advice.

Life insurance and annuities are issued by Allianz Life Insurance Company of North America. Variable annuities are distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.542.5427.

Increasing income potential is provided through either built-in or optional riders at an additional cost.

Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

Allianz Life

Sherri Du Mond, senior vice president, Head of FMO Distribution, is responsible for managing the relationships with the field marketing organizations (FMOs) that distribute products from Allianz life Insurance Company of North America (Allianz Life®). In her role, she directs the largest Allianz Life sales channel, leading ongoing sales initiatives, recruiting new distribution relationships, and managing the overall strategic direction of FMO Distribution.