The latest research from LIMRA verifies a troubling consumer trait that advisors might have long observed: People are worried about the wrong things.
Consumers worry about inflation, whether Social Security will still be around, and other factors involving the economy and public policy.
Certainly those are big issues, but consumers cannot do much about them, and these issues are not the biggest threats to retirement security.
The true villains are many, but they have a common denominator. They all have longevity as the root. People don’t have a real appreciation for not only how long they will live but also the real impact of getting old.
For example, three out of four non-retirees are worried that pensions and Social Security will not be sufficient for their retirement, according to LIMRA. They might be right, but probably not for the right reason.
Here’s another impressive number: One out of four healthy 65-year-old men will live to 93. The lucky one out of four women will chug on to age 95. The survey didn’t ask whether people believed they would live that long, but the odds are good that far fewer than 25 percent thought so.
That is a key takeaway for Jafor Iqbal, the assistant vice president for the LIMRA Secure Retirement Institute and the architect of an ambitious report on retirement income.
“When we talk about the average life expectancy, people know that it’s age 85 or thereabouts,” Iqbal said. “But average life expectancy is a really unwieldy term to use because average life expectancy means that roughly 50 percent of the people would be living beyond that average life expectancy.”
So, although a 65-year-old might think they are being responsible by planning their retirement to last another 20 years, they have really good odds of being woefully unprepared. They might be aiming for age 85, but that is in the middle of the pack. They stand a 50-50 chance of living longer.
If longevity is the key issue, consumers are far too focused on risk factors outside their control.
“They think that public policy risk is No. 1,” Iqbal said. “They are worried about whether the government will be reducing their Social Security or Medicare benefits or raising their taxes.”
Consumers can do little about those issues on a macro scale. But they can use those concerns to spur on their own savings, because it is becoming more apparent that they are on their own.
“There is an understanding right now that retirement is now a personal responsibility,” the researcher said. “Ten thousand people are reaching age 65 every day. Pensions are being cut each generation. That is strengthening the message that you need to save because all the other traditional methods are going away.”
Once consumers absorb that insight, they will need help in dealing with the insecurity and then building dependable security.
Advisors most likely know the key risks to their clients’ retirement security, such as health-care costs. But advisors might be wise to acknowledge their clients’ fears while steering them toward their most significant issues.
“Advisors probably think market risks, health-care risk or longevity would be the most important things that the retirees or pre-retirees should address,” Iqbal said. “But retirees and pre-retirees are not there. They want to take care of the other things first.”
That means helping clients see the real picture. For example, many Americans just assume they always will have the option to work. But how they feel about working at age 55 or 60 is not the same as they will feel at age 70.
LIMRA research shows that people often retire earlier than they expect to.
“Our data shows 50 percent of the retirees have to retire earlier than they had planned,” Iqbal said. “It is not determined by them. That is another misconception that I think that we should emphasize whenever we talk about retirement.”
People also will not have the mental faculties that they assumed they would. One in six 70-year-olds will have some dementia.
Retirement planning often is pointed at one number, the magic one that will supposedly ensure security. Advisors and online sources have a selection of formulas and rules that add up to a lump sum to accumulate.
Although saving money is vital, focusing all the planning on a number might not be so healthy, Iqbal said, adding that it could lead to disappointment. Instead, a formal retirement plan puts clients at ease.
“We don’t put enough emphasis on a real retirement plan,” he said. “Instead, we say that if you have saved $500,000 or $1 million or $2 million, you are safe and you are good for retirement.”
That number is different for each individual, and good advisors factor that into the calculation. But there are many contingencies that are difficult to factor into a number, such as needing assisted living earlier in the retiree’s senior years.
That is why Iqbal and others are urging the investment and insurance industry to focus more on a full plan, rather than solely on accumulation.
“It is unique for every person and every household,” Iqbal said of a formal plan. “Clients should get an advisor to really figure out with them what their retirement lifestyle will be, their financial objectives, and set their retirement goals. That’s what we’re calling the formal retirement plan.”
The research showed the plan not only puts the financial pieces in place, but also brings a peace of mind.
“A plan really makes sure that a customer gets that extra confidence in their retirement,” the researcher said. “We have seen that when confidence goes up, clients also feel very, very satisfied with their advisors because they think that the advisor has done a wonderful job.”
Iqbal said that over the next few years, insurance and investment advisors will be hearing much more about how to speak with clients on broader retirement planning and how to structure those plans.
When they have a formal plan, three out of four clients follow it. Research shows planning pays off not only for consumers but also for advisors.
The relationship improves, and the client also wants to move more assets to the advisor, Iqbal said. “So all of the things are coming together.”