Much time is spent helping clients create strategies to save for retirement so they are able to comfortably retire on their terms. But saving is just the beginning. Equally important to accumulating assets is having a retirement income strategy that will endure through retirement.
Financial professionals can help clients build a solid retirement income strategy that may be protected against several risks including the impact of inflation, longevity, the rate of consumption, and market volatility. Take these risks into consideration and discuss how they can potentially impact a client's portfolio to help them feel prepared and more secure when their last day of work arrives.
1. Inflation
When helping clients build a retirement income strategy, ensure that inflation doesn't erode savings faster than expected.
(Related: 3 Common RMD Errors Advisors Must Avoid)
According to a recent Allianz Life inflation study, nearly one third of Americans claimed they were either "panicked" or "very worried" about inflation, yet 64% of them did not have a financial plan to address the rising cost of living in retirement. This is where financial professionals can truly make a difference. Discuss what inflation increases may mean for clients and their retirement income – especially as retirements potentially last longer.
Consider this, the U.S. Census Bureau projects that clients retiring today at age 65 could expect to live at least another 20 years based on life expectancy tables. Even with a modest inflation rate of 2.5%, costs would double over the course of a period of 28 years. Those planning an early retirement will need to pay even closer attention to inflation risk as their retirement may last longer.
2. Longevity
On average, the Census Bureau also estimates that by the year 2020 women will live to be 81.9 and men will live to be 77.1.
Compare that to 1935, when life expectancy was just over 59 for men and slightly above 63 for women, and it's clear that managing longer lives creates an increased need for income protection in retirement, especially as assets are drawn down. Social Security, which was a large part of retirement income in the past, may not be enough to effectively address inflation in the future and may be a smaller portion of a retiree's overall income. To make up the difference, other income options may need to be explored.
With longevity also comes higher health care costs and medical expenses.
It is estimated by the U.S. Bureau of Labor Statistics that retirees who are 65 and older can expect to spend 12.2% of their income on health care expenses (as compared to 4.6% for 25-to 34-year-olds). Also consider the fact that Social Security cost-of-living (COLA) increases may not cover the rising costs of healthcare like Medicare.
