With lingering economic uncertainty and rumblings about the future of Social Security, many Americans feel a continuing unease about their prospects for a secure retirement.
This sentiment was aptly captured by ING U.S.'s Retirement Revealed study, in which nearly half (48 percent) of respondents — representing more than 4,000 adults ages 25 to 69 with full-time jobs — indicated they did not feel prepared for retirement.
Of course, it's possible that these respondents were merely articulating an accurate assessment of their retirement preparation. After all, in its 2013 Retirement Confidence Study, the Employee Benefit Research Institute learned that 57 percent of workers in the United States have less than $25,000 in savings and investments (excluding home values). One can hardly feel confident with a retirement nest egg that is on par with the sticker price of a new car.
Yet, astute financial advisors should be just as worried about the half of Americans who say they are confident about their pathway to retirement security. Clients who fall in this category may indeed have their acts together, with a clear-eyed plan for the future and a solid track record of saving. But do these clients really understand how vulnerable their retirement plans are to the perils of life?
The fact is that a range of risks — from serious illness, to premature death, to job loss to other financial constraints — can arise at any time and from any angle. These risks can deliver serious setbacks to a retirement savings strategy or drain away assets in ways that make it difficult to recover.
To help protect your clients' retirement momentum, here are four tactics that can keep these unpredictable life risks at bay, both before and during retirement.
Tactic #1: Tapping group life at the workplace.
Workplace retirement savings will be exposed in two significant ways if your client dies prematurely. First, and most obviously, surviving family members may need to liquidate or take large loans from the account to overcome the loss of income, weakening the ability to pursue long-term investment gains. The second exposure is the loss of potential future contributions, which might have totaled hundreds of thousands of dollars.
Group life insurance is an inexpensive but powerful shield against these two forces. By delivering a tax-advantaged lump sum to the surviving family, the death benefit can help to ease short-term financial pressures and keep a 401(k) or IRA balance intact.
Often, the employer provides a death benefit equivalent to the deceased's annual salary at no cost. While this amount of coverage is generally not enough, it does provide a base amount. What's more, step-ups to higher amounts of coverage are usually very affordable and often require no underwriting.
This tactic is an easy one. Remind your clients to sign up for group life insurance at their company's annual enrollment time.
Tactic #2: Cushioning medical costs with voluntary benefits.
Premature death is just one of the perils that might put a client's retirement savings at risk. Serious illnesses or accidents can generate significant expenses for an individual, even if there is a decent medical insurance plan in place. Too often, families do not have ready cash flow to deal with extensive out-of-pocket medical expenses or to weather the elimination period before disability payments kick in. Point in fact: the 2011 National Bureau of Economic Research Financially Fragile Households report found that nearly half of Americans are not able to access $2,000 easily for an unexpected expense.
In cases like these, the client may be under intense pressure to take out a 401(k) loan, which will diminish the account's compounding potential and may, if not paid back, permanently dial back retirement savings.
To guard against this risk, your clients may be able to buy accident, critical illness, hospital indemnity or disability coverage through payroll deductions at an affordable price. When reminding your clients about these insurance coverage options, be sure they realize policy payouts typically are unrestricted and can be used for anything — car payments, mortgage, food, etc. — and not merely for medical expenses.
