The Most Critical Years: Retirement Planning for Middle-Aged Clients

Indexed universal and other cash-value life insurance policies are particularly popular right now, and for good reason. "They have the potential for growth with no risk, and they're great for people in their 30s and 40s" said Ryan Brown, CR Myers and Associates financial planner. "They can't lose money, and if something happens to them, their families will be taken care of. There's no other financial vehicle in the world that can do that." Brown noted that while the common illustrated rate of return hovers around seven percent, he's seen clients make as much as ten percent depending upon their premiums and the current S&P 500 performance.

As for clients already heavily invested in the market, staying the course is likewise a bad move  – at least according to more conservative advisors. "A correction is imminent, and if my portfolio was inflated, I'd move that money into a protected contract like an annuity," said Petersmarck. "It's my opinion that we cannot afford to gamble, and thus the open equities market is removed from consideration." Brown likewise commented that, "If the richest of the rich don't know what's going to happen with the market, why would average people think they can beat it?" Both argue that by starting early and contributing regularly to safer investment vehicles, clients can reap the same or better rewards compared to what they'd gain through the market, but without the risk of losing their initial investments.

Not all advisors agree that middle-aged investors should be so risk-averse, however. "Even if the market dropped 30 percent, the dollar cost average will help them out because they're continually putting money away and not drawing money out," said Frazzitta. Still, Frazzitta also noted that a mix of safe and variable investments is ideal, and that middle age is the perfect time to start using annuities and cash-value life insurance. Clients' risk tolerances and income will ultimately determine their involvement in the market, but even advisors who generally favor equities might want to stay open-minded regarding annuity- and insurance-heavy portfolios. Now that decades-long retirements are the norm, safe and even lifelong guaranteed income streams are only going to become more important for clients of modest means.

Looking Forward

Whether or not they invest heavily in equities, middle-aged planners also need their advisors to stay on top of changes in both the market and legislature. "We don't know what the economic environment will look like down the road, and ideally you'll have two or three different strategies or alternate scenarios you can track," said Frazzitta. A client might have an aggressive, equities-heavy strategy dependent upon a growing market, for instance, as well as a safer fallback plan that would involve shifting money from stocks to annuities and life insurance vehicles. "You'd need to track these on an annual basis to see how they're coming along, and if the tax situation changes, at least have a plan to change course," Frazzitta added.

The likelihood of tax hikes also makes Roth IRAs, health savings accounts and other tax-free growth investments ideal choices for clients who still have plenty of time to contribute. "With the amount of debt the government has accumulated over the years, it's highly likely that income tax rates are going to be significantly higher than they are now," said Frazzitta. Many middle-aged savers feel like they're already stretched thin, but matters will become far worse for those who continue to delay, and whose main income streams are subject to ever-higher tax rates in retirement.

Finally, it might be a good idea to treat Socially Security a little differently for the under-55 crowd. The collection ages already rise at regular intervals, but with the trust fund expected to exhaust by 2033, and with a cost of living adjustment that doesn't always provide for retirees' increasing expenses, middle-aged people shouldn't count on it as a significant source of income. Frazzitta, Brown and Petersmarck all think of it as an eventual supplement to their clients' income, not as a primary source in and of itself.

Starting Early, Thinking Long-Term

Ultimately, middle-aged clients need to pick solid strategies and start savings as early as possible, but they also need to keep open minds as tax rates, investment laws and market trends change throughout their working lives. "An advisor working a younger client absolutely should be thinking about how the economic environment, tax environment and cost of living is going to change down the road and start planning for it accordingly," said Frazzitta. Even if a client's risk preferences, spending power and retirement goals stay the same through his 40s and beyond, a changing economic environment will still require course adjustments.