The Biggest Retirement Risk
Two Questions to Help Your Client See Longevity Risk Differently
Human beings naturally tend to avoid pain and seek pleasure. This is especially true when it comes to their retirement planning. We discussed in the last issue of The Current how clients tend to remember the recent years in the market and often forget about how difficult the last recession was. In this issue I want to address the most important risk to retirement planning that your clients want to avoid talking about – longevity!
No one can answer the question “How long are you going to live”? But this is the first question that needs to be answered to have a successful, worry-free retirement. As financial professionals we have to make it a point to ask the right questions even though they are the hardest ones to ask. We want to show them why longevity risk is the #1 threat to retirement using these two approaches.
The first approach is statistical: there is a 50% chance that you will live to be age 89 and a 25% chance you will live to be 94.
How confident is your client that their current portfolio will provide them an income stream if they were one of the 25% to live into their 90’s? Most would say “maybe” or “probably” or “not sure” but there is only one answer and that answer must be “YES.” If they cannot confidently answer “yes” and tell you why it is true, you must help them understand what it will take for them be able to answer “YES.”
The second approach is to prove it to them. I like to say longevity is the most important risk in retirement income planning, and I will prove it to you. There are many risks in retirement: market risk, inflation risk, interest rate risk and others, but longevity needs to be taken care of first. Longevity risk is a risk accelerator. I ask the client, “If your retirement was only 4 years long (retire at 66 and live until 70), would inflation be very impactful? Would market fluctuations affect your portfolio? Would you care about low interest rates?” The answers to these is “no.” But as we start to live longer we need to plan for inflation, we are more concerned about possible market corrections and where can I get a higher yields. You see, the longer we live, the more impact other risks have on our retirement. Longevity truly is a risk multiplier.
If we as financial professionals can help the clients understand this one concept and give them strategies to overcome longevity, we will have taken the first step towards giving them an income plan that they can say YES to. Asking these questions and having the longevity conversation with your clients is the strongest way to build trust and start helping them.