Presented by Deb Strong
Risk 1 – Inflation
What is the #1 increase in expenses for a retiree? Most people will say it is Health Care, which isn’t actually accurate. The #1 increase in expenses in retirement is daily living. Every day is a Saturday. What is inflation directly tied to? The increase in the costs of good and services over time…daily living. Not to mention, do you expect inflation to go up or down? Similar to taxes, everyone expects inflation to go up over time.
So having at least a portion of the client’s money allocated to a policy that can help them combat inflation is just smart planning for your client.
Risk 2 – Market Volatility
In the last 14 years the market has corrected by 50% twice! Over that 14 year period investors would have averaged a 2% annualized yield in the market. We are at the top of a 6 year bull market, when the average bull market only lasts 4. If client’s are heavily allocated to the market they may not have time to recover from another major correction. Hence, the reason I like the rule of 100. Take the client’s age from 100 and that is the percentage of their assets that should be at risk (example 100-70=30). This means my 70 year old client should not have more than 30% of their retirement assets at risk.
Not to mention, from the Future of Retirement Income Study, 60% of annuity owners and 61% of annuity considerers would be willing to pay ADDITIONAL fees to keep from losing any money in a bad year, while gaining SOME of the market in good years. People are willing to pay for what an index annuity does contractually!
Risk 3 – Interest Rate Risk
Many clients use bond funds in their retirement income plan. However, most of them do not understand the inverse relationship of bond fund rates to interest rates. In 2013, 88% of bond fund rates lost money. The other interest rate risk is for the $11.3 Trillion dollars on the sidelines earning less than 1% interest, not even keeping up in a low inflation market.
Risk 4 – Longevity
Longevity is the multiplier of all Risks. One out of 4 people 65 years old today will live past 90. One out of 10 will live past 95. People are in retirement as long as they are in their professional careers. You have to make sure that they have an income they can’t outlive.
Unfortunately, many advisors are still using the outdated method of the 4% rule. Which says that if you have a 50/50 stock bond portfolio you can pull out 4% annually and it would be guaranteed to last 30 years. We have a White Paper and tools called Rethinking Retirement Income, which is a study done that shows if you use that, you have less than a 50% chance of success. The real number is more like 2.8%. What I find as more of the real problem versus the percentages is what happens when you outlive the 30 years?