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One of the most delicate balancing acts advisors face is managing client expectations against reality. And yes, those two areas often clash.
For example, some clients may get too cozy during bull markets, expecting double-digit-plus equity returns every year. Likewise, some advisors are apt to have some older clients that were stunned by the Federal Reserve’s spate of recent interest rate hikes because it sure felt as though from early 1980s onwards, rates only went down.
Those are just a couple of hypothetical examples, but they underscore the point that many clients are ambitious. That’s a good thing. Where the delicate balancing act comes in is advisors coaching clients to understand things such as bull markets aren’t permanent and $10 million in retirement savings isn’t attainable for everyone.
Speaking of retirement planning and savings, younger clients are particularly ambitious on those fronts and that’s something for advisors to be aware.
Younger Clients’ Retirement Goals Difficult, Not Impossible
Here’s something advisors really need to focus on working with clients in the millennial and Gen Z demographics: A recent survey by the World Economic Forum found that 44% of people under 40 want to retire by age 60.
There’s nothing wrong with goal setting, but for someone that is, say, 35 today, retiring in 25 years won’t be easy. Not impossible, but not easy, either.
“As people are living longer lives, business and government need to restructure their approach to later life planning. Failing to adopt a multistakeholder approach towards longevity will inevitably result in a significant portion of people retiring into poverty,” notes the World Economic Forum.
Focusing on the U.S., advisors know that 62 is the earliest age at which someone can claim Social Security benefits. That might sound positive to clients wanting to retire at 60. After all, getting Social Security two years later supplements lost income and prevents larger-than-necessary investment withdrawals. However, clients thinking that way probably don’t realize there are material benefits in waiting to claim Social Security benefits.
The point is that workers in the U.S. that are aiming to retire likely need to fit into one of the following three categories: 1) Higher earners (think top 5%) 2) Access to a lavish defined benefit pension (probably employer-funded healthcare, too) and 3) Diligent savers that spent at least a fair portion of their careers earning six figures or close to it. Obviously, not everyone fits into those groups.
Longevity: The 800-Pound Elephant in the Room
Younger clients that are aiming to retire at 60 may be forgetting an important point and this is where advisors need to step in. That point is life expectancies are increasing. Someone who is in good health at 40 years old may well live to be 85 or 90 or older.
That means if that client retires at 60, a 30-year-plus retirement could be in the offing and that takes substantial resources –something not everyone has – and dependence on riskier assets like stocks later in life.
“Increasing longevity globally will require new innovations and solutions to address how people can stay financially resilient in a retirement that may be 20 years longer than their grandparents,” concludes the World Economic Forum. “With supportive actions from government and employers, individuals will have a chance to try new approaches to longer lives and reassess how they want to study, live, work, save and retire in ways that are different from what has been done in the past century.”