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What is Your Financial Advisor Not Telling You?

By Richard Barrington on June 10th, 2010
Life Insurance

It's not that your financial advisor is hiding something. It's just that communication gaps often prevent Americans from getting everything that they should from retirement planning.

A study by LIMRA, a research and consulting trade association for insurance and financial service organizations, found that fewer than 4 in 10 retirees have a plan to guard against the risk of running out of money during their retirement years. Often, there are barriers of emotion or understanding that prevent financial advisors and their clients from resolving key issues. Your retirement planning should focus on making sure those barriers are overcome, so that you have a plan for addressing key retirement risks.

Key Retirement Risks to Discuss with Your Financial Advisor

You should ask your financial advisor to identify a plan for dealing with each of the following retirement risks.

Longevity

It may seem strange to talk about longevity as a risk, but the longer you live, the more you risk outliving your savings. Catherine Theroux, a spokesperson for LIMRA, points out that this is more of an issue for today's retirees, because people are typically living 20-30 years in retirement. "Retirement now is a whole phase of your life," says Theroux, "it's not just the end of your life." To manage longevity risk, you should consult with your financial advisor before deciding to retire, and work with your advisor to budget so that your savings last.

Illness

While Medicare may pay some expenses, the need for long-term care can be a real drain on your resources. The cost of long-term care is getting even steeper. According to Genworth Financial, the cost of assisted living facilities and nursing homes has increased at a rate that has exceeded the general rate of inflation in recent years. LIMRA's Theroux suggests talking to your advisor about whether long-term care insurance might be appropriate, and she points out that the sooner you take this step, the better. Long-term care insurance rates are likely to be lower if you initiate the contract when you are younger. If you are already nearing retirement, you might discuss whether it makes sense to transition from life insurance to long-term care insurance with your advisor. There are also hybrid products, such as annuities or life insurance policies that also have a long-term care component.

Inflation

Increasing costs threaten retirees for a couple of reasons. Because they are no longer working, they don't have wages or salaries that tend to rise as inflation rises. Also, with a 20-30 year time horizon, retirees could easily see costs double over the course of their retirement. You should work with your advisor to create a spending plan that takes into account rising costs over time, and to make sure your assets are positioned to mitigate the impact of inflation.

Market Volatility

The investment dilemma for retirees is that while stocks have offered the best long-term returns historically, your time horizon effectively becomes shorter once you start drawing on your savings. Withdrawing money when your assets are down only amplifies the impact of market volatility, so work with your advisor on an asset allocation plan that adjusts your risk level as you approach and then enter retirement.

The impact of these risks on individuals has grown as the U.S. retirement system has transitioned largely from defined benefit plans to defined contribution plans (most prominently, 401k plans) over the past quarter century. Defined benefit plans used to give retirees an income stream throughout retirement, but defined contribution plans rely on the individual to accumulate enough money and to figure out how to make it last.

Theroux cites LIMRA research that says only about half of Americans get enough of an income stream from defined benefit plans and Social Security to pay their bills. She believes this proportion of Americans may decline even further as the generation that has relied primarily on defined contribution plans reaches retirement. That means more responsibility on the individual for saving and budgeting.

Advisors and Clients May Be Talking Past Each Other

All of these risks are routine topics for financial advisors, and according to Theroux, LIMRA's research has found that 90 percent of advisors say they do talk about retirement income planning with their clients. So why do so many clients walk away without an adequate retirement income plan?

Theroux believes there may be a disconnect between how the message is being delivered, and how it is being received. "Advisors tend to describe financial concepts logically," she says, "but people are making decisions emotionally."

An example of how emotions can get in the way of logic can be seen in a study by Age Wave/Harris Interactive, which was sponsored by Genworth Financial. The study found that being a burden on family was the greatest concern Americans had about their later years, which exceeded the fear of death. However, despite concerns about being a burden on family, fear of upsetting family members was the dominant reason people avoided discussing long-term care solutions--even though those solutions could ease the eventual burden on family members.

Bridging the Gap

How can you bridge these communication gaps to make sure you come up with a thorough financial plan for retirement? Theroux recommends four ways that advisors and their clients can find common ground:

  1. Meet with your advisor at least five years before retirement to start discussing your goals and how you want to use your money in retirement. Note that you should start saving for retirement early in your career, but as you approach retirement you should plan the shift from saving to spending.
  2. Discuss finding an income stream to meet your monthly needs. Advisors tend to focus on the total retirement sum you are accumulating, but most people relate better to the way money is used from month-to-month.
  3. Participate in the decision-making. Don't let your advisors dictate all the answers. An advisor should present you with a range of suitable choices, such as multiple insurance quotes or information on different investment options, and empower you to make the final decisions.
  4. Make sure the final plan is written out. This can ensure that everyone involved is on the same page, and that this understanding won't fade over time.

Financial advisors typically have relevant training plus analytical resources at their disposal. However, only by controlling the communication process can you be sure to get the full benefit of those tools.

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