This issue’s special reports on “the new normal” that has arisen in the wake of the pandemic touch on the many ways the financial advice business has changed. Technology has played a key role in much that is different, from the growth of remote work in its many forms to new ways of communicating, to empowering advisers and creating a more level playing field for them regardless of which channel they choose. Technology also is increasingly important in financial and retirement planning, a subject also covered in the issue.
But technology hasn’t changed everything, and one important aspect of retirement planning that hasn’t changed — and is likely never to change — is the need for advisers to be forthright with their clients, especially about matters relating to longevity and income adequacy, not just investments. It’s not a matter of honesty, it’s more about the willingness to have conversations that may be uncomfortable for advisers and clients both. In the case of retirement, the tough conversation that should be had involves the potential for having inadequate retirement income. With a wide range of factors contributing to that greater uncertainty, this could well be the time for such difficult, but important, conversations.
What’s different now? The pandemic, of course, has led to profound changes in the way people view work. Many have chosen to retire early, take a break from work or seek a job that pays less but satisfies in other ways. All those choices may seriously affect an individual’s ability to build an adequate financial cushion to provide the income needed in retirement.
What’s more, about a third of those who take Social Security benefits choose to start receiving benefits at age 62, when they’ll get 25% to 30% less than if they waited to their full retirement age of 66 or 67. Only about 9% of women and 6% of men wait until age 70 to claim what could be as much as almost one-third more money than what they would get at full retirement age.
The need for advice on how to manage retirement in a much-changed world is particularly acute.
Inflation is another worrisome factor. Pandemic-caused supply chain problems that raised the prices of goods have been compounded by higher fuel prices in the wake of the Russia-Ukraine war. Our decades-long era of low inflation and worries about deflation seem to be over, causing concerns about how income will be able to keep pace with prices during one’s post-work years.
Meanwhile, the Federal Reserve raised its key interest rate by 25 basis points last week, signaling the beginning of a series of hikes aiming to raise that rate to about 2%. While that’s still very low by historic standards, the upward direction of interest rates points to higher costs in the future for anything requiring borrowed money, such as homes and cars.
Many advised clients are in good financial shape to weather whatever the future holds. But given the paucity of savings overall and the difficulty that most people have in translating the total value of their holdings into regular income, the need for advice on how to manage retirement in a much-changed world is particularly acute. Whether the solution involves working longer, monitoring spending or perhaps choosing to annuitize a portion of one’s wealth to cover basic expenses, an adviser’s compassionate and honest discussion can be invaluable.
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