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Advisors and Investors: Views on Retirement Risks


Matthew Drinkwater, Ph.D., FSRI, FLMI, AFSI, PCS
Corporate Vice President, Annuity and Retirement Income Research

July 2024

Risk — exposure to the possibility of something harmful happening — is a part of everyday life. To varying degrees, people avoid, transfer or face risks throughout their lives, but retirement is an especially risk-prone life stage. The level of concern expressed by individuals about a particular retirement risk should be based on their own ideas about how likely it is that the event will impact them and their sense of how significant that impact could be. For retirees and those close to retirement, how risks are conceptualized can impact their willingness to consider risk-mitigation solutions, including products that transfer some or all the risk to an insurer.

Assessment of risk can be highly subjective, as it involves implicit estimation of whether future events will happen and what their effects will be. No one has the proverbial crystal ball. At the same time, financial professionals have an obligation to ensure that their clients have an understanding of risk that is evidence-based and to steer their clients toward solutions that will maximize the likelihood of positive outcomes, in line with clients’ risk tolerance levels.

LIMRA recently asked investors who regularly work with financial professionals and financial advisors about the potential impact of various risks on retirement living standards. When standardized so that the overall levels of concern are equal, it's clear that advisors and the clients of advisors have sharply different views on the hazards posed by retirement risks.

Figure 1. Concerns About Retirement Risks

Based on 2,350 investors (retirees and non-retired workers, aged 40 to 85, with $100,000 or more in household investable assets) and 759 advisors (investment advisor representatives of registered investment advisory firms, and dually registered representatives of broker-dealers). Risks not displayed: The possibility of becoming a full-time caregiver (both investors and advisors rated this as a very low concern) and becoming widowed (not asked of advisors). For investors, percentages refer to the proportion who responded 8, 9 or 10 on an 11-point scale, with 0 = “No concern” and 10 = “Significant concern.” For advisors, percentages refer to the proportion who indicated the risk was a “Major concern” (other options were “Minor concern” and “Not a concern”). Both of these metrics were standardized to allow for comparability across the studies. See 2023 Retirement Investors: Behaviors, Attitudes, and Financial Situations LIMRA, 2023, and Advisors and Retirement: Income Planning and the Role of Annuities, LIMRA, 2024.

Investors More Concerned: Investors are more likely than advisors to express significant concern about the potential impact of government benefit reductions, including Social Security and Medicare. Such changes to public policy, while unlikely, are possible. Should these reductions go into effect, they would at best curtail retirees' lifestyles and at worst would be devastating for many retirees. Yet to most advisors, the low probability of these policy changes happening, along with their focus on portfolio management, may have led them to underestimate just how top of mind and concerning these risks are to their clients.

Investors and Advisors Equally Concerned: Investor clients and advisors express similar levels of concern about tax increases, a prolonged stock market downturn, inflation and becoming a full-time caregiver to an older relative. For wealthier clients, tax planning plays a major, if not central, role in the advice and guidance their advisors provide. Similarly, portfolio management represents a core service for advisors, whereby they position their clients' assets to avoid over-exposure to stock market risks. The steep rates of inflation experienced in 2022 and early 2023 likely elevated concern about the potential impact of cost increases over the long term, among both retirees and non-retired workers. Dealing with inflation through hedging and other techniques has become a priority. All three of these risks tend to be perennial concerns; investors and clients will find more grounds for agreement about their importance and greater willingness to engage in mitigation strategies compared with other risks.

Advisors More Concerned: Compared to clients, advisors are more inclined to believe that health- and long-term-care-related risks, and longevity risk, can negatively impact living standards. For advisors, these major, usually unplanned out-of-pocket expenses can derail careful budgeting and cash flow planning. Long-term care in particular could wipe out a retiree's nest egg, depending on the nature of the care and how long it is needed. Such situations are not especially rare: About 6 in 10 seniors (age 65 and older) who file bankruptcy do so because of an inability to pay for medical expenses, according to a 2018 study. And retirees face increasing exposure to health and long-term care risks — as well as other risks, such as inflation — the longer they live. Thus, advisors are rightly focused on the possibility of their clients depleting their assets over a lengthy retirement period.

While investors are undoubtedly also worried about the impact of healthcare and long-term care costs, these risks themselves may be less salient to them than public policy changes that would make handling these costs even more challenging. Even more abstract to many investors is the concept of "living too long."  They may feel that living into their 90s is so unlikely that it doesn't need to be explicitly included in planning or feel that they will simply deal with it when the time comes. Unless advisors properly educate their clients about longevity risk, they will struggle to create effective plans for managing this risk.

Financial services companies and advisors can help retirees and those preparing for retirement with risk education and management. For example, advisors can discuss how investment allocation and insurance products and services can address risks. Because it is not possible to cover every risk, this process will involve prioritization, based in part on an individual’s perception of risk. But such prioritization cannot be based solely on clients’ or advisors’ perceptions. Advisors not only should be responsive to the preferences of their clients, but also have a responsibility to help their clients think rationally about risks and the best ways to minimize them.

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