Today’s financial environment has many clients in “reaction mode”—adapting to the ever-changing landscape. In my recent conversations, many of my clients want to know how to manage the impact of inflation, prepare for a possible economic recession, and address the market volatility that geo-political conflicts may generate. These are sound questions for clients to ask and for advisors to answer—but these misgivings of the moment making headlines now only scratch the surface of the conversations that clients and advisors should be having.
There are six significant risks to retirement that financial advisors must proactively contend with when managing their clients’ financial security: market volatility, inflation and taxes, health care costs, long-term care needs, legacy goals and longevity. Each one of these challenges can arise at any moment and complicate anyone’s future financial plans unless advisors and clients have addressed them in advance.
One of the least-discussed but most significant risks to a comfortable retirement is an increasing lifespan. In the U.S., a man who turns 65 today has a 50% chance of living to the age of 88. A woman has a 50% chance of living to the age of 90. For married couples who have reached age 65, there’s a 50% chance that one of them will live beyond 94. Of course, these extended years can be incredible—providing people with more time to create memories. But if individuals and couples are under-prepared to live a longer life, it could impact their retirement plans as well as any hopes for generational wealth. Complicating matters further, future retirees who must lean on their children for financial stability may impede their kin’s ability to properly save for their own future.
In the past, more Americans were able to rely on company pensions. Unfortunately, today, they are not nearly as readily available, especially those that provide significant guaranteed income in retirement. In March 2023, just 10% of private industry nonunion workers had access to defined benefit plans, according to the Bureau of Labor Statistics.
If advisors want to help their clients generate superior financial results to fund a longer life, they need to help them build an effective wealth management strategy. A strategic, balanced and diversified approach to investing must focus on the long-term and account for the risk of rising inflation, taxes and health care costs on a portfolio. The advisor’s investment philosophy should carefully align with each client’s risk tolerance, time horizon and overall financial goals. These financial experts should also encourage clients to use rebalancing and dollar-cost averaging—adjusting portfolios as appropriate while resisting the temptation to change the strategy during an up or down-moving market.
Alongside a robust approach to investing, however, more is needed. An investments-only approach to financial security can still leave an investor vulnerable. That’s why advisors need to develop financial plans that protect what their clients have already built while also creating future prosperity.
In recent years, E&Y performed a study that confirmed a plan that connects investments for growth, life insurance for protection and growth, and annuities for guaranteed retirement income is proven to deliver better outcomes over time than any investment-only approach. Corroborating that research, Northwestern Mutual’s proprietary study found that this comprehensive approach delivers superior outcomes. In fact, for a 35-year-old seeking to retire at age 65, this holistic plan delivers 5% greater accumulation portfolio value, 14% higher retirement income and 28% more legacy funding than even a “buy term and invest the difference approach” on average. For anyone worried about outliving their life savings, these results could be a significant part of the solution.
The key reason for a comprehensive plan: permanent life insurance and income annuities both outperformed fixed income investments over the long run.
Having permanent life insurance in a portfolio not only offers a death benefit, but the cash value a policy holds grows over time in a way that is safer and separate from the rest of the portfolio, creating more long-term value. In fact, pairing the guaranteed growth of life insurance cash values with investment returns gives people dual opportunities to grow their wealth. Policyholders may also receive dividends from their insurer, increasing the value of the asset even more over time.
Permanent life insurance is not only guaranteed to grow but its value can also be accessed tax-free for any reason through a policy loan. For example, during a market downturn in retirement, an investor could choose to tap the cash values built up in a permanent life insurance policy instead of selling stocks at market lows. And when the market rebounds, the policy loan could be repaid—providing the individual with greater retirement income while also protecting the policy owner’s legacy goals.
When combined with the guaranteed income of an annuity, it offers clients the opportunity to take on even more risk in other areas of their portfolios—and potentially see greater returns. Moreover, permanent life insurance and income annuities both offer tax-deferred growth.
This strategy doesn’t just deliver greater financial outcomes—it also provides clients with greater peace of mind. Knowing that they are protected from the six key risks in retirement makes them feel more confident to live each day to its fullest and not hold anything back. That’s the outcome that we should want for our clients. At the end of the day, financial security is not about being rich but about being financially secure. The people we serve deserve a plan that succeeds not just in the best possible scenario—but across hundreds they may encounter in an increasingly long life. A comprehensive financial plan that protects assets and grows wealth can help tip the scales in our clients’ favor, eliminate blind spots and increase their probability of success.
Jeffrey J. Rapp, is Partner of the Heartwood Planning Group – a Northwestern Mutual Private Client Group