What can we do for clients who can’t afford to retire?

If we stop for a second and ask ourselves, "Why do financial advisers need to exist in the first place?", three key reasons spring to mind.

1. People need to be nudged into action. We all want someone to hold our hand, sit us down, and give us confidence in big decision-making. This is why many robo-advice tools have fallen flat. People want people.
2. Finances, investments, and financial products are incredibly overwhelming to most. People typically need guidance in making decisions around holistic financial planning, and choosing the most suitable products for them.
3. People need to build wealth during their lifetime to ensure a retirement reality with financial freedom.

Let’s focus on the last point for now: building wealth in order to have a financially free retirement. Too often clients are given a beautifully calculated financial needs analysis ("FNA") and insurance quotations that they simply cannot afford. If they do accept the amount of insurance cover proposed, there’s also a huge risk that they will end up paying thousands of Rands every year in insurance premiums; leaving little for investment or retirement savings.

Here we find ourselves in a very real conundrum. Clients that are nearing 65 and wish to retire (or slow down the pace) simply can’t, because they haven’t saved enough, yet they have spent hundreds of thousands on various life insurance policies for the last 35 years or so.

Now, there’s obviously a critical need for risk protections during one’s working career, there remains a question around how much is being spent on insurance premiums versus retirement planning or investments.

Many advisers who are considered highly respected still show evidence of this trend in their practice: high insurance premiums, and not enough investing for future wealth.

But it’s not all doom and gloom. There are smarter strategies that advisers can adopt today.

Strategy One: Pre-retirement
Adopt a concept called ‘Rebalancing’. This is a term coined by ICON’s approach to financial planning reviews. ‘Rebalancing’ does just that – rebalances the amount of funds spent on insurance versus investments and savings. This approach means that advisers can free up funds in a client’s existing budget . How can this be done? By using a blend of best-in-category products, leveraging the more affordable income-based benefits, and stripping down on over-insurance. This approach means that the client has the very best bang for buck in terms of risk cover, investments, and savings.

Strategy Two: At retirement
Offer your clients the option of a life annuity for their retirement income.

For many years, life annuities were the go-to, because they were, well, the obvious choice for most people. Then, living annuities with annual drawdowns entered the market in the mid 90’s as an option for the wealthier echelon of clients, and this retirement vehicle allowed them to pass wealth onto their families. As living annuities grew in popularity, life annuities and guaranteed income benefits fell by the wayside, and it’s almost as though the genius of guaranteed life annuities was forgotten altogether.

However, with markets being topsy-turvy, attractive long term interest rates, and the many economic predictions that speak of another market crash coming soon; life annuities are beginning to gain favour again and are back on the radar of some financial advisers.

For clients who are nearing or are already in retirement, advisers can secure a highly competitive guaranteed income for life, no matter how long they live. With some providers – clients can even receive better rates with ‘reverse’ underwriting – whereby clients who have pre-existing conditions or health challenges, will receive better guaranteed income terms. Imagine that!

With clients today predicted to live into their 100s, a just and fair solution with a guaranteed income annuity for life, is exactly what 94% of clients need. This statistic is considered from the 2020 10X Retirement Reality Report that says only 6% of South Africans could retire (1).

Furthermore, there is an argument that even those who can afford to retire, will also benefit from a life annuity, or at least a blended approach. Too often, these affordability calculations assume that your client will retire at 65 or 70 and live until 90, which in turn results in the benefit of a secure lifetime income being undervalued. There is an interesting correlation between health and wealth (2), indicating that the higher the income of the individual, the longer their lifespan, which is why we believe that removing the longevity risk and guaranteeing a secure income is a no-brainer.

Both these strategies help combat risks throughout your clients’ life. They require less housekeeping and active management, and they make annual reviews far easier; further mitigating risks for both you, the adviser, and your clients’.

(1) 10X Investments’ Retirement Reality Report, 2020).
(2) Wallstreet Journal Retirement Report, 2020).