National Retirement Security Month: A time for pre-retirees to come up with a ‘formal written plan'

October is National Retirement Security Month, a time for financial advisors to encourage consumers nearing retirement to take actionable steps toward their future financial security – and that means help them come up with a formal written retirement plan. Six in 10 retirees and pre-retirees say they would be willing to pay $100 or more for a comprehensive analysis of their financial situation, including what is needed to save for retirement and where to invest their savings, according to LIMRA research.

Those with formal retirement plans are more likely than those who don’t to say they are well prepared for their retirement goals (71% versus 29%, respectively), according to LIMRA’s newest edition of the Retail Retirement Reference Guide.

“We have multiple research studies to support the idea that the creation of a formal, written plan for managing income, expenses, and assets in retirement (FWP) is linked to positive outcomes for investors,” said Matthew Drinkwater, corporate vice president, LIMRA Annuity and Retirement Research. “These FWPs typically focus on IRA planning, asset allocation, managing sequence of withdrawals from various tax-advantaged accounts, Social Security claiming, estate planning, long-term care planning, and more. Financial professionals are either creating these plans themselves for clients or working closely with their clients in developing them.”

Having a formal written plan not only benefits consumers, but also the financial advisors who work with them. LIMRA data shows that helping clients with creating a formal written plan could help contribute significantly to their books of business. The main benefits cited by 6 in 10 financial professionals are that their clients feel more confident about their retirement security and that they better understand their client’s goals.

Clients themselves would agree. Investors (ages 40–85 with at least $100,000 in household investable assets) who have a formal written plan strongly agree that their financial professionals understand their long-term needs (67%) and entire financial situations (61%) compared with investors who do not have plans (49% and 43% respectively).

Also, clients with a formal written plan are more likely to want to stick with the same financial advisor for the rest of their lives (52%). Financial professionals who take the time to help their clients create a formal written plan benefit from strengthened client relationships and a more loyal client base.

Additionally, LIMRA data suggests that helping a client with a formal written retirement plan could also lead to future discussions about other product solutions, such as annuities. At least 25% of clients go on to purchase insurance or investment products when implemented in a formal plan. Among annuity owners with a formal written plan, about two thirds of them purchased annuities as part of their plan.

Related: The rise of the millennial advisor: How AI is at the forefront of retirement planning

Future retirees face a different landscape than current retirees. Access to pensions has declined over the past two decades. Pre-retirees expect personal savings — 401(k)s, IRAs, and other savings – to surpass Social Security as the main source of retirement income within the next 10 years, according to LIMRA research. This means future retirees need to be more self-reliant and suggests formal retirement planning will be more important than ever before.

Over one-third of pre-retirees have major concerns about running out of money in retirement; women are more likely than men to have this concern (38% versus 28%). Rising health care costs along with looming talks of cutting Medicare could add substantial expenses for future retirees. Seventy-three percent of married couples must also prepare for one spouse outliving the other by at least 5 years.

“Among the pre-retirees in our research, 1 in 3 expressed ‘major concern’ about outliving their assets …,” said Drinkwater. “Concern about longevity risk itself tends to be moderate, compared with major concerns about inflation, reduction of Social Security or Medicare benefits, tax increases, or health-care costs. Still, most of these concerns are intertwined.

“Inflation is much more of a concern for people who believe that they will live a very long time in retirement. Reduction of Medicare benefits combined with experiencing health issues would cause more concern about significant health care costs. And these ‘concerns’ reflect investors’ expectations about the likelihood and severity of various retirement risks …It’s the level of uncertainty regarding these risks that could drive much of the concern.”

Financial professionals can help provide peace of mind by helping clients create a formal written plan tailored to their individual goals and needs. Doing so helps build trust and loyalty among their clients while empowering their clients with greater confidence toward their retirement security.

On average, 3 in 4 financial professionals spend between 2 and 8 hours completing each formal written plan. Yet, the time invested seems worthwhile as clients appreciate the professional advice. “For example, 67% of clients with FWPs “strongly agree” that their FPs “understand my long-term needs,” compared with 49% of those clients who don’t have FWPs,” according to Drinkwater.

“Among pre-retirees and retirees whose households work with a financial professional (FP) to assist with investment and financial decisions, those who have created an FWP are much more likely than those without FWPs to feel confident that they will be able to live their desired retirement lifestyle, 42% versus 23%, respectively,” said Drinkwater.

“Among pre-retirees only, 47% of clients with FWPs and 24% of clients without FWPs are very confident that they are saving enough for retirement; 73% of pre-retiree clients with FWPs and 45% of pre-retiree clients without them consider themselves to be very prepared for retirement.

“Part of this positive sentiment may be driven by the accomplishment of key planning activities when implementing FWPs. For example, 59% of clients with FWPs, but only 34% of clients without them, have developed a specific plan or strategy for generating income in retirement. (This plan/strategy may involve the use of an annuity, depending on the needs of the client.) “The completion of these tasks, including the purchase of new investments or products, could contribute to confidence by instilling a feeling of preparedness – that they are on the right track and that they have contingency plans in place in case things don’t work out as expected. In addition, retirement investors with FWPs are more likely than those without such plans to express positive sentiment toward their financial professionals.

“Clients with FWPs, to a greater extent than clients without FWPs, feel that their FPs understand their financial situations better, always put their clients’ interests first, and provide excellent value for the fees charged … FPs themselves understand the value of FWPs for their clients’ well-being. Among FPs (securities-licensed advisors working with RIA firms or dually registered reps of broker-dealer firms) who offer FWPs to their pre-retiree and retiree clients, 58% strongly agree that these plans increase clients’ confidence in achieving their desired retirement lifestyle. Such plans can therefore boost the connection between FPs and clients, making for a more effective, trusting relationship.”