Welcome to the intricate world of retirement planning, where financial advisors play a crucial role in shaping the financial futures of their clients. While the life of a financial advisor may seem enviable to some, the reality is a deeply responsible one. It’s not just about helping clients achieve their desired comfort in retirement; it’s also about providing guidance on spending wisely to avoid both overspending and the newly recognized problem of underspending.
Retirement planning has become increasingly daunting for many, with 56% of Americans feeling behind in their retirement savings journey. This challenge is compounded by rising living costs and uncertainties surrounding government programs, creating a tangible risk of not saving enough for retirement.
On a brighter note, a growing number of individuals, especially Gen Z, are taking proactive steps by starting to save for retirement earlier in life with 66% already saving for retirement. This trend underscores the evolving retirement landscape, where early savers intersect with age-old financial stressors.
As financial advisors, navigating this landscape requires a deep understanding of client needs, aspirations, and the ever-changing financial environment. In this blog, we’ll explore strategies to help clients save for retirement earlier, thereby mitigating future financial stress and ensuring a secure retirement.
Let’s dive into the intricacies of retirement planning and empower clients to achieve their financial goals with confidence.
Know Generational Differences
Many factors affect how a person views money, especially the market situation during their formative years and the major events they’ve lived through. While it’s important not to treat all people from a generation the same because of their age, having a basic understanding of their general mindset and approach to finances and retirement can set the foundation for creating a personalized retirement plan.
Baby boomers, or the generation now entering retirement, started saving at an older age. The majority (85%) have employer-sponsored retirement plans, but 41% expect to rely on Social Security as their primary source of retirement income. As retirement comes closer for baby boomers, many are pushing it off — 49% expect to work past age 70 or not retire for financial or health-related reasons.
On the other end of the spectrum are millennials and Gen Z, who are further from retirement and in the earlier stages of their savings journeys.
Millennials entered the workforce during uncertain economic times, which delayed the start of their retirement savings. Nearly 80% have a 401(k) or similar account but are only setting aside 12% of their annual salary on average. Millennials are in the thick of things, with many serving as caregivers to children or aging parents while also dealing with mental health concerns, a pandemic, and a challenging economy.
Gen Z may be the youngest in the workforce, but they started saving the earliest — at age 19 on average. And while Gen Z saves more of their annual income (20%) than millennials, the balances of their retirement and savings accounts are lower because of their age. Even with their early savings, Gen Z is concerned about finances, with more than half struggling to make ends meet and having a side hustle.
Work Backward: How Much Should They Save?
The biggest benefit to starting saving for retirement earlier is to spread out the investment, meaning investors are putting in less money but doing it for longer. Over time, they may be investing or saving the same amount of money, but saving less per month by starting earlier.
To help clients reach their goals, whether they have 50 years until retirement or 15, start with the end in mind: how much money do they actually need to retire? What are their retirement goals, and how much do they expect to live on? At what age do they expect to retire? Having honest, transparent conversations with your clients about what they expect from retirement and how much they’ll need to save will put you on the same page and give them a realistic expectation of what it will take to reach their goals.
The cost of retirement is increasing, but the current average in the U.S. for retirement expenses is $835,453 for 25 years and $1,003,548 for 30 years. Of course, those numbers can vary dramatically based on where a person lives, their family situation, and their lifestyle. A 25-year retirement in Hawaii, for example, costs more than $2 million, while a similar retirement in West Virginia costs less than $700,000.
Understand Risk Tolerance
When clients start saving for retirement earlier, they have more flexibility to take risks with their investments and potentially earn big rewards from a higher-risk product. This matches younger generations like Gen Z, which are more open to risk. However, don’t naturally assume a younger client wants to take risks in their retirement savings.
As you build a relationship with your client, you can gauge their risk tolerance and help them find the right accounts and products to match their goals and comfort level. The PreciseFP risk tolerance questionnaire can be a great place to start the conversation. Start your free trial today and add even more value to your clients.
