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Post-Pandemic Financial Planning

August 30, 2021

Article originally published in Financial Advisor Magazine.

It’s been more than a year since COVID-19 was declared a global pandemic. Stock markets have recovered. But the economy is nowhere close to pre-pandemic levels, especially as the Delta variant is creating new challenges and the country is racing to get more people vaccinated.

We’ve seen how COVID-19’s impact is creating winners and losers, re-shaping the workplace and everything from commercial real estate to retail shopping. And we’re not out of the woods yet. It likely will take some time before we understand the true impact of the pandemic and move into whatever becomes the new normal.

Managing the Emotional and Financial Impact

According to the Nationwide Retirement Institute’s sixth annual Advisor Authority study of more than 2,500 advisors, financial professionals and individual investors, 85% of investors said they could do all the right things to manage their finances, and still be blindsided by outside events. Likewise, 70% said the pandemic has had an impact on their financial decision making. Investor optimism plummeted 19 percentage points last year, with only 36% of investors having an optimistic outlook in 2020 compared to 55% in 2019.

If there is a silver lining, it’s that more investors are turning to advisors and financial professionals to get the help they need. In fact, the number of investors who said they have an advisor or financial professional increased 16 percentage points, to 67% in 2020 from 51% in 2016. Investors said the number-one reason for working with an advisor was to feel more confident in their financial future. And when markets are volatile, they said the most important benefit of an advisor was to help them protect assets against market risk.

Protecting Against Market Risk

In 2020, investors said their number-one financial concern was portfolio losses related to the pandemic, with protecting assets a close second. At the same time, Advisor Authority revealed that only 64% of investors had a strategy in place to protect their assets against market risk, compared to 91% of all advisors and financial professionals. Clearly, investors could use your help.

To protect assets against market risk, diversification remained the foundation for both investors and financial professionals, according to Advisor Authority. In addition, our study showed that advisors and financial professionals were two to three times as likely as investors to use a diverse range of risk management solutions—including hedging strategies (42% vs 16%), liquid alternatives (39% vs 23%) and smart beta ETFs (32% vs 10%).  While important, diversification and other risk management solutions do not assure a profit and do not guarantee against loss in a declining market.

The adoption of annuities was also on the rise, especially among younger investors. Nearly three-fourths of Millennial investors (70%) and Gen X investors (71%), compared to just under half of Boomers (49%) said they would feel more secure if a portion of their portfolio was invested in an annuity to help protect against market risk. Roughly two-thirds of Millennials and Gen Xers said they would choose an annuity in the next 12 months to help protect against market risk as part of a holistic financial plan.

Balancing Growth and Protection

A diverse range of annuities can help clients with different risk profiles balance between growth potential and downside protection. For moderate to aggressive clients, able to take on more risk in exchange for more upside potential, Registered Index-Linked Annuities (RILAs) allow them to benefit from stock market growth, based on the performance underlying indices, such as the S&P 500, NASDAQ 100 or hybrid indices. This is combined with different degrees of protection against market risk through a buffer or a floor.

If your client’s concern is losses from ongoing volatility, RILAs with a buffer can protect against losses within a specific range—but can leave a client exposed, should markets fall below that range. To protect against substantial losses if downturns go lower for longer, RILAs with a floor offer a clearly defined level of protection—and absorb any losses below that floor. Some RILAs, such as Nationwide’s Defined Protection® Annuity, provide a floor to limit losses, with the ongoing flexibility to dial that defined level of protection and risk up or down, as a client’s risk tolerance changes over time.

For your conservative to moderate clients, fixed indexed annuities (FIAs) may be a good fit, especially in today’s persistent low rate environment. Research indicates that FIAs may be suitable as a bond substitute, for greater diversification, to help de-risk portfolios and to mitigate longevity risk.1FIAs can offer upside potential linked to the performance of an underlying index—and also guarantee principal protection, for risk-averse clients concerned about losing their initial investment or credited earnings when volatility is rising or when there is a sharp market downturn. Note that all guarantees are subject to the insurer’s claims-paying ability.

Taking on the Retirement Income Challenge

Just as tax-deferred and tax-free compounded growth are part of the foundation of accumulating for retirement, the 4% rule has been a cornerstone of retirement income planning for decades. But with ongoing volatility, interest rates hovering near 30-year lows, and the complexities caused by the pandemic, clients today face difficult choices. Many are forced to reduce withdrawals, take on riskier assets or increase the chance of depleting their portfolio and outliving their savings.

In fact, nearly three-fourths of investors (72%) said the pandemic has had a negative impact on how long they could live off their retirement savings. More than one quarter (26%) said it’s likely they would need to delay taking retirement income for the next 12 months and more than one-quarter (26%) also said they would need to reduce the amount of their retirement income withdrawals for the next 12 months.

Protecting Against Outliving Savings

According to Advisor Authority, nearly three-fourths of Millennial investors (72%) and nearly two-thirds of Gen X investors (65%), said they would feel more secure if a portion of their portfolio was invested in an annuity to help protect against outliving their retirement savings. When a predictable source of income is guaranteed by an annuity in one part of the portfolio, this not only helps protects against longevity risk, it also frees up assets in another part of the portfolio to invest for growth potential, inflation protection and to leave a greater legacy.

Recent analysis also suggests that allocations to variable annuities with Guaranteed Lifetime Withdrawal Benefits (GLWBs) can create more income with less risk than through systematic withdrawals alone, reducing the risk of portfolio depletion.2 In fact, according to Advisor Authority, 84% of advisors and financial professionals say that the use of an annuity with an income guarantee is important for supporting a sustainable withdrawal rate. Many of the advisors and financial professionals we work with have adopted a new approach to the 4% rule by using a VA with a GLWB to provide a guaranteed withdrawal rate for life, in some cases including up to 100% equity exposure for greater income growth potential and protection from market downturns.

Have a Plan—and Stick to it

Despite the current financial pressures, it’s important to help your clients understand that decisions made today can affect their financial future. As you guide your clients through the remainder of this year, and the recovery continues to unfold, there’s bound to be challenges. For the best chance of success, clients will need your help to develop a holistic financial plan. And many will need your help to stick to it.

Creating a plan and a well-diversified portfolio, structured to help protect assets against declining markets, ongoing volatility and record low interest rates, is crucial no matter the stage of their financial lifecycle—accumulation, retirement income or legacy planning. During these uncertain times, you can help clients keep their emotions in check and stay focused on their long-term goals. As Advisor Authority shows, 93% of investors say that having a financial plan helps them feel in control, even if they can’t plan for everything.

Sources / Disclaimers

  • 1

    Roger Ibbotson, “Fixed Indexed Annuities: Consider the Alternative.” March 2018.

  • 2

    Goldman Sachs Asset Management, “Extending the Retirement Runway.” November 2020.

  • Annuities have limitations. They are long-term vehicles designed for retirement purposes. They are not intended to replace emergency funds, to be used as income for day-to-day expenses or to fund short-term savings goals. Withdrawals of tax-deferred accumulations are subject to ordinary income tax. Withdrawals made prior to age 59½ may incur a 10% IRS tax penalty.