Risk management is as important to long-term financial planning as the growth of investments
People who can be classified as members of the growing mass-affluent group might be considered better informed and more sophisticated when it comes to planning their financial future.
They have achieved success by working hard, and they've invested wisely, often with the help of a financial professional.
By definition, so-called mass affluents have investible assets of $100,000 to $1 million; they frequently spread their allocations across investments such as 401(k)s, individual retirement accounts and certificates of deposit.
These are the same people who would presumably understand the need for a diversified approach to financial planning, one that supplements growth strategies with the right protection products: life insurance, disability insurance and annuities.
They most likely know their income stream is their most valuable asset, and they realize an injury or illness that would prevent them from getting a paycheck could dramatically affect their ability to save. They might even be aware of a sobering statistic from the Social Security Administration: Just over 25% of today's 20-year-olds will become disabled before they reach age 67.
Yet the results of a poll conducted in November by the MetLife Premier Client Group suggest that mass affluents may not be as prepared for retirement as we expect.
WORK TO DO
The MetLife Financial Planning Perspectives Poll shows that financial professionals still have work to do in educating these “smarter” investors about implementing a holistic approach to long-term planning. The poll surveyed adults identified as mass affluents and offered a glimpse into their thinking:
• Seventy-two percent say they have a financial plan in place to provide for their future, and an equal number believe they are on the right track.
Their confidence may be misplaced, however. Fifty-five percent of those surveyed said protecting their assets with products such as insurance and increasing their assets with products such as mutual funds were not equally important. That indicates that even more-astute investors don't fully understand how critical it is to deploy the right safeguards.
• There is still plenty of confusion and uncertainty surrounding insurance. Roughly two-thirds of those surveyed don't know how much life and disability coverage they should have.
• Many people are taking what might be called the “offense-only” approach to financial planning.
Nearly three-quarters of those surveyed are participating in 401(k) and other retirement plans. Meanwhile, a much smaller number have invested in products such as annuities (37%), long-term-care insurance (34%) or disability insurance (32%).
Sound financial planning and sports of every kind share a common organizing principle: An offense-only approach will not lead to a win. Clients who are focused solely on increasing their assets are ignoring the potential risks to their current earnings capacity as well as to their future income stream. That can put their entire strategy in jeopardy.
The risks are even greater when you consider that Americans are living longer.
IMPLICATIONS
The Centers for Disease Control recently reported that a baby born in the U.S. in 2012 has a life expectancy of 78.8 years. That represents an increase of two years since the beginning of the century and of more than nine years since 1960.
The prospect of living longer has significant implications for retirement and long-term financial planning, and it should serve to alert financial and insurance professionals as they help clients formulate strategies.
The poll shows that 63% of those surveyed expect that they will be able to retire while they are in their 60s. With longer lifespans, however, those same people may need to build a financial structure that keeps them secure into their 80s or beyond.
Financial professionals can go a long way toward securing the trust of their clients by demonstrating the value of a diversified approach to long-term planning. That means adding a smart defensive strategy to the offensive one that's probably already in place.
Michael Russo is a financial adviser with MetLife Premier Client Group in Milwaukee.
