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Look to history to help clients gain a holistic view of retirement planning

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When asked which is deadlier, a shark or a cow, many people say shark. But while shark attacks get more headlines, five times as many people are killed each year by cows than by sharks.

People generally focus on top-of-mind events — whether it's a headline-grabbing shark attack or a hot stock market. So they often base investment decisions on recent market performance, even though the recent past may not be a good indicator of the future.

Case in point: When the stock market is performing well, new retirees are more likely to keep their retirement savings in the market rather than use a portion of those savings to purchase a fixed annuity, which provides protection from market downturns. And the reverse is also true. When the market is performing poorly, retirees are more likely to opt for protection.

Over-responsiveness in retirement planning

The tendency to over-respond to recent and highly publicized events merely because they come to mind more easily than alternative events is known as the "availability bias." Of course, the market can swing wildly from day to day and year to year — and your clients need a retirement plan that will protect them no matter which way the market turns. But overconfidence in the stock market based on recent high returns can lead to overly risky retirement-planning decisions.

One way to help your clients overcome this bias: look to history.

Consider The Great Recession of 2008-2009, in which American households combined lost about $16 trillion in net worth. For many people who were retiring at this time and were overexposed to the stock market, the effects were devastating.

Clearly, when you retire can make all the difference. Take this example of two individuals who retired just five years apart — Bob and Ted. Both retired at age 65 with $500,000 invested in an S&P 500 fund, and both withdrew $25,000 annually.

  • Bob retired in 1995. Over the next three years, the S&P 500 more than doubled in value, boosting Bob's nest egg to $800,000 16 years later. At age 81, he has enough money to comfortably live out his retirement years, and likely will be able to leave behind an inheritance for his children.
  • When Ted retired just five years later, the market promptly shed 40 percent. In 16 years his nest egg barely made up the lost ground and his portfolio is worth just $24,932. At 81, he'll likely need to find part-time work just to scrape by — not how he pictured his retirement years.

Of course, your clients want to hope for the best, but it's important to plan for the worst. Try modeling the likely performance of a client's portfolio based on historical rates of return using both best-case and worst-case scenarios. Compare that unpredictability to the income they'd be guaranteed to receive from an annuity.

In their simplest form, annuities can insure your clients against outliving their money. Unlike other investments, annuities can provide a guaranteed stream of income — free from the volatility risk your clients may not be focused on when the market is doing well.

The availability bias is just one of 10 biases that can create roadblocks to smarter financial decision-making. Athene commissioned a review of biases from two experts in judgment and decision making at the UCLA Anderson School of Management which uncovered these behavioral tendencies and provided solutions to help overcome them. The extensive white paper, Solving the Annuity Puzzle: A behavioral analysis, can help put you and your clients on the path toward making smarter financial decisions together.


This information is brought to you by Athene — where innovative annuity solutions are powered by unconventional thinking.