In this week's edition of The FIDx Five, we discuss annuity taxes, the ideal amount to save for retirement—for both Millennials and Gen Z, the advisor / client relationship, and a new player in home insurance marketplaces.
The Taxing Process of Understanding Annuities and Taxes
Understanding how different annuity contracts work can be a challenge for any investor, or even a seasoned financial professional. Layer in the different advantages an annuity can offer, and the process of selecting the right annuity can be downright daunting. “Annuities are taxed favorably for retirement purposes,” said Steve Parrish, co-director of the American College Center for Retirement Income at The American College of Financial Services. “Part of the favorable treatment is the flexibility you have in choosing the annuity that fits your personal tax profile.” Whether withdrawals come from a qualified or non-qualified annuity, consulting with a CPA, tax attorney or financial advisor can help ensure your making the tax decision.
(John Egan, Forbes Advisor, October 24th, 2022, Understanding Annuity Taxes, Link)
Do Your Clients have a Plan for Saving $1.7 million for Retirements?
According to a recent study by Charles Schwab, the American worker thinks they’ll need to save $1.7 million dollars for retirement. Therefore, many advisors are telling their clients to save at least 15% of their pay for retirement. It’s no surprise to learn that the earlier you start saving, the less pressure there will be to save later in life. “You don’t have to start out with a bang,” says Nathan Voris, Director of Investing, Insights and Consultant Services for Schwab Retirement Plan services. “Even if you’re starting small, that gets you engaged and then you can bump it up each year.” Your annualized rate of return also has a significant impact on your ability to reach the $1.7 million goal. Someone starting at age 30 with a 4% annual rate of return, saving 15% per year, would need an income of $148,848 to reach their goal. However, someone starting at age 40 with an annual rate of return of 8%, saving 15% per year, would require essentially the same income level, $143,010, to reach their goal.
(Cheyenne DeVon, CNBC, October 20th, 2022, Americans think you need $1.7 million to retire comfortably—here’s how much you need to save each month to get there by 65, Link)
Millennials and Gen Z are Redefining Retirement Savings Strategies
Technology has impacted the way younger savers think about investing. A recent Charles Schwab study reports that only 37% of Gen Z workers first investing experience was through their 401k plan. Many Gen Z workers were introduced to investing by mobile trading (22%), cryptocurrency (11%), traditional brokerage accounts (10%), and health savings accounts (9%). “Younger workers today are beginning their financial journey from a different place than older generations did when they began,” said Catherine Golladay, Head of Schwab Workplace Financial Services. “They are questioning traditional approaches to both work and retirement as they have changed jobs and reconsidered priorities during the pandemic. The 401(k), while still their primary retirement savings tool, is no longer viewed as their only path to retirement. They see an opportunity to reach their financial goals through diverse assets that are making them excited about investing and engaged in their financial futures.” Gen Z and Millennials also want more investment vehicles available to them in their 401(k) plans. More than 4 in 10 wish they could invest in annuities and cryptocurrencies, and more than a third are interested in ESG investments and fractional shares. The study also reported that Gen Z and Millennial workers are more likely to also invest in cryptocurrency, real estate, annuities, and small businesses, unlike older generations.
(Businesswire, October 25th, 2022, Schwab 401(k) Study Finds Millennials and Gen Z Take Advantage of Broader Range of Retirement Resources Than Previous Generations, Link)
Clients Expect More from Their Advisor Experience
Markets are down, inflation is rising at meteoric rates, healthcare costs continue on their trend upwards, and unsurprisingly, people are nervous about retiring. Nick Foulks, an advisor and Director of Communications Strategy and Client Engagement for Great Waters Financial sat down with Private Wealth magazine to discuss why his firm has shifted their retirement planning offering. Nick’s stance is clear. “As their advisor, understanding what money means to them creates far greater context around their transition into retirement. The accounts that our clients have built over their lifetimes are more than just a dollar amount; they are symbolic of sacrifice, hopes, dreams, and aspirations. They are the reflection of countless hours traded over a working career. While it is our duty to take the emotion out of financial planning, it is our responsibility as fiduciaries to understand how a loss on a financial account is not just a reduction in a client’s balance, but also a direct impact on their vision for the future. By taking this step back to see the bigger picture, we can help bring a clearer definition to a client’s personal vision for the future. We look at several key areas that experience a shift during this time and talk about how to redirect finances to the areas of life that matter—areas such as health, family relationships, values, and so much more. As an advisor, it may seem difficult to broach subjects such as family and relationships but we have found educating pre-retirees on the life changes they are about to experience can significantly help.”
(Russ Alan Prince, Private Wealth magazine, October 24th, 2022, Now Is The Time For Advisors To Redefine The Retirement Planning Experience, Link)
The British can now buy their home insurance through Amazon
Amazon continues to grow its financial services business by signing three major insurers to its home insurance portal, AEGES UK, LV= General Insurance, a unit of German insurer Allianz, and Co-op. Last year, Amazon partnered with Lloyd’s broker Superscript to offer insurance to small and medium sized UK customers. The Amazon portal will provide customer reviews and rating on insurance companies and the rate at which claims were accepted for policies offered. The site would give insurance customers more choice over how they buy coverage, said Charles Offord, managing director, Co-op Insurance, while Ageas UK CEO Ant Middle said the insurance market needed "new and progressive digital distribution platforms" like Amazon. Amazon also offers car insurance in India and product insurance in Britain. Amazon is disrupting the insurance marketplace. Instead of losing business to tech firm, insurers partnering with them and offering them commissions to sell their products.
(Carolyn Cohn and Rhea Binoy, Reuters, October 19th, 2022, Amazon launches home insurance comparison website in Britain, Link)
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