Following a rough year encapsulated with market volatility and inflation, financial advisors and their clients are taking a step back to reassess their financial and retirement goals for the new year, with many wanting to cut back on spending and focus on budgeting and saving.
Recent research from Fidelity found 39% of respondents want to save more, 32% hope to pay down debt, and 28% want to spend less, with the goal of ultimately saving for immediate targets rather than long-term goals like retirement.
These changes in attitude comes amidst rumors of a looming recession in 2023. According to research from Equitable, four in 10 Americans are less confident today in their ability to achieve retirement goals than before the pandemic, as 77% cite increasing prices and 72% name spending power as a concern. As a result, many are now relying on their income to outpace inflation, said Stephen Dunbar, managing partner at Equitable Advisors.
“Instead of the phrase, ‘cash is king,’ now it’s ‘income is king,” he said. “That’s really the big concern for savers right now.”
Annuity adoption in 2023?
Of Dunbar’s clients who are focused on retirement goals for 2023, receiving guaranteed monthly income to cover living expenses in and out of retirement is crucial. As a result, not only are investors striving to cut back on their day-to-day spending, but they’re also considering guaranteed income options to prepare for retirement one day.
Once a contentious theme in the retirement industry, guaranteed lifetime products have peaked investor’s curiosity in the past years, driven primarily by the market turbulence and overall uncertainty during the COVID-19 pandemic, then by the passage of the SECURE Act in 2020, and now due to the current market environment. Part of this interest stems from investors wanting protection in a tumultuous environment, and the other comes from improved advisor education on annuity products, added Dunbar.
“We’re finding now that the investor has a much better understanding of annuities, advisors are doing a better job at educating people and you’re hearing it talked more about in the public media,” he said. “With volatility and people feeling a lack of control with finances, the idea of guaranteed products starts to feel really good.”
Accumulating retirement contributions
But not everyone sees this shift in attention with annuity products. Brent Bruggink, director of Retirement Plan Services at CG Financial Services, hasn’t seen several clients express sizable attention towards annuities, despite still having those conversations with them. “We’ve been talking to more people about income options in retirement, however I wouldn’t say it’s been dominating our client meetings,” he said.
Instead, Bruggink finds most of his clients are focused on adding savings and increasing contributions for future emergency and retirement needs. One seasonal way clients are doing so is by adding a portion of their annual bonus to their savings or increasing contributions to their retirement accounts in 2023.
“Couple this with education on why and how much you should contribute, what it means for when you retire, then you really can have good conversations about deferring a bit of that bonus and increasing contributions,” he added.
Aside from adding annual or quarterly bonuses to savings, Dunbar anticipates a rise in automatic increases towards retirement accounts.
Creating a successful tax strategy
Financial conversations typically switch to tax strategies after the new year, but it sounds like investors are getting ahead for the 2023 tax season and beyond. Bruggink said he is hearing more questions about retirement tax approaches like Roth 401ks and pre-tax contributions.
Additionally, he noted that a higher number of clients are inquiring about investing more and how they can increase their retirement readiness.
“We proactively bring these topics up with clients, but we’re seeing more employees now bring this up with us, so there is a change there,” he said.
Budget wisely and spend smarter
Bruggink notes that while budgeting has always been a top financial resolution for clients, this year has seen more investors devising budgeting strategies for 2023. “It’s always been around, but it’s more in the spotlight now due to inflation and the cost of things increasing this year,” he said. As a result, recent Fidelity research has coined 2023 as the year of “living sensibly” for many investors.
However, Dunbar cautions investors to avoid going overboard with their budgeting. It’s okay to spend money during uncertain market environments—just work a smart plan into your savings strategy.
Dunbar suggests clients work with an advisor and list their short, mid-, and long-term savings needs, document what has already been saved, and plan a savings strategy that also works with their current lifestyle. That way, investors can understand what their savings pace is, and if they can hit a certain goal in the right timeframe for them. “We have the tendency to not just correct but overcorrect. That’s just how we’re wired,” he said. “What people are doing is looking for ways to take back control. When a plan is done in context, this fear response goes down.”
SEE ALSO:
- Forget Retirement – Americans are Choosing these Financial Resolutions in 2023
- Why Investors are ‘Terrified’ About Retirement Savings
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
