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Retirement Confidence Report

Retirement Confidence Report

December 20, 2022

Opportunities to strengthen client relationships

Matt Sommer, Head of Defined Contribution and Wealth Advisor Services at Janus Henderson Investors, discusses how findings from Janus Henderson’s 2022 Retirement Confidence Report can help financial professionals guide clients through a challenging market environment.

The ability to assess investor confidence levels is a critical aspect of helping clients work toward their goals. And in a difficult environment like the one we’re currently experiencing, it’s more important than ever for financial professionals to stay attuned to how clients are feeling about their financial future.

In an effort to uncover insights that may help advisors better understand how clients are coping, Janus Henderson conducted a survey in October 2022 of nearly 2,000 investors age 50 and older who are the sole or shared financial decision-maker for their households. Following are some of the key findings and thoughts on how they can help inform financial professionals’ interactions with clients during these challenging times.

86% of survey respondents said they are “concerned” or “very concerned” about inflation, and 79% are “concerned” or “very concerned” about the stock market.

Digging deeper into the survey results, women reported greater concern about the stock market than men, although no gender-based difference was found in responses regarding inflation. Another key finding was that investors still in the workforce were more worried about the stock market and inflation compared to retirees, perhaps because of the many uncertainties associated with how their household budgets will change in retirement.

From a financial professional’s perspective, these findings underscore the fact that investors who expect to spend more years in retirement will be more challenged to overcome market losses and may have to adjust their plans for retirement accordingly. Specifically, females – who on average have longer life expectancies than males – and pre-retirees, who must fund several more years of retirement compared to older cohorts, are likely to require a revised retirement income analysis.

While the market decline has impacted all investors, budgetary adjustments and delayed retirement dates will be most likely necessary for mass affluent clients at the lower end of the wealth distribution. One silver lining is generous cost-of-living adjustments for Social Security recipients, which are magnified even further when coupled with delayed retirement credits.

45% of respondents feel less confident in their ability to have enough money to live comfortably throughout retirement as a result of market performance and inflation, while 54% said their confidence has not changed. Only 1% reported higher levels of confidence.

While retirement confidence has suffered, it has not collapsed entirely, as slightly more than half of investors reported no change in their confidence levels despite the recent stock market performance and inflationary environment. Nonetheless, almost half of investors may be feeling unnerved. As such, advisors should be proactively reaching out to clients to check in and inquire how they are coping with declining account balances.

The good news is that financial advisors have an important role to play, as previous research has linked financial advisor use with higher levels of confidence. Encouraging clients to engage or re-engage in the financial planning process may also help boost confidence levels. This is important because high confidence levels have been found to be associated with “staying the course,” particularly during periods of economic turmoil, and with implementing agreed-upon recommendations from a financial professional.

Only 13% of investors have moved money out of stocks or bonds and into cash as a result of financial market performance or rising inflation. Males were more likely than females to have done so.

Some financial professionals may find it surprising that, while males seem less concerned about the markets and inflation and thus were less likely to have reported a drop in their retirement confidence, they were more likely than females to react, perhaps impulsively, to the market environment. This contradiction may be explained by known gender differences regarding investment behaviors, however. Research has found that males are more likely to display investment overconfidence, which is defined as the difference between what investors think they know and what they actually know. The larger the discrepancy, the more overconfident the investor.

Research has also found that this overconfidence is associated with excessive trading and market timing, which has been linked to subpar investment performance. Thus, financial professionals who have developed “gender smarts” and who are able to incorporate lessons from behavioral finance and investor psychology into their client service model have a distinct advantage within the profession, particularly during periods of extreme market volatility.

About 60% of investors believe the S&P 500® Index will be either a lot or a little higher one year from now, while 26% believe it will be either a lot or little lower one year from now.

The majority of investors believe brighter days are ahead for the stock market. About one-quarter, however, think stocks are likely to head lower. These investors may be tempted to move to cash, despite some having an extended time horizon to retirement.

When discussing the importance of remaining in the market with skittish clients, financial professionals may wish to incorporate known approaches in behavioral finance. For example, shifting the client’s focus from all-time market highs to whether they are still on track to meet their goals can be a powerful motivating factor.

Another approach is to ask clients if they would have feelings of regret three, five, or 10 years from now if they were to sell and the markets eventually rebounded. This hypothetical situation can be empirically supported by pointing to how the stock market has historically provided generous returns immediately following previous bear markets. Finally, advisors should remember that investors are often influenced by the actions of others. Using the results of this study, financial professionals can reassure clients that their feelings of concern are warranted and shared by others, while also pointing out that most of their peers continue to remain invested and are optimistic about the future.

Approximately 41% of investors reported that they reduced their spending in 2022 – and 39% plan to reduce their future spending – as a result of the financial markets and rising inflation.

Among our sample, the respondents who said they have reduced spending in 2022 were females, younger investors, individuals with lower wealth levels, and those who self-described their health as anything other than “excellent.” Thus, a pattern is emerging in which the investors who reported being most concerned about the stock market and inflation, and who reported a drop in retirement confidence, have taken the common-sense action of having already reduced their spending in 2022.

Most of the research regarding sustainable withdrawal rates over the last 20 years points to the importance of mid-course corrections – that is, adjusting annual withdrawals downward following significant market drops to allow assets more time to benefit from eventual recoveries. Guiding clients through these withdrawal changes is where a practitioner can add value.

Final thoughts

One aspect of our survey findings that financial professionals will likely find most useful is how various investor attributes affected their mindset and actions amid the current downturn.

For example, we found that clients who may be most unnerved by the current economic conditions and require the most immediate attention are females, pre-retires, and those with health-related concerns. Advisors should focus on helping individuals who fall into these groups cope with their financial anxiety by offering emotional support and reassurance.

However, it’s important to note that while men reported feeling less concerned about the markets and inflation, they were more likely to react impulsively to the market environment and make poor investment decisions due to their tendency toward overconfidence. As stated earlier, advisors who develop “gender smarts” and incorporate investor psychology in their practices can help both male and female clients avoid bad behaviors and manage their emotions.

Lastly, I think the broad takeaway from our study is that investor confidence has suffered, but it hasn’t collapsed. While investors are clearly concerned about the market downturn and inflation, it appears that many are taking the common-sense approach of reducing their spending and not moving out of stocks in response to this year’s challenging market environment. Financial professionals have an important role to play in encouraging these behaviors and reminding clients of the importance of creating and sticking to a plan in all types of markets.  Click here for more Janus Henderson 

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