In a recent survey of 1,500 affluent and high-net-worth clients of financial advisors, 20% intended to retire earlier than they had planned prior to the COVID-19 pandemic, with a heavy tilt toward younger investors. 45% of survey participants under 35 years old, and 39% of investors from 35 to 44, have earlier retirement expectations, specifically because of the pandemic. These investors say they will be retired at 55, or 62 at the outside.
Stating it mildly, these people are delusionary.
During the March 2022 survey, markets had quickly recovered from the COVID-induced crash and had recently set new highs. Many young people had invested in crypto, and experienced huge (paper) returns. Life was good, and attitudes had been bolstered. Nascent economic problems, including lingering inflation and falling markets, had not yet damaged expectations.
At survey time, 24% had increased their estimated retirement spending needs, while only 20% said their retirement budgets had declined because of the pandemic. We do not understand their reasoning. Overall, less than half of the investors were very confident they will achieve their goals. In the “sandwich generation,” ages 45 to 54, less than a fourth were very confident they will reach their retirement goals. They cited paying for college, helping their parents, and a shrinking window for retirement savings. False confidence in early retirement seemingly conflicts with financial realism.
Where do financial advisors fit in? Younger people expressed feelings of entitlement and expectation that are not explainable in the real world. One troubling finding was that fully half of the youngest group of investors, those under 35, felt advisors showed a real understanding of their full financial picture. Many failed to disclose their crypto activity, clouding the picture.
Good advisors help their clients understand the realities of investment returns and drawdown rates, yet a quarter of participants said their advisors had not discussed long-term return expectations and withdrawal rates within the last 12 months. Unacceptable.
While only 1 in 5 survey advisors expected returns to be 10% or more per year, 3 in 5 investors said they did expect their returns to be 10% or more. Incredibly, 2 in 5 expected their returns to be more than 25%. On the withdrawal side, investors ranked inflation and market volatility being the greatest risks to their portfolios, while longevity risk (outliving your money) was the number one concern among advisors.
Advisors remain far more realistic than most of their clients and are therefore duty-bound to convey their reasoning to all age groups.
Van Wie Financial is fee-only. For a reason.
