Retirement confidence off slightly, still soaring past 2020 levels

Even as clients’ confidence in their retirement planning dipped slightly in January, advisors say that 2021 began generally strong, with key metrics of retirement confidence posting higher marks than over much of the past year.

Many advisors polled in the Retirement Advisor Confidence Index, Financial Planning's monthly barometer of business conditions for wealth managers, see hopeful signs in the encouraging news about the COVID-19 pandemic and the end of a tumultuous political season.

"Clients feel more comfortable now that [the] vaccine is underway," one advisor says. "They feel more comfortable with the market."

In January, advisors overall rated their clients' confidence in their retirement situation at 55.2, off 1.1 points from the previous month, but higher than at any other point in 2020. Notably, excepting December 2020, clients' retirement confidence in January was higher than at any point since January 2018.

RACI scores above 50 indicate an increase in investor confidence. Scores below that level signify a drop in confidence.

Other indicators fared similarly, with advisors reporting high confidence in investments in equities and overall retirement contributions.

The component of RACI that tracks investments in equities posted a score of 62.7, off 2.3 points from December, but up nearly two points from the average score throughout 2020, and 6.1 points higher than the same period a year ago.

"There seems to be an optimism in the market for higher returns," one retirement advisor says. "People feel better about investing based on last year's market performance and the fact that vaccines seem to be coming out and the hope things will get back to normal."

But that confidence comes with a caveat. Many advisors report that clients have been spooked by volatility in U.S. markets and are growing more risk-averse, with several saying that they are moving money into international investments.

"Risk tolerance in January was lower than in December due to political change and the perception of the market being elevated," one advisor says.

The RACI element that tracks clients' risk tolerance tumbled 8.4 points to a mark of 52.4, still well ahead of many months in 2020 and 5.4 points over the year-earlier period.

January also saw an increase in clients opening new retirement accounts, which one advisor attributes to fluctuations in the labor market.

"A number of clients have left their jobs — voluntarily or involuntarily — and established IRAs," the advisor says.

The RACI component that tracks total products sold posted a score of 59.6, up 3.6 points from the previous month and the highest mark since December 2019.

Overall plan contributions were down slightly from December, but with a score of 63.9 remained stronger than at any other point in 2020. Some of that strength can be traced to employers expanding their own menu of retirement options to make participation more attractive.

"As employers start to offer Roth option[s], we are seeing more participants take advantage of it," one retirement advisor says. "The company match has a direct effect on participant enrollment."