For many Americans, a beach house in Florida or a mountain home in California's Sierra Nevada has long been on the list of retirement dreams. They've planned. They've saved. And they thought once they left the workforce, they'd be able to make those dreams a reality.
Today, with wildfires, severe drought and hurricanes increasing in frequency, some are giving up on those reveries, choosing instead to live out retirement closer to home and save the cash they would have otherwise spent for other wishes and wants.
Take for example a couple that RBC Wealth Management adviser Kim Shappee has worked with for more than a decade. They'd been planning to buy a retirement home in the Florida Keys. For the past five years, on Shappee's advice, they've spent one month a year visiting various parts of the area to settle on their favorite spot.
The time they spent researching on-site each year confirmed their decision to retire there—until last winter.
A hurricane hit during their stay, giving them an up-close look at what life in The Keys during severe weather might be like. Once they began to look at the data on storm frequency, they realized that while they'd been lucky with good weather the four years prior, the prognosis for the future wasn't necessarily good. So they changed their mind.
They'd already entered into a purchase agreement on a home there, so the pivot cost them money, but not as much as they thought they might spend long-term.
That's because erratic weather patterns are not only worrisome from a safety standpoint—they can be financially costly.
A recent article in Coastal Heritage Magazine noted that the cost of homeowners' insurance, including wind coverage, is increasing significantly in hurricane-prone areas. In fact, climate change will add $183 billion to annual premiums for property insurance by 2040, according to research by the reinsurance group, Swiss Re Institute.
For some insurers, premium hikes aren't even enough to make the risk profitable. Coastal Heritage Magazine found that in 18 states along the Gulf Coast and the Atlantic seaboard, many major insurers are in retreat, selling fewer policies or not renewing them at all. Meanwhile, in California, where 2017 and 2018 went down as the state's worst two years for fire on record, insurers paid $24 billion in claims. Today, in an effort to limit their exposure and losses, some insurers are refusing to renew home policies there, declining 350,000 renewals over the past five years.
As wealth managers responsible for helping clients not only preserve but protect their wealth, we must take these risks into consideration.
Exorbitant insurance premiums may be doable for some ultra-high-net-worth families, but even for families of means, they come at the expense of other important things like long-term-care insurance or leaving a financial legacy for children and grandchildren.
That's why understanding the potential impact of climate change on clients' retirement plans and helping to guide and coach pursuant to those risks is absolutely critical for advisers doing business today and in the future.
Asking tough questions
A new Intergovernmental Panel on Climate Change report released in Aug. 2021 showed that the planet's average temperature has risen about two degrees Fahrenheit in the last 120 years. This has led to mean sea levels rising seven inches between 1901 and 2018.
The report states that these changes are contributing to weather extremes such as heatwaves, heavy precipitation, droughts and tropical cyclones.
RBC, as an enterprise, acknowledges that climate change affects all communities and sectors of the economy. In 2019, the company released its Climate Blueprint, which is our enterprise strategy to accelerate clean economic growth and support our clients in a socially inclusive transition to net-zero.
While this is important work at a macro level, in our wealth management business, it's imperative we address these risks with clients on a micro level. We help clients evaluate the risks of the area they want to live by asking pointed questions such as:
- What climate risks are there in the area I am looking to move to?
- Can I insure against the risks present in the area I'm looking to move to?
- Will I be able to sell my property in the climate risk area if I buy it now?
- If I buy a destination retirement home, what will the resale value be for my heirs?
Increasingly, there are tools available to help answer these important questions.
The American Communities Project offers a climate risk mapping tool to determine what regions' populations and infrastructure may be especially vulnerable. Climate Check also offers a tool that allows you to look at risks or the specific address or ZIP Code a client is looking at.
It's also imperative that people seeking to purchase property in a flood- or hurricane-prone area or in regions where wildfires are becoming more frequent speak first to a property and casualty insurer to see whether they can even purchase a policy to protect their new asset and if so, at what cost.
Advisers must become as familiar with these tools as they are with 401(k) savings projection calculators and estate planning laws.
When risk outweighs reward
Today, counties with the largest share of homes facing high heat, drought, fire, flood and storm risk saw their populations increase due to net migration over the last five years while areas with lower climate risk saw their populations decline, according to Redfin. This is largely due, they say, to the lower costs and the attractiveness of the area they are moving to.
Areas with significant risk are also areas with a high level of retirees moving to them.
That might be changing.
In fact, an April 2021 survey from Redfin found that about half of respondents who plan to move in the next year said extreme temperatures and/or the increasing frequency or intensity of natural disasters played a role in their decision to relocate. More than a third (36 percent) said rising sea levels were a factor.
For investors not considering these factors, it's important that advisers highlight both the climate cost and risk when clients are making a decision as to where to retire because as with any investment, it's our job to point out that what they save today—they might spend in spades later.
This article was originally published in MarketWatch.