This Month:
Treasury, Labor act to enhance retirement security
Libbe: Client Resolutions
Obama outlines path for middle class economic security
The Retirement Readiness of Generation X
Don't listen to a movie character when putting your finances in order
Help not wanted: Americans spurn planning
Income crisis underscores need for retirement strategy
Turner & Cohen: Equipping the retirement advisor
Retirement Reinvention: A mindset makeover
Retirement Risk Run Rampart
Harrington: The Changing face of wealth management
Ryan: Meeting the challenge of longevity
Vasileff: Boomers: Legal separation instead of divorce
U.S. Treasury, Labor Departments Act
to Enhance Retirement Security for an America Built to Last
Executive Actions Broaden Options, Increase Transparency for 401(k) Savers
WASHINGTON- Following President Obama's State of the Union Address in which he proposed a blueprint for an American economy built to last, the U.S. Departments of the Treasury and Labor today announced two executive actions designed to help enhance security for millions of Americans saving for retirement. The measures announced today will expand transparency in the 401(k) plan marketplace and broaden the availability of retirement plan options so Americans can maximize their ability to save responsibly and securely.
The Treasury Department's proposal will reduce regulatory burdens and make it easier for retirees to choose to receive their benefits as a stream of income in regular payments for as long as they live. These flexible 'lifetime income' options can provide greater certainty in retirement and minimize the risk of retirees outliving or underutilizing their retirement savings.
"When American workers take the responsible step of saving for retirement, we should do all we can to provide them with sensible, accessible choices for managing their hard-earned savings. Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security," said Treasury Secretary Tim Geithner.
The U.S. Department of Labor's Employee Benefits Security Administration today issued a final rule that will provide employers sponsoring pension and 401(k) plans with information about the administrative and investment costs associated with providing such plans to their workers. The department also announced a three-month extension in the effective date of this rule, meaning service providers must be in compliance by July 1, 2012, for new and existing contracts or arrangements between ERISA-covered plans and service providers.
"As President Obama has said, we're at a make or break moment for the middle class and those trying to reach it. What's at stake is the American value that hard work pays off. The common-sense rule that we are finalizing today will shed light on the true costs of 401(k) accounts and ultimately reward those working hard and saving for retirement," said Secretary of Labor Hilda L. Solis. "This rule, and its companion participant-level fee disclosure rule, will greatly increase the level of transparency in retirement plans. When businesses that sponsor retirement plans, and the workers who participate in those plans, get better information on associated fees and expenses, they'll be able to shop around and make informed decisions that will lead to cost savings and a larger nest egg at retirement."
Together, the actions by both the Treasury and Labor Departments will expand available options and provide greater transparency to help working families successfully plan for retirement and manage their retirement savings. The Council of Economic Advisers has prepared a detailed report describing the significance of today's actions, which can be accessed here.
More on the Treasury's Proposed Guidance Package on Lifetime Income
As Americans live longer and pensions increasingly trend away from the traditional defined-benefit structure that provides a stream of guaranteed income for the duration of a retiree's life, improving access to retirement income options is an important way to help retirees manage their savings. Lifetime income is particularly important for women, as the average lifespan for American women exceeds that of men.
Many retirees find it difficult to devise and adhere to a methodical plan for managing and drawing down retirement assets over an uncertain, and potentially lengthy, time horizon. Some retirees may forecast that they will live only to or just past the average life expectancy, only to far outlive their savings by living much longer. Other retirees, fearful of exhausting their savings, may unnecessarily restrict their spending and not reap the benefits of the funds they have saved. Since Americans' financial prospects for retirement increasingly are determined not solely by how much they save but also by how they manage their savings, retirement policy should focus both on how best to encourage the accumulation of savings and on how to give retirees attractive options for using that accumulation to provide retirement income.
Today's guidance package , which builds on comments received in response to the Departments of the Treasury and Labor's joint request for information on the desirability and availability of lifetime income alternatives in retirement plans, will help Americans meet their need for income during retirement by:
- Encouraging Partial Annuity Options. Retirement plan participants are often confronted with a 'cash or annuity' decision upon retirement. Given an all-or-nothing choice, many opt for a lump sum and decline the lifetime income stream because they are unaware they have the option to combine approaches. The proposed regulation changes a regulatory requirement to make it simpler for defined benefit pension plans to offer combinations of lifetime income and a single-sum cash payment. This is designed to encourage more retirees to consider partial annuities, which allow for retirees to receive a steady stream of income for the duration of their lifetimes while also keeping a portion of their savings invested in assets with the flexibility to respond to liquidity needs. .
- Removing a Key Obstacle to "Longevity" Annuities. Another proposed regulation expands on the combination approach by removing a regulatory impediment to purchasing a deferred "longevity" annuity. This change would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income for life starting at an advanced age, such as average life expectancy. Annuities of this type would provide an efficient way for 65- or 70-year-olds (or even younger savers) to address the risk of outliving their assets by purchasing a predictable income stream starting at age 80 or 85. Once that risk is addressed, a retiree's task of generating income from the remaining assets is more manageable because it is limited to a fixed period of time.
- Clarifying Rules for Plan Rollovers to Purchase Annuities and Spousal Protection Rules for 401(k) Deferred Annuities. Two revenue rulings issued today clarify how rules protecting employees and spouses apply when plan sponsors offer lifetime income options under their plans. The first ruling clarifies how the rules apply when employees are given the option to use a single-sum 401(k) payout to obtain a low-cost annuity from their employer's defined benefit pension plan. The second ruling clarifies that employers can offer their employees the option to use 401(k) savings to purchase deferred annuities and still satisfy spousal protection rules with minimal administrative burdens. Both of these rulings would facilitate the availability of flexible options for employees so that they can better use their 401(k) savings to achieve financial security in retirement.
Additional information on these proposals is available in a fact sheet posted on Treasury.gov. The proposed regulations announced today are also available at Regulations.gov for public comment.
More on the Department of Labor Final Rule on 401(k) Fee Disclosure
The Labor Department's rule requires service providers to furnish information which will enable pension plan fiduciaries to determine both the reasonableness of compensation paid to the service providers and any conflicts of interest that may impact a service provider's performance under a service contract or arrangement. It requires disclosures of direct and indirect compensation certain service providers receive in connection with the services they provide. The rule applies to those service providers that expect to receive $1,000 or more in compensation and provide certain fiduciary or registered investment advisory services, make available plan investment options in connection with brokerage or recordkeeping services, or otherwise receive indirect compensation for providing certain services to a plan.
The Department today also announced that in the near future it intends to publish for public comment a separate proposal that would require service providers, in addition to providing the required fee and investment expense information, to furnish a guide or similar tool to assist plan fiduciaries in identifying and locating the potentially complex information that must be disclosed and which may be located in multiple documents.
The 3-month extension of the effective date of today's final rule has been provided to allow service providers sufficient time to prepare for compliance. Service providers not in compliance as of July 1, 2012 will be in violation of ERISA's prohibited transaction rules and subject to penalties under the Internal Revenue Code.
The effective date of the final rule announced today works in conjunction with the compliance date of the department's participant-level disclosure regulation (29 CFR § 2550.404a-5) which requires plan administrators to give workers who direct their retirement accounts in 401(k)-type plans easy-to-understand information to comparison shop among the plan investment options available to them. Due to the extension of the effective date of the final rule announced today, plan administrators for calendar year plans now must make the initial annual disclosure of 'plan-level' and 'investment-level' information (including associated fees and expenses) to participants no later than August 30, 2012, and the first quarterly statement (for fees incurred July through September) must be furnished no later than November 14, 2012.
Plan sponsors and service providers with questions about the final rule can contact EBSA’s Office of Regulations and Interpretations at 202-693-8500. A fact sheet on this regulation is available on EBSA's website here. Additional information about how the final rule announced today differs from the previously published interim final rule can be seen by going here.
Client Resolutions:
On the heels of a year uncertainty, 2012 could be a call to action
by Katie Libbe
Ms. Libbe is vice president of Consumer Insights for Allianz. She can be reached at katie.libbe@allianzlife.com
By All Accounts, 2011 was Volatile Year for the Economy in the United States.
A number of global issues - including the earthquake in Japan and debt crisis in Europe - caused anxiety and aversion to U.S. markets. Then, the political stalemate in Washington, D.C. led to a downgrade of our national debt, the first such downgrade in the history of the country. On top of that, the housing problems we experienced throughout 2010 weren't getting any better. The U.S. stock market's ups and downs throughout 2011 provided no reason for sustained optimism either.
Although the S&P 500 index finished the year in nearly the same spot that it started (closing at 1267.64 in 2010 and 1267.60 in 2011) and the Dow Jones Industrial Average grew slightly, 2011 was actually one of the most volatile years on record for the U.S. stock market. On 35 trading days, the market closed with a gain or loss of 2 percent or more, demonstrating just how uncertain people were feeling about the overall health of the economy.
This uncertainty was reflected in a recent survey about New Year's Resolutions conducted by my company. The volatile stock market (10 percent), U.S. budget fiasco (23 percent), home prices (15 percent) and European debt crisis (5 percent) all registered as 'worrisome economic events' of 2011, but 'unemployment' actually came in as the top concern with 48 percent of the vote.
These statistics illustrate that, from an economic standpoint, people had to digest a lot of negative news last year, which we believe should have an effect on the way they plan to manage their finances in 2012 - including everything from setting the household budget to saving for retirement. It also begs the question of whether or not they're seeking help from a trusted financial professional to assist with their retirement strategies.
Sadly, it doesn't seem that 2011's headlines were enough to convince people that help with financial planning should be a top priority for the new year.
When asked if 2011's economic conditions made them more or less likely to seek the advice of a financial professional, 80 percent of respondents in the Allianz Life survey said they were either 'unsure' (49 percent) or 'less likely' (31 percent). Furthermore, when asked if they were going to include financial planning in their resolutions for 2012, that same 80 percent said 'no.' This lack of financial focus is at the highest level in the survey's three-year history, exceeding the 67 percent of Americans who chose not to include financial planning when making resolutions in both 2009 and 2010.
Barriers to Financial Planning
Although those responses seem troubling, a look behind the numbers is where there is truly cause for concern.
Respondents who answered 'no' were also given the opportunity to provide feedback about why they were not focusing on financial planning. Nearly a quarter (23 percent) noted that they already have a solid financial plan, which is certainly positive news, but the other responses should have financial professionals searching for ways to make connections with the disenfranchised majority.
Although some felt that financial planning was 'too complex' (6 percent) or said they would rather spend their money on 'fun activities' (5 percent), the biggest reason cited for avoiding financial planning was the feeling that they 'don't make enough (money) to worry about' financial planning (35 percent). This attitude that financial planning is only for the wealthy is alarming not only because it puts planning on an unnecessary pedestal - it also stunts the process and makes it challenging for real financial planning to ever begin.
This all comes at a time when Americans are expected to generate a bigger portion of their retirement income than ever before. The traditional three pillars generating retirement income in the U.S. - defined benefit plans (pensions), Social Security, and personal savings - are rapidly changing, forcing people to re-evaluate how they plan to fund their retirement and where they can look for guarantees. Defined benefits plans have declined substantially in the past 15 years as employers have determined these plans are too costly and carry too much long-term financial risk for the company. Longer life expectancies and the decreasing ratio of workers to beneficiaries will likely change how Social Security pays out in the future.
Thus, what's left is personal savings. People are now being required to shoulder the weight of saving money for the future. They must ensure their savings grows along with things like inflation and rising health care costs and turn those assets into income they can't outlive.
You’d think that reality, along with the shaky economy we experienced in 2011, would have more people looking for help with their financial plans. But when asked in the survey about the most important focus area for 2012, a majority of Americans (45 percent) said that health/wellness was their top priority. Financial stability came in a distant second with only 30 percent of the vote.
Health and Fitness are Still the Focus
Diet and exercise was also the top resolution that people said they are most likely to keep this year. Forty-nine percent of respondents felt more confident in their ability to stay fit than to 'manage money better,' which came next at 43 percent. While getting in shape and living a healthier lifestyle will always be a part of New Year's Resolutions, this time of year is also a great opportunity to think about financial stability and preparing for the future. Physical fitness is certainly important, but fiscal fitness needs to play a bigger role in how people plan to make improvements in their lives.
Given everything that happened from an economic standpoint in 2011 - on both the macro level with the U.S. budget standstill and volatility in Europe, and the micro level with people affected by high unemployment and decreasing value of their homes - it's surprising that financial planning is not a bigger priority for Americans in 2012.
Seeing health concerns grabbing more attention - despite all that happened in 2011 and the changing retirement landscape - shows our belief that many people are feeling powerless about managing their finances.
So what can financial professionals do to make an impact and demonstrate the value they can bring during these uncertain times?
Financial Planning Starts with You
It seems there is still some uncertainty about working with a financial professional and people see barriers that may not actually exist. There are many financial models that can work with a variety of budgets, so our industry needs to do a better job of promoting those options to different types of potential clients.
Free financial tools that people can access online also provide a way to start the process. That first step could be crucial in getting these holdouts to start thinking more proactively about managing their money, and eventually, about the wisdom of working with a professional that can help them navigate through the ins and outs of the financial world.
The key is to help them get started now. Just because a majority of Americans are saying they'd rather not spend time on financial planning this year doesn't mean you have to accept their lack of interest.
This industry knows the dangers of ignoring financial planning, and we have the talent and resources to help people plan for a more secure retirement. It's time we take the situation into our own hands and resolve to make a difference in 2012 - because if we don't, it seems that most will lack the motivation to take action themselves.
President Obama Outlines Path
To Increase Middle-Class Economic Security
One-Quarter of Middle-Class Americans
Ages 30-65 Lack Confidence In Their Financial Future;
Underscores Consumer Need for Guaranteed Retirement Income Strategies
WASHINGTON, D.C. - In his State of the Union address, President Barack Obama highlighted the need to further support the financial security of working-class Americans. IRI research shows that working-class Americans are pessimistic about their financial future. More than one-quarter (26%) of middle class Americans ages 30-65 lack confidence that they will have the ability to meet their economic needs in retirement, while another four out of 10 (40%) state that they are only somewhat confident that they will have enough money to live comfortably in retirement.
"We applaud the President for discussing the critical need for our nation to chart a course toward greater economic prosperity, and we share his goal to help all Americans attain a financially secure future," said IRI President and CEO Cathy Weatherford. "A key piece of any successful long-term economic roadmap, must include opportunities for all Americans, especially those in the middle class, to have access to retirement savings vehicles. Throughout the year, IRI will continue our efforts to promote and protect the ability of all Americans to invest in retirement strategies that can help them attain financial peace of mind, and we look forward to working with the Administration and Congress to achieve this important goal."
Of note, IRI research shows that the tax deferral of annuity earnings is of greatest benefit to middle- income Americans, who comprise the largest segment of annuity owners. With eight in 10 (80%) of annuity buyers having incomes less than $100,000 and two-thirds (64%) earning less than $75,000, insured retirement strategies clearly play a significant role in the retirement income planning of middle-class Americans. In addition, in the absence of tax deferral, hard-working, middle-income Americans would be faced with potentially burdensome restrictions to access insured retirement strategies.
With millions of Americans expressing concern about their financial well-being, IRI will continue to work to ensure that access to suitable retirement savings vehicles, as well as professional investment advice, is not curtailed. Specifically, IRI will vigorously advocate to:
- Ensure the Department of Labor (DOL) re-proposes its fiduciary rule in a way that achieves the proper balance between protections for consumers while preserving the ability of retirement tools for all Americans;
- Protect the tax deferral status of annuity earnings so that those who need them most, working-class Americans, continue to have access to these heavily relied on investment strategies;
- Create a regulatory environment that encourages Americans to meet their retirement income needs, and develop the best environment in which the industry can provide products and services in the most cost efficient manner possible by working closely with the Federal Insurance Office as they identify ways to modernize and improve the country's regulatory system;
- Provide consumers clear and concise information when making investment decisions, by working with the Securities Exchange Commission to bring a variable annuity summary prospectus into the marketplace; and
- Increase access to guaranteed lifetime income options for all Americans, through continued work with the DOL and Department of Treasury and support for the Lifetime Income Disclosure Act.
For more information about IRI's advocacy work, and to access IRI's research, go here.
About the Insured Retirement Institute: The Insured Retirement Institute (IRI) is a not-for-profit organization that for twenty years has been a mainstay of service, commitment and collaboration within the insured retirement industry. Today, IRI is considered to be the authoritative source of all things pertaining to annuities, insured retirement strategies and retirement planning. IRI proudly leads a national consumer education coalition of nearly twenty organizations and is the only association that represents the entire supply chain of insured retirement strategies: our members are the major insurers, asset managers, broker dealers and more than 75,000 financial professionals. IRI exists to vigorously promote consumer confidence in the value and viability of insured retirement strategies, bringing together the interests of the industry, financial advisors and consumers under one umbrella. IRI's mission is to: encourage industry adherence to highest ethical principles; promote better understanding of the insured retirement value proposition; develop and promote best practice standards to improve value delivery; and to advocate before public policy makers on critical issues affecting insured retirement strategies and the consumers that rely on their guarantees. Visit www.IRIonline.org today to experience the vast resources of the Insured Retirement Institute for yourself.
The Retirement Readiness of Generation X
Two-Thirds of GenXers are Not Confident in Their Ability to Cover Future Financial Needs
WASHINGTON, D.C. - The Insured Retirement Institute (IRI) has released its report, Retirement Readiness of Generation X: An Overview of the Next Generation of Retirement Investors. This exclusive report explores the retirement preparations of Americans in their 30s and 40s, and looked at their outlook for retirement and the issues that are shaping these expectations. The report found that nearly two-thirds (65 percent) of the members in Generation X (GenXers) lack confidence that they will have enough money to live comfortably in retirement, to cover medical expenses during retirement and to pay for the cost of their children's higher education.
The recent economic recession has had an impact on many GenXers' financial savings. Nearly a quarter (23 percent) of GenXers stopped contributing to their retirement accounts, 15 percent made early withdrawals from their 401(k) plans and more than one-fifth (22 percent) stopped contributing to college savings plans.
"While much of the focus as of late has been on the Baby Boomers who have just begun to enter retirement, 70 million GenXers are following right behind them and must not be overlooked," said IRI President and CEO Cathy Weatherford. "The recession impacted their ability to not only save for retirement but also for their children's education, compounding the financial pressures they will face in the years to come. However, with the proper preparation and with guidance from an advisor, GenXers can get back on track, build their nest egg and gain confidence in their ability to achieve their retirement goals."
The report also found that:
- Only 41 percent of GenXers have tried to figure out how much money they will ultimately need to save, and among those who have saved, half have amassed less than $100,000.
- 54 percent of female GenXers rated themselves as having little to no investment knowledge, this compares to 37 percent of male GenXers.
- Of GenXers who identified an anticipated retirement age, the average age chose was 64, indicating a retirement period of more than 20 years.
- Presently, 37 percent of GenXers have consulted a financial advisor. Among single GenXers, this decreases to one-fifth.
The full report can be found here.
IRI commissioned Woelfel Research, Inc. to conduct a survey to determine how retirement is viewed by individuals in their 30s and 40s. The research was conducted by means of telephone interviews with 802 adult Americans ages 30-49. The sample was selected from a list of households in this age group, developed by Accudata, Inc. by compiling data from available sources such as motor vehicle records. Results were weighted by age and gender to the 2010 United States Census. Data was collected from November 10-22, 2011, and analyzed by IRI in December 2011. The margin of error for the sample of 802 was ±3.5%.
About the Insured Retirement Institute
The Insured Retirement Institute (IRI) is a not-for-profit organization that for twenty years has been a mainstay of service, commitment and collaboration within the insured retirement industry. Today, IRI is considered to be the authoritative source of all things pertaining to annuities, insured retirement strategies and retirement planning. IRI proudly leads a national consumer education coalition of nearly twenty organizations and is the only association that represents the entire supply chain of insured retirement strategies: our members are the major insurers, asset managers, broker dealers and more than 75,000 financial professionals. IRI exists to vigorously promote consumer confidence in the value and viability of insured retirement strategies, bringing together the interests of the industry, financial advisors and consumers under one umbrella. IRI's mission is to: encourage industry adherence to highest ethical principles; promote better understanding of the insured retirement value proposition; develop and promote best practice standards to improve value delivery; and to advocate before public policy makers on critical issues affecting insured retirement strategies and the consumers that rely on their guarantees. Visit www.IRIonline.org today to experience the vast resources of the Insured Retirement Institute for yourself.
Tongue in Cheek Dept.
Don't listen to a movie-character when putting personal finances in order
Larger than life, yes, but are they prepared for retirement?
Washington, DC – Millions will watch the upcoming Golden Globe Awards. Some will be envious of the movie stars' talent and lifestyle. However, even though the stars' lives may appear glamorous, it might not be financially smart to think like some of the characters that have been portrayed on the big screen throughout the years.
The National Foundation for Credit Counseling (NFCC) reflects on the following famous movie lines and relates them to personal finance:
- Gone with the Wind - "I can't think about that right now" didn't work out too well for Scarlett O'Hara, and it won't work for today's financially strapped heroine, either. Delaying reaching out for help with your financial situation will only make matters worse.
- Casablanca - Wanting Sam to play the same song over and over is one thing, but repeating the same financial mistakes month after month is not music to anyone's ears. If your financial hole is getting deeper, it's time for a new tune.
- Wizard of Oz - Dorothy knew that "there's no place like home," and the millions of Americans who have been displaced from their homes would agree. A home is typically a person's largest investment. Don't risk losing yours. Reach out for help at the first signs of trouble so that you and Toto will always have a roof over your heads.
- Dr. No - James Bond was a convincing secret agent in dozens of films, identifying himself simply as "Bond, James Bond." Today, even James Bond could have trouble keeping his personal information secure, as thieves have sophisticated methods of stealing identities. Unauthorized charges on existing accounts, new accounts opened in your name, and drained bank accounts are just some of the results of being a victim of identity theft. To keep from needing your own secret agent, educate yourself with identity theft protection tips at www.ProtectYourIDNow.org.
- The Good, The Bad and The Ugly - Many may think that this movie title describes their financial life. If so, do something about it by facing the financial facts. Take charge of your financial future by tracking spending, creating a payday cash-flow calendar, and knowing how much you owe. It's your money and your financial future. No one cares more about it than you.
If your finances are not award-winning, reach out to a trained and certified counselor at an NFCC Member Agency. To locate the agency closest to you, dial (800) 388-2227, or go online to www.DebtAdvice.org. For assistance in Spanish, call (800) 682-9832.
The National Foundation for Credit Counseling (NFCC), founded in 1951, is the nation's largest and longest serving national nonprofit credit counseling organization. The NFCC's mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services. NFCC Members annually help more than three million consumers through close to 800 community-based offices nationwide. For free and affordable confidential advice through a reputable NFCC Member, call (800) 388-2227, (en Español (800) 682-9832) or visit www.nfcc.org. Visit us on Facebook: www.facebook.com/NFCCDebtAdvice, on Twitter: twitter.com/NFCCDebtAdvice, on YouTube: www.YouTube.com/NFCC09 and our blog: http://financialeducation.nfcc.org/.
Equipping the Retirement Advisor
Providing Income to Retiring Boomers
by Elvin Turner, JD, MBA and Larry Cohen
Elvin Turner, JD, MBA is the President of Turner Consulting, LLC and Director of Research for the Retirement Income Industry Association (www.riia-usa.org). He can be reached at Turnerconsult@sbcglobal.net
Larry Cohen is the Director of Consumer Financial Decisions, and he can be contacted through lcohen@sbi-i.com
Boomers face major challenges with retirement. The pensions that sustained their parents are fast disappearing or uncertain. Health care costs are rising and will continue to rise. The challenge for advisors is: What products or services should they recommend that will enable Boomers to meet their income needs during retirement.
As one of the largest cohorts to ever grace the globe, Boomers are wildly diverse. This guarantees that no one product or service will be right for every Boomer. To facilitate understand some of the larger differences, in the 2006 RIIA report The Topology of Retirement, we divided households into four segments and looked at some key characteristics of each. These segments are:
Retired - Age 65+ living on a fixed income, enjoying retirement pursuits (travel, hobbies, grandchildren), and managing resources.
Pre-retired - Age 50-65 retirement is a looming concern.
Builders - Age 35-50 focus on family, career, and other opportunities.
Starters - Under Age 35, just starting, retirement is not a concern.
Each of these life stages have different financial priorities that translate into different approaches to retirement. Each use different products, accept different levels of risk or loss aversion, and have different views of what is retirement.
In addition to life stages we must consider household resources, so each life stage segment is divided into four 'markets' based on assets. Those in the wealthiest segment are likely to retire, those in the poorest segment will not. For households in-between, we divided them into those who, with reasonable guidance and assistance, should be able to have some form of retirement from those that even with significant help, may have difficulty retiring. These four levels of wealth roughly correspond to how many financial institutions divide the retail market. They are:
Wealthy - Households in the top 5% for their life stage cohort.
Affluent - Households in the next highest 15% for their life stage cohort.
Mass Market - Households in the next 50% for their life stage cohort.
Marginal - Households in the bottom 30% for their life stage cohort.
Based on data from the 2010-11 SBI MacroMonitor, the size of these life stage and market segments is displayed in the figure below. The bulk of the Boomers are pre-retired.
The figure below shows the average total financial assets held by each life stage in each market. Clearly the Wealthy Pre-retired are the best prepared for retirement of any of the typology's segments. The Wealthy Retired, Wealthy Builders, Affluent Retired and Affluent Pre-Retired have the next highest average amounts of financial assets. However, from a total market perspective, this is not a rosy picture.
Note that in the (green segments) pre-retired Mass Market and Marginal households are totally unprepared for retirement. When we consider the fact that Marginal and Mass Market households combined represent 80% of pre-retired households, that means that only 20% of pre-retired household have anywhere close to the amount of assets to support retirement income.
Even the Affluent and Wealthy Pre-retired households' prospects are not entirely bright. Affluent and Wealthy pre-retired households average $600,000 and $1.9 million in asset respectively, to generate retirement income. However given the current typical rate of return, even that level of assets is insufficient to generate a level of income anywhere close to the incomes that they earn during their working years. The figure below shows household income from all sources for the segments.
Even the Affluent and Wealthy Pre-retired households' prospects are not entirely bright. Affluent and Wealthy pre-retired households average $600,000 and $1.9 million in asset respectively, to generate retirement income. However given the current typical rate of return, even that level of assets is insufficient to generate a level of income anywhere close to the incomes that they earn during their working years. The figure below shows household income from all sources for the segments.
Note that 2010 annual household income for the Affluent and Wealthy pre-retired averaged $140,000 and $196,000, respectively. If these households withdraw an amount equal to 4% of their assets as income in their retirement years, their retirement investment income as compared to their pre-retired income will be as follows:
Age-Wealth Segment Pre-Retired Income Estimated Retirement Investment Income Estimated retirement investment income as a % of Pre-Retired Income
Affluent Pre-Retired $140,000 $24,000 17%
Wealthy Pre-Retired $196,000 $76,000 39%
With Affluent and Wealthy Pre-retired households only receiving 17% and 39% their pre-retired income from their assets, even many of these households will be looking for additional sources of income.
Pre-Retired households still have a number of years to save, so those lacking assets now can save, continue to work, and alter how they plan to live in retirement (including continuing to work). The key for these households is to rely on the help of their trained, knowledgeable advisors. Consider the following seven strategies.
Strategies for Advisors:
1) Segment your customer base
Only 20% of pre-retired households have the assets to provide meaningful retirement income. Even within that fortunate 20% of households, many clients will need additional sources of income. How many of your households are within the 20% of households? How many in the 5%? Devise strategies for each and try to rebalance your practice to include more affluent and wealthy households.
2) Expand your view to the whole household
In most pre-retired households today, there is more than one person. The retirement of one income provider transforms that character of that household but may not introduce all the freedoms and obligations of retired life across the entire economic unit. For example, means tested benefits under Medicare look at the modified adjusted gross income of both spouses when calculating the monthly Medicare premium for either spouse. Advisors need to look at the entire household as one unit. Impress on the client that the issues you are discussing, the analysis that you are running, the recommendations that you are making are their spouse's business as well. Further the spouse's goals, needs, assets, income and obligations should be included in the analysis.
3) Be an "Income Detective"
For most households, every income source is important. If investments only provide 30% of income, 70% of their income needs to come from other sources. Social Security helps but you will need to search further. Check the resume and ask about each job. Was the client on a job long enough to vest in a pension? Six or seven years on a job may only give them a $300 per month pension per job. Doing your homework may add more monthly income.
4) Match product and services to segments
Just like no two households retire in exactly the same way, no one product or service is right for every household. Even within life-stages, households have different objectives, timings, and approaches to retirement. Each is comfortable with different amounts of risk, loss, complexity, and view retirement with a different level of priority. The key is to talk to your clients and listen to what they say. Read between the lines. Match your professional expertise and knowledge to products that your client needs- thinking about the entire household and the duration of their retirement. Over time, your clients needs will keep emerging- succession planning, medical expense management, etc.- anticipate the needs, design suitable products to meet them, and adjust your practice accordingly.
5) Identify Segments that are Profitable for You
You may discover that you have developed a niche offering that is effective and important to a group of your customers. Their willingness to pay you to perform this professional service suggests a capability you could leverage beyond your base. For example, you may work with a valuation vendor and have developed an expertise in helping business owners value and sell their businesses. If Boomer business owners are a profitable segment for you, go with it, build it and make it a part of your brand. Leverage this niche to gain more customers with the same needs and leverage these customers by filling other key needs, specifically their retirement income. The Retirement Income Industry Association (RIIA) offers a Retirement Management Analyst designation (RMA) that provides advanced training, credentials, credibility and branding in the retirement income market. Programs like this give you cutting edge expertise that helps establish a new offering in the retirement market.
6) Disengage from Unprofitable Clients or Those Who Just Don't Get It
Some clients will never be profitable, because of insufficient assets or reticence to pay for the level of service to meet their needs. Clients with tremendous needs do not always require extensive planning, whereas others with minimal needs may demand constant hand-holding. Consider your core group of clients as those that will work with you. Your time is better spent building these relationships that fit and move your practice forward, spin off additional revenue opportunities, and enhance your brand through word-of-mouth referrals for the more profitable services that you provide.
7) Integrate Clients' Human and Social Capital
As RIIA's RMA teaches, the majority of households solve their retirement income riddle by integrating their human, social and financial capital. In other words, they find a way to make it work together. Advisors who recognize the multidimensionality of clients' needs and provide solutions that go beyond the financial capital to take advantage of the client's human and social capital will soon find clients flocking to their door. The only way many Boomers will be able to engage in a dignified retirement is by taking advantage of all three types of capital. The advisors that enable these Boomers to accomplish this will find plenty of clients, profits, and satisfaction from helping people who otherwise might not have been able to retire.
Elvin Turner, JD, MBA is the President of Turner Consulting, LLC and Director of Research for the Retirement Income Industry Association (www.riia-usa.org). He can be reached at Turnerconsult@sbcglobal.net.
Larry Cohen is the Director of Consumer Financial Decisions, and he can be contacted through lcohen@sbi-i.com.
Help Not Wanted
Americans Unlikely to Address Financial Planning in 2012
Despite Tumultuous Economy, Financial Planning Takes a Back Seat;
Waistlines Trump Wallets in New Year's Resolutions
MINNEAPOLIS - Even though 2011 saw high unemployment, sagging home prices and a volatile stock market, 80 percent of Americans said that they will not focus on financial planning in their resolutions for 2012, according to a recent survey* from Allianz Life Insurance Company of North America (Allianz Life). This lack of financial focus is at the highest level in the survey's three-year history, exceeding the 67 percent of Americans who ignored financial planning when making resolutions in both 2009 and 2010.
The main reason for leaving financial planning out of resolutions was respondents' belief that they 'don't make enough to worry about it' (35 percent). Twenty-three percent said that they already 'have a solid financial plan' and 17 percent attributed it to the fact that they 'don't have an advisor/financial professional.'
"Everyone, regardless of income level, needs to make financial planning a priority," said Katie Libbe, vice president of Consumer Insights at Allianz Life. "Whether you do it yourself, through a range of free and inexpensive tools online, or seek the help of a financial professional, the last few years have taught us that we must prepare for uncertainty and risk. Sound financial planning helps people increase their capacity to save."
Waistlines Trump Wallets
Americans also put their waistlines ahead of their wallets in 2012 New Year's resolutions. Forty-nine percent said that they were most likely to make and keep a resolution related to exercise/diet versus managing their money better (43 percent).
Moreover, when asked to rank five life focus areas- 'health/wellness,' 'financial stability,' 'employment,' 'education' and 'leisure'- 45 percent of Americans said that 'health/wellness' was their most important focus area for 2012. 'Financial stability' trailed with 30 percent.
Unemployment Worries
In a list of five economic events- 'unemployment,' the 'U.S. budget fiasco,' 'home prices/sales,' 'volatile stock market' and the 'European debt crisis'- 48 percent of Americans ranked 'unemployment' as the most worrisome of 2011. The 'U.S. budget fiasco' followed with 23 percent, with 'home prices/sales,' 'volatile stock market' and 'European debt crisis' drawing less attention with 15 percent, 10 percent and 5 percent, respectively.
Help Not Wanted
Despite financial strains in the United States and throughout the world, when asked, 'Given 2011's economic conditions and your current financial situation, are you more or less likely to seek the advice of a financial advisor/professional,' nearly one-third (31 percent) said that they are 'less likely' to look for help with financial planning. Only 20 percent indicated that they were 'more likely' to seek financial advice with most people (49 percent) saying they’re 'unsure' about focusing on their finances.
"It's troubling to see that despite all of 2011's economic volatility, Americans are placing less emphasis on addressing their financial security," said Libbe. "Now more than ever, it's imperative that people have a plan in place to help ensure financial stability and security- and help reduce some of the uncertainty surrounding retirement."
About Allianz Life Insurance Company of North America
Allianz Life Insurance Company of North America has been keeping its promises since 1896. Today, it carries on that tradition, helping Americans achieve their retirement income goals with a variety of annuities and life insurance products. As a leading provider of fixed index annuities, Allianz Life is part of Allianz SE, a global leader in the financial services industry with 150,000 employees worldwide. More than 80 million private and corporate customers rely on Allianz knowledge, global reach, and capital strength to help them make the most of financial opportunities and safeguard themselves against risk.
Retirement Income Crisis in America Underscores
the Need for Insured Retirement Strategies
A Call For Expedient Public Policy Action
WASHINGTON, D.C. - The Insured Retirement Institute (IRI) recently submitted its response to the Federal Insurance Office (FIO) request for comment for 'Public Input on the Report to Congress on How to Modernize and Improve the System of Insurance Regulation in the United States.' In the letter, the IRI commends the FIO's efforts to identify ways to modernize and improve the country's insurance regulatory system, while examining the availability of insurance products to underserved populations. The Institute also encourages the FIO to focus on the regulatory environment in the context of the current state of retirement savings readiness in America and the need for consumers to insure against the risk of outliving their assets as part of any assessment of the regulation of the insured retirement industry.
"Seventy-nine million Baby Boomers today face immediate and unprecedented retirement income challenges- challenges that simply did not exist in earlier generations," stated IRI President and CEO Cathy Weatherford in the response letter. "In particular, when looking at the financial preparedness of middle-income consumers nearing retirement, IRI's research shows a concerning lack of savings. Nearly one-third of Baby Boomers cite having adequate retirement assets as a top concern, while over half said they will work for income in retirement, meaning they actually will not be retired. This reality underscores the critical importance of educating consumers about the need to create a prudent, well-thought-out retirement income plan, as well as the importance of a regulatory environment that encourages consumers to meet these needs and creates the best environment in which the industry can provide products and services in the most efficient and cost effective manner possible."
In IRI's response letter, the Institute recommends that the FIO include the following items in its report on how the system of insurance regulation can be modernized and improved:
- Federal and state regulators should provide consumers more education regarding the risk of outliving their assets and the financial strategies that can provide guaranteed lifetime income.
- Congress should pass the Lifetime Income Disclosure Act to assure workers receive adequate information about their retirement lifetime income needs.
- The Securities & Exchange Commission (SEC) should adopt a variable annuity summary prospectus and other summary disclosures providing more user friendly consumer information and encouraging greater use of guaranteed lifetime income products.
- All states should adopt the Interstate Insurance Product Regulation Compact, or product standards and approval deadlines consistent with the Compact, and the Compact should complete products standards for all products.
- FIO should recommend Congressional adoption of NARAB II legislation and continued state pursuit of full reciprocity and uniformity in the agent licensing process.
- Producer examination standards should be uniform and transparent.
- Market conduct examinations should be conducted in a coordinated and efficient manner on a consolidated basis.
- Any resolution authority should maintain the current prioritization of policyholder claims and the current status of separate account assets that apply to annuity products.
The full text of the letter can be accessed here.
About the Insured Retirement Institute: The Insured Retirement Institute (IRI) is a not-for-profit organization that for twenty years has been a mainstay of service, commitment and collaboration within the insured retirement industry. Today, IRI is considered to be the authoritative source of all things pertaining to annuities, insured retirement strategies and retirement planning. IRI proudly leads a national consumer education coalition of nearly twenty organizations and is the only association that represents the entire supply chain of insured retirement strategies: our members are the major insurers, asset managers, broker dealers and more than 75,000 financial professionals. IRI exists to vigorously promote consumer confidence in the value and viability of insured retirement strategies, bringing together the interests of the industry, financial advisors and consumers under one umbrella. IRI's mission is to: encourage industry adherence to highest ethical principles; promote better understanding of the insured retirement value proposition; develop and promote best practice standards to improve value delivery; and to advocate before public policy makers on critical issues affecting insured retirement strategies and the consumers that rely on their guarantees. Visit www.IRIonline.org today to experience the vast resources of the Insured Retirement Institute for yourself.
Retirement Reinvention: A Mindset Makeover
Most Americans admit to being unprepared
By Julia Valentine
Ms. Valentine is a public speaker and the author of 'Joy Compass: How to Make Your Retirement the Treasure of Your Life.' visit at www.JoyCompass.com.
Modern retirement is riddled with uncertainty and is much riskier than it was decades ago when there were many safeguards and veritable guarantees in place. The burden of assuring a suitable retirement nest egg has shifted from employers and the government to individual retirees. Even with this now common knowledge, far too many have still not adapted to the changes and find them self ill-equipped or, worse, entirely unable to retire when desired.
In fact, most Americans actually admit to being unprepared. The 2010 Wells Fargo Retirement Fitness Survey found that nearly three-quarters of respondents (72%) don't have any idea how much they will be able to spend or on what, and fully 67% don't have a written plan related to their life expectancy or in determining how long their savings will need to last. Scarier yet, a Harris Poll found that over a third of Americans have no retirement savings whatsoever. With over 10,000 baby boomers turning 65 each day, throngs of those in or approaching retirement have their proverbial head in the sand and are heading into a financial disaster - with implications for the economy at large.
While retirees are subject to a multitude of risk factors beyond their control, there are many ways to better assure a prosperous, secure and joyful second half of life. But you have to get your head in the game! Today, successful retirement requires a proactive, take charge approach with realistic planning and a road map for creating financial and emotional well-being. As risks have increased over the years, a myriad of tools and resources have also come about to help us realize better results with less stress. Retirement should be anticipated with joy, not fear.
Here Valentine offers Retirement Mindset Makeover tips and tools to foster productive planning
- Vision is vital. While economists and political pundits continue to ponder why Americans under-save for retirement, psychologists may have found an answer. Psychologist Dan Ariely describes some of our current financial tools, such as retirement calculators, as a product design failure. When a number comes out of this calculator, Ariely says, "it does not help us imagine what it would be like to live to a hundred if we have very little in our savings accounts by the age of seventy; it does not translate into anything that we can visualize or comprehend, and in doing so it also doesn't motivate us to try harder to save more." The reason people can spend months planning a wedding or weeks planning a vacation is that they have an appealing vision, an anticipation for what's to come, and the motivation to follow through with the planning. As long as our perception of retirement as 'declining years' persists, there is little motivation to plan or look forward to it. By envisioning and mapping out an appealing lifestyle before you get to the retirement calculator, and it will motivate you to invest in your prosperity as well as your physical and emotional health. In fact, a Yale University study found that a positive image of old age may add, on average, 7 1/2 years to one's life span!
- Alleviate angst with automation. Some of the classic tools recommended by financial planning professionals, such as making a detailed budget, do not take into account the level of stress that can result from using them. No one disputes what needs to be done; rather, it's the approach itself that can feel uncomfortable for some people. Today, there are a myriad of automated tools and techniques that simplify such processes, including automatic savings and automatic expense tracking that can alleviate this pressure. Remember that financial tools should help you gain control and confidence to decrease stress, rather than produce anxiety. So, spend the time to identify and set up tech-driven systems that work for you.
-Fuel your own fire. Research on motivation by University of Rochester Professors Ryan & Deci showed that 'self-motivation, rather than external (or extrinsic) motivation, is at the heart of creativity, responsibility, healthy behavior and lasting change.' With this in mind, working toward a happy, healthy and successful retirement requires self-initiated, authentic actions versus those you are undertaking to appease others. New tools consistent with this understanding are available to provide support and help you achieve such self-directed goals. Seek and leverage any help you can get when motivating yourself to live well.
- Design your destination. Research proves that a successful, happy retirement is impossible without planning based on self-examination. Indeed, a Dartmouth University study found that people who plan end up with twice the wealth of people who do not. Beyond financial planning, it is imperative to take time to figure out what lifestyle needs must be fulfilled to make you happy, and then find specific ways to ensure those needs can be met. Retirement lifestyle design then becomes the driver for making good choices and building the foundation of physical, emotional and financial health that ensures joy and fulfillment after fifty.
- Knowledge is power. The 2010 Wells Fargo Retirement Fitness Survey also found that the typical American is not knowledgeable about health care costs, life expectancy, income needs, inflation and other risks. Understandably, this lack of clarity creates apprehension and distress. Now is the time to take control and start creating the senior lifestyle you want. To ease and expedite the process, take advantage of specialized resources that are readily available. For example, regional events like Ideal Living Resort & Retirement Expos provide convenient, one-stop access to a myriad of retirement solutions. These valuable Expos help retirees explore their comprehensive options, gain insights, make comparisons, and create a realistic blueprint for retirement.
"Retirement is the time when you have already fulfilled your obligations to others in life and are now free to make some new choices with yourself as the priority," Valentine concludes. "With proper preparation and forethought, you can realize your full potential and enjoy an astonishing quality of life in retirement that may include working, mentoring, volunteering, traveling, learning and anything else that helps you feel secure, joyful, independent, valuable and carefree.
Retirement Risk Running Rampant
Most Americans admit to being unprepared
With a whopping 10,000+ baby boomers turning 65 each day, the number of Americans in or approaching retirement- and heading into a financial disaster- is downright shocking. "Study findings continue to reveal the ominous outlook for current and future retirees," notes Julia Valentine, author of 'Joy Compass: How to Make Your Retirement the Treasure of Your Life. "Far too many will find them self ill-equipped or, worse, entirely unable to retire when desired."
Equally unnerving is that most Americans actually admit to being unprepared for retirement, with the majority unsure of how much money they will need in retirement, also operating without any kind of plan or intention. Most concerning, over one third of Americans have NO retirement savings whatsoever! Just how deep does this problem run? Consider these scary statistics Julia has compiled and is available to discuss along with how Americans can better prepare them self for the second half of life:
The 2010 Wells Fargo Retirement Fitness Survey
- 72% don't have any idea how much they will be able to spend or on what.
- 67% don't have a written plan related to their life expectancy or how long their savings will need to last.
- 37% of all respondents (43% of respondents age 60 to 69) aren't sure or can't estimate how much money they will need during retirement.
- The typical respondent is not knowledgeable about health care costs, life expectancy, income needs, inflation, the future of Social Security, and the many other risks that retirees face.
- Only one out of every three Americans has a written, detailed plan for how they will manage their finances during retirement.
- 65% believe they should be saving more and could save more if they made some minor changes in their spending habits and had help in the form of financial advice.
- Eight out of every ten respondents say they would be motivated to save if they were told the specific amount of money they will need during retirement.
- The growing use of automatic enrollment during the past 10 years has been a contributing factor in helping young people start saving for retirement at an earlier age.
- 32% (34% male, 29% female) are excited and look forward to retirement. 38% (39% male, 37% female) never think about retirement. 27% (23% male, 30% female) are worried about retirement due to financial stress or worry.
Wells Fargo Retirement Survey, December 2010
- Three in Four Americans Expect to Work through Retirement Years;
- Average Americans Woefully Underfunded, with Less Than 7% of Desired Retirement Nest Egg Saved;
- 20-Somethings Least Confident in Stock Market and 40-Somethings Most Stressed.
Annamaria Lusardi (Dartmouth College and NBER), February 26, 2010
- In addition to not preparing for unforeseen emergencies, people do not prepare for predictable events. Despite the changes in the pension landscape in the past twenty years and the increased individual responsibility for financial security after retirement, the majority of Americans have not done any retirement planning. Making decisions about how much to save in order to afford a comfortable retirement requires collecting information about several important variables (including Social Security and pension benefits) and doing some, even rudimentary, calculations. Yet, when asked whether they have ever tried to figure out how much they need to save for retirement, only 42 percent of respondents who are not retired said they did.
- Lack of planning is high not only among young respondents, but also among older adults: only 51 percent of respondents who are 45–59 years old and not yet retired have tried to calculate how much they need to save for retirement.
- Financial illiteracy is widespread among older Americans: only half of the age 50+ respondents could correctly answer two simple questions regarding interest compounding and inflation, and only one-third correctly answered these two questions and a question about risk diversification. Fewer than one-third of our age 50+ respondents ever tried to devise a retirement plan, and only two-thirds of those who tried actually claim to have succeeded. Overall, fewer than one-fifth of the respondents (19%) believed they engaged in successful retirement planning.
- American workers are increasingly responsible for securing their own retirement. Yet only a minority of American households feels 'confident' about retirement saving adequacy, and one third of adults in their 50s say they have failed to develop any kind of retirement saving plan at all (Lusardi 1999, 2003; Yakoboski and Dickemper, 1997). What explains this low level of retirement preparedness? Why do people do such a poor job, when it comes to designing and carrying out retirement saving plans? This paper explores the hypothesis that poor planning may be a primary result of financial illiteracy.
Findings
1. Financial illiteracy is widespread among older Americans.
2. Retirement calculations are not an easy task: only 31% of these older people had ever tried to devise a retirement plan, and only two thirds of these succeeded. For the sample as a whole, only 19% engaged in successful retirement planning.
3. Financial knowledge and planning are clearly interrelated.
4. The respondents who did plan were less likely to talk to family/relatives or coworkers/friends than they were to use formal means such as retirement calculators, retirement seminars, or financial experts.
5. Keeping track of spending and budgeting habits appears conducive to retirement saving.
- In as much as planning is an important predictor of saving and investment success, we may have uncovered an important explanation for why household wealth holdings differ, and why some people enter retirement with very low wealth (Venti and Wise 2001, Lusardi 1999). Our preliminary empirical analysis finds that financial literacy has an effect on both savings and portfolio choice.
"Surveys show that the typical American is not knowledgeable about health care costs, life expectancy, income needs, inflation and other risks," Julia says. "Understandably, this lack of clarity creates apprehension and distress. Now is the time to take control and start creating the senior lifestyle you want. But you have to get your head in the game! Today, successful retirement requires a proactive, take charge approach with realistic planning and a road map for creating financial and emotional well-being. To ease and expedite the process, take advantage of specialized resources that are readily available such as the Ideal Living Resort & Retirement Expos. These regional events provide convenient, one-stop access to a myriad of retirement solutions. These Expos and other such widely available tools help retirees explore their comprehensive options, gain insights, make comparisons, and create a realistic blueprint for retirement."
Harris Interactive, March 2009
- Today's pre-retirees say they will need to postpone their retirement 4.2 years on average, which would be the first time in history that retirement age significantly increased in America. The uninsured costs of healthcare are now considered the biggest potential financial wildcard in retirement.
- Today, the biggest financial worry among the age 55+ population is being unable to afford uninsured medical expenses during retirement. In fact, older Americans are 2.5 times as likely to say they are worried about paying for uninÂsured medical expenses in retirement as they are about a lack of personal savings
- Almost seven in 10 people will need some long-term care, such as home care, assisted living, or nursing home care, after age 65. In 2008, the average annual cost for a private nursing home room was $76,460 a year.2
- Although 35 states mandate sex education, only three states have made personal finance courses a requirement in high school.
- When we asked Americans what their ideal plan would be for balancing work, leisure, and money in retirement, 70% told us they wanted to include work in their retireÂment.
- In prior Age Wave studies, pre-retirees told us that what they most seek from their retirement work experiences are flexible schedules, the opportunity to continue learning, and the abilÂity to teach younger workers.
Ernst & Young, July 2008
- Three out of five (60%) middle class retirees would outlive their financial assets if they didn't cut back on spending significantly.
An exploratory study by Jim Sundali of University of Nevada, Reno, James W. Westerman of Appalachian State University and Yvonne Stedham of University of Nevada, Reno
- The researchers asked people whether they worried about not having enough income to get by in retirement. Less than 20% of respondents reported no worry at all.
- Pantis (2004) found that retirees reported higher levels of satisfaction when they had guaranteed income streams (as in Defined Benefit plans), and reported that retirees with household income of between $15,000 and $30,000 with a Defined Benefit pension were just as likely to be very satisfied in retirement as retirees with income above $50,000 with no guaranteed pension income.
Can you stop working today and support yourself until 2036?
'Lifestyle Calculator' shows that longevity planning must begin today
Ms. Barsch is a Northwestern Mutual vice president, market strategy
Just-released U.S. Census Bureau research provides clear evidence that people are living longer, underscoring that individuals need to broaden their understanding of what makes a complete retirement plan, according to Northwestern Mutual. With longevity on the rise, individual retirement planning needs to include asset accumulation and savings, as well as strategies for managing the personal and financial risks that can arise when you live into your 80s and 90s.
According to the recent Census Bureau report: in 1980, there were 720,000 people aged 90 or older (in the United States)
in 2010, there were 1.9 million people aged 90 or older by 2050, there will be an estimated 9 million people aged 90 or older.
"Imagine you stop working right now, in 2011, and you must go on to support yourself until 2036. How would you meet your needs, your wants and also handle the unexpected through another 25 years of life?" said Rebekah Barsch, Northwestern Mutual vice president-market strategy. "When you retire, this hypothetical question becomes very real, and it is only by developing a holistic retirement plan now, and incrementally and consistently working toward achieving that plan, that you can enter a financially secure retirement."
According to Barsch, the first step is to understand what longevity means for you and how it factors into your personal retirement planning. Start by trying Northwestern Mutual's Lifespan Calculator to learn more. This fun, online calculator considers 13 lifestyle factors including diet, drinking, smoking and stress to estimate life expectancy, using the latest information from the National Center for Health Statistics. In addition, Facebook users can download the Lifespan Calculator Facebook application to compare their life expectancy score with that of their friends.
"Understanding longevity and the other risks of retirement can be empowering. The good news is that a well developed retirement income plan can help you weather the unexpected. The key is to start planning now," continues Barsch. "Work with a trusted advisor to align your expectations with your lifestyle and build a plan that will take you through retirement, not just to retirement."
About Northwestern Mutual
The Northwestern Mutual Life Insurance Company, Milwaukee, Wis. (Northwestern Mutual), the 'World's Most Admired' life insurance company in 2011 according to FORTUNE magazine, has helped clients achieve financial security for more than 150 years. As a mutual company with $1.2 trillion of life insurance protection in force, Northwestern Mutual has no shareholders. The company focuses solely and directly on its clients and seeks to deliver consistent and dependable value to them over time. Northwestern Mutual and its subsidiaries offer a holistic approach to financial security solutions including: life insurance, long-term care insurance, disability insurance, annuities, investment products, and advisory products and services. Subsidiaries include Northwestern Mutual Investment Services, LLC, broker-dealer, registered investment adviser, member FINRA and SIPC; the Northwestern Mutual Wealth Management Company, limited purpose federal savings bank; and Northwestern Long Term Care Insurance Company; and Russell Investments.
The changing face of wealth management
New trends in financial services highlighted by
emerging social media, new compliance mandates and renewed focus on the advisor's role
By Bruce Harrington
Mr. Harrington is Head of Sales and Strategy at John Hancock Financial Network (JHFN), responsible for the development and implementation of sales and investment strategy and programs across all product lines of JHFN. He can be reached at bharrington@jhancock.com
2010 and 2011 were busy as well as reflective years for many in the insurance and financial services industry. Increased regulations and movements pushing toward fee transparency, enhanced fiduciary oversight and competency based trust have left us refining our value propositions. One can only assume the same type of fee transparency and increased fiduciary oversight measures will continue to impact the industry in years to come.
We know that individuals need insurance products and your expertise to help them plan for their future- whether it is life, health, or long-term care (LTC) insurance, college savings strategies, retirement products, etc. It's a fact that individuals are more confident about their future when they work directly with an advisor. There is also plenty of opportunity on the horizon. Lower drug costs when patent changes take effect, play-to-pay rules and the influx of tens of millions of new customers into the health insurance market due to new coverage mandates, all combined, will bring new challenges. Cross selling opportunities will grow significantly, especially for life insurance, annuity and personal lines.
An increased use of social media/mobile technology/apps
The number of viral consumers are growing, especially with the tech-savvy Generation Y group beginning to take notice of the need for financial planning. The future will see enhanced used of mobile technology like health and wellness applications on smart phones, to help determine if insureds are taking steps to be eligible for performance-based cost reductions (another trend discussed further on). Social media may also play more of a role in underwriting. Currently, there are insurers studying social media sites and finding that an individual's consumer data can be just as useful in revealing potential health risks as sending an insurance customer for a blood or urine test.
Sales tip: If allowed by your firm, use insurance key words in your blogs and online posts to help you appear closer to the top on search engines when someone is looking for the types of services you offer. Take advantage of professional networking sites like Linkedin- it's your online rolodex.
Continued focus on retirement readiness- future preparedness
We know that retirement confidence is at an all time low; however, a recent study found individuals with an annuity or LTC insurance felt better about the future. Individual clients need to be asked the critical question: "...do you have a strategy in place that will help provide you with enough money for each month of retirement that will continue for the rest of your life?" An overall financial strategy has become imperative in securing a comfortable financial future.
Automatic features will also continue to drive plan design as leaders in behavioral finance repeatedly extol the virtues of libertarian paternalism with features such as auto enrollment, higher deferral rates, automatic increase programs and default investment options. Planning for long-term care may also become part of the retirement planning process. Currently, only about 8.25 million Americans have stand-alone policies to address it. (American Association for Long-Term Care Insurance, 2009 Sourcebook) There is opportunity for greater coverage.
Sales tip: Make a list of all your clients that would benefit from some type of annuity or similar product with guarantees and give them a call.
A greater emphasis on performance-based measures
Pricing and service will become more focused on performance. This could include things like incentives for healthy behavior. For instance, if individuals can prove they are taking regular, actionable steps toward ensuring they are in good health, they may be eligible for lower rates, i.e. performance-based cost reductions.
Sales tip: Expanded levels of service may help you deepen your relationships with clients and differentiate. You can do that with performance measures when you offer incentives to your best customers. Think about how you can expand your service offering.
Accelerated Customer Centricity
New regulations have prompted insurers to upgrade their data management capabilities. Companies will use this rich consumer data to target more effectively and deliver on their customers wants and needs. Cloud computing will give access to enhanced technologies.
Sales tip: Define your target market and focus your marketing efforts on that group. Avoid taking on clients that are not ideal. Disengage from unprofitable client relationships and improve your bottom line.
A holistic approach to wealth management
There is a definite movement toward a holistic approach to financial planning. Customers are starting to realize they need to take more responsibility for their financial future and more often are giving their financial professional the full picture of their portfolio.
The benefits of seeing the big picture are happier, more prepared individuals. A recent study showed that even throughout the global economic crisis financial professionals who adopt a comprehensive financial services practice double their counterparts in productivity and tripled them in income. Client loyalty is also higher in this model.
Sales tip: Individuals who have a comprehensive financial strategy are more likely to buy additional products to supplement their existing policies because they can see the big picture. Make sure your clients have a comprehensive strategy and look for opportunities to cross-sell.
Increase in fee-based advisors
Fee-based advisors are perceived to have their values more in line with the client because they have an on-going fiduciary obligation. The number of fee-based advisors is expected to double in the near future, according to our data. A driving force is the new fiduciary service definition which will include advisors who are providing advice to a retirement plan. Some fee-based advisors may be well positioned to take advantage of this opportunity.
Sales tip: There will be an increase in the need for financial advisors due to the growing need for advice on portfolio management and income distribution, particularly for young boomers. Consider expanding your practice to include financial advisory services.
Continued heavy use of target date/target risk funds
Individuals often need help building well-diversified portfolios. Providing a solution for individuals who want and need asset allocation help is a top priority. Target date and target risk funds continue to be among the most popular choices.
Sales tip: Never make the mistake of assuming you manage the lion's share of your clients' assets. Take advantage of every client interaction to find out more about them and discuss the breadth and depth of your service offering, like offering asset allocation funds.
Continued rise of the independent professional
The trend of financial professionals leaving wirehouses and moving to independent broker/dealers where they can be their own brand, run their own business and be more of an entrepreneur will continue. A recent study found that approximately 25 million people, that's one in four Americans, ages 44-70, are interested in starting a business in the next 5 to 10 years.
Sales tip: Research shows the majority of your clients will follow if you decide to leave. Making a move is a challenge and an opportunity to gain focus over your client base and find your best customers.
Strategically seeking out partners that enhance your value proposition
Providers have a lot of service and support to offer and that trend will continue. There will be more access to professional development, resources, designations, cutting-edge tools, industry experts and good coaching models from the forward thinking organizations.
Sales tip: The right partner will give you all the tools, support, and service you need to help you succeed every step of the way from prospecting to retention. Make sure you're getting everything you need from your relationships and it can help impact your bottom line.
These are some trends you may see in the coming years. No matter what the trends, there looks to be continued volatility in the market and an increase in new regulations. All this helps ensure that clients will need financial professionals more than ever.
More Than Half of Americans Feel Financially 'Under-Protected'
One in Five Americans Report Feeling Severely Under-Protected
Tapping Into National Feelings of Financial Unpreparedness
New York Life Launches Personal Protection Index for Americans to Check Their Own Protection Level
NEW YORK - Americans are reporting concern about how financially protected their families are, according to a new survey of over 1,000 adults aged 30 and older conducted by Ipsos Public Affairs. The survey was released today and sponsored by New York Life Insurance Company.
Thinking about any savings accounts, emergency funds, or life insurance coverage they may have, the majority, 53%, report that they are financially under-protected, with one in five (19%) believing they are severely under-protected. Just 46% describe their family as being protected when it comes to their finances, the survey revealed.
"The survey reinforces what our agents are hearing in their communities: Significant numbers of Americans are concerned that their financial resources are not adequate to meet both the challenges of today's economy and their future obligations, whether that's paying for their children's educations or their own retirements," said Mark Pfaff, executive vice president in charge of U.S. Life Insurance & Agency, New York Life. "This is where knowledgeable advisors can make an enormous difference by helping people plan ahead."
Some interesting findings from the survey include:
- Parents are less likely to feel that their family is protected than are adults without a child under 18 (36% vs. 51%).
- Older adults- those 60 and up- are much more likely than adults ages 30-59 to feel that their family if financially protected (63% vs. 39%).
- A large gap also emerges across income groups; those with a household income of $50,000 or more are more than twice as likely as those with a lower household income to feel that their family is protected financially (61% vs. 27%).
- Others who are most likely to feel financially protected include college graduates (60%) and retirees (63%).
"At this time of year many Americans are watching professional football and may be referring to the New York Life Protection Index, launched last year, to gauge their favorite team's ability to protect their quarterback- often a key driver in the team's ultimate success. At the same time, they may be asking themselves, how protected am I? Or how protected is my family? We are pleased to offer the Personal Protection Index, which will provide a good gauge of your own financial protection level," added Pfaff.
The New York Life Personal Protection Index, launched this month, uses stated and industry-standard income replacement goals to estimate how much you might need for your retirement and survivors, as well as funds for unexpected needs. Once you input your current age, income and resources, you receive a Personal Protection Index number, which indicates, on a scale of 0 to 100 percent, with 100 being very protected and 0 being severely under-protected- how your family currently stands.
"We hope Americans will use the Personal Protection Index to get a general idea of how well they are financially protecting themselves, their family and their loved ones. And just like a quarterback, when you're well protected, everyone on your 'team' has an opportunity to win," added Pfaff.
Survey Methodology
These are some of the findings of an Ipsos poll conducted November 10-14, 2011. For the survey, a national sample of 1,011 adults aged 30 and older from Ipsos U.S. online panel were interviewed online. Weighting was then employed to balance demographics and ensure that the sample's composition reflects that of the U.S. adult population according to Census data and to provide results intended to approximate the sample universe. A survey with an unweighted probability sample of 1,011 and a 100% response rate would have an estimated margin of error of +/- 3.1 percentage points 19 times out of 20 of what the results would have been had the entire adult population of adults aged 30 and older in the United States had been polled. All sample surveys and polls may be subject to other sources of error, including, but not limited to coverage error, and measurement error.
About New York Life Protection Index
The New York Life Protection Index is the authoritative measure of a team's aptitude in pass protection. In today's football, the 'golden age' of passing, a pro football team's ability to protect the quarterback is a key attribute to winning games. The New York Life Protection Index is owned by New York Life Insurance Company, and was developed in 2010 by sports and entertainment agency STRATEGIC, along with STATS, LLC, a global sports statistics and information company. While the New York Life Protection Index is calculated using a proprietary formula, the fundamentals are comprised of the length of a team's pass attempts combined with penalties by offensive lineman, sacks allowed and quarterback hurries and knockdowns. The New York Life Protection Index is updated weekly throughout the regular season and available at www.newyorklife.com/protectionindex.
About New York Life
New York Life Insurance Company, a Fortune 100 company founded in 1845, is the largest mutual life insurance company in the United States and one of the largest life insurers in the world. New York Life has the highest possible financial strength ratings currently awarded to any life insurer from all four of the major credit rating agencies: A.M. Best (A++), Fitch (AAA), Moody's Investors Service (Aaa), Standard & Poor's (AA+). Headquartered in New York City, New York Life's family of companies offers life insurance, retirement income, investments and long-term care insurance. New York Life Investments provides institutional asset management and retirement plan services. Other New York Life affiliates provide an array of securities products and services, as well as retail mutual funds. Please visit New York Life's Web site at www.newyorklife.com for more information.
Among American Workers, Women Much More Concerned Than Men
with Keeping Up With Monthly Expenses
Survey: The the weak economy is weighing heavily on the minds of American workers
SPRINGFIELD, Mass., - In a recent nationwide survey of American workers who are eligible to participate in an employer-sponsored defined contribution retirement plan, both men and women are concerned about saving enough for retirement, but for women, just keeping up with monthly expenses is an even bigger concern. The proprietary survey, sponsored by MassMutual Retirement Services and conducted by Brightwork Partners, indicates that the weak economy is weighing heavily on the minds of American workers.
Among survey respondents, 31% believe the United States will be in a recession in the next 12 months and 38% are somewhat or very concerned about losing their jobs. Overall, the biggest financial worry is "just keeping up with monthly expenses" (21%) closely followed by "saving enough for retirement" (18%) -- but there are important distinctions between genders and age groups:
Saving enough for retirement is the biggest financial worry for men, but women are far more concerned about just keeping up with monthly expenses, in fact, more than twice as many women are concerned about monthly expenses than saving enough for retirement.
Interestingly, respondents under age 30 have significant concern about saving to buy a home, indicating that there is still an appetite for home ownership among younger workers. Keeping up with monthly expenses was their only larger concern.
The top two concerns for people over the age of 60 are "expense of catastrophic illness" and "long term care for yourself or your spouse when you need it, two factors that have potential to rapidly deplete retirement savings.
In terms of being able to retire, 35% of respondents have considered delaying retirement beyond their original target date, and that percentage jumps to more than 50% for people currently age 50 and older. In addition, 64% of people expect to work at least part-time in retirement and 54% expect they will need to reduce their standard of living. Women expect to work longer than men, with an average expected retirement age of 66.9 compared to 65.6 for men.
On a positive note, the percentage of respondents who took action likely to improve their retirement savings was far higher than that of the respondents who took action that could harm their chances for a comfortable retirement. The three most frequently cited positive actions taken by respondents were increasing savings percentages through workplace retirement plans (19%), reallocating existing portfolios (19%), and contributing to a regular IRA (18%). Actions taken that could harm respondents' retirement savings outcome included decreasing contribution percentages in their workplace retirement plan (8%), taking loans (8%), stopping saving in their workplace retirement plan altogether (7%), or making hardship withdrawals (4%).
The data also shows that there is plenty of opportunity for retirement plan advisors to help participants prepare for retirement. Only 29% of respondents currently have, or have had in the past five years, a relationship with a personal financial advisor.
"It's encouraging to see that a significant number of participants are still taking positive actions towards securing an adequate retirement income despite the very uncertain economic conditions," says Merl Baker, principal, Brightwork Partners. "That said, there are still a lot of Americans who need help. Tools that enable participants to manage to a better retirement outcome are clearly part of the support that is needed," adds Baker.
"This data clearly captures the uncertainty that is pervasive in today's economic environment and, at the same time, it shows that saving for retirement is a top-of-mind concern. Research such as this continues to fuel MassMutual's efforts in the realm of plan health and participant readiness, and makes us better equipped to help participants understand what it will take for them to retire," says Elaine Sarsynski, executive vice president of MassMutual's Retirement Services Division and chairman and CEO of MassMutual International LLC. "Providers like MassMutual who offer tools to show retirement plan participants what they can expect in terms of projected monthly income in retirement, this is the kind of information that truly helps participants understand their situation and 'see it' in a way that is meaningful," she adds.
The nationwide survey was conducted online between June 29 and July 29, 2011, and included 2,170 defined contribution plan participants who are eligible to participate in a 401(k), 403(b), 457 or similar workplace retirement plan.
Earlier this year, MassMutual introduced its RetireSmart(SM) Ready tool that provides a simple way for retirement plan participants to calculate and implement saving rates and asset allocation strategies that may significantly increase their chances of achieving enough income in retirement. The RetireSmart Ready tool, which is personalized for an individual participant's goals and preferences, is available to all participants on the MassMutual retirement services platform. To access the tool, participants simply log into their retirement account here .
In addition, MassMutual introduced its PlanSmart(SM) Analysis report, a plan-level solution that assesses the percentage of employees who are on track to replace a specified level of income in retirement. RetireSmart Ready and PlanSmart Analysis are key elements of MassMutual's award-winning participant engagement platform. Together, they put actionable tools in the hands of retirement plan advisors, plan sponsors and participants with the goal of helping more participants achieve their desired income level in retirement.
About MassMutual
MassMutual's Retirement Services Division has been serving retirement plans for 65 years. It offers a full range of products and services for corporate, union, nonprofit and governmental employers' defined benefit, defined contribution and nonqualified deferred compensation plans. It serves approximately 1.3 million participants.
Cross-Generational Confusion
Americans Overwhelmed About Prospect of Saving for Retirement
NEW YORK - Results of a national survey designed to gauge Generation Y's, Generation X's and Baby Boomers' perceptions of the economy and its effects on their financial futures found that, regardless of age or gender, a significant percentage of Americans are confused about the best way to plan and manage a financial strategy.
Released yesterday by The Guardian Life Insurance Company of America (Guardian), the survey also revealed pervasive uncertainty about the economy, coupled with the belief that it is headed in the wrong direction, as a leading source of trepidation at every life stage about the ability to save for a comfortable retirement. A sense of being overwhelmed about retirement planning further heightens the distress many Americans feel about financial security over the long term. While nearly all respondents (92%) surveyed say they are confident in their personal financial decision making, almost four in ten of the general population (39%), more than half (52%) of Gen Y and a third of Gen X don't even know where to begin when it comes to planning for retirement.
"The survey results clearly indicate a national need for comprehensive, lifelong financial education to equip the public with the guidance and tools they need to build a sound strategy for financial security, from young adulthood to retirement, in turbulent times and calmer cycles alike," said Michael Ferik, senior vice president of Individual Life at Guardian, who presented the survey results today at Guardian's third annual issues forum, Financial Guidance for the Whole Life: Generations Y, X & Boom. "Today's forum of financial experts initiated a discussion that we hope will serve as a springboard to a national agenda on how the public and private sectors can better serve Americans at every stage of life to feel that they have some control over their financial destiny," Mr. Ferik continued.
Joining Mr. Ferik in the panel discussion was Carol O'Rourke, a Certified Financial Planner and executive director of the Coalition for Debtor Education, a nonprofit organization housed at Fordham University Law School, and Lawrence J. White, Ph.D., distinguished economics professor and economics department deputy chair at New York University's Stern School of Business and co-author of Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance, published earlier this year. Noted author, journalist and personal financial advice expert Carmen Wong Ulrich served as the forum's moderator. The former Money Magazine editor and current Glamour Magazine money expert can also be seen on NBC's Today Show, MSNBC and CNN.
Among factors the survey looked at were people's perceptions of the direction the economy is heading. From a generational standpoint, Gen X (82%) believes the economy is headed in the wrong direction and feels the least financially secure (47%) of any group. In comparison, three-fourths of the general population also shares a pessimistic view of the economy's direction, while more than one-third (37%) do not have a sense of financial security. Gen X members (59%) are also the most concerned that they will not have enough money saved for retirement, perhaps reflecting the sequence of economic forces that have impacted the continuum of their working lives - from the 1987 stock market crash to unprecedented levels of college debt to the current housing slump.
Survey respondents who own Whole Life insurance (66%) are the most confident that they will have saved enough for a comfortable retirement. This feeling of security may be due to their knowledge that the cash value of a Whole Life policy can be accessed on a tax-advantaged basis for supplementing retirement income1,2 if necessary, Mr. Ferik offered. However, among the general population, the survey found that there is a lack of understanding about how different types of life insurance work. For example, Americans in general are divided about whether the smarter approach is to buy Term Life insurance and invest the rest, or to buy Whole Life insurance and treat it as part of one's overall financial portfolio (40% each).
As for how their perceptions of the economy have impacted their overall financial decision making, the survey revealed that two-thirds of respondents from the general population (65%) are more likely to keep their money in a savings account rather than invest it, despite the fact that 62% of them feel that a down market is an opportunity. However, most respondents (60%) still believe it is important to keep investing in their retirement fund because the economy is less stable, with skittish Gen X being the exception: 47% of respondents from this cohort believe investing in their retirement fund is actually less important during this time of economic instability.
"Members of Gen X may have been disproportionately impacted by the turmoil of the economic landscape, but this Guardian survey indicates that all Americans are exhibiting uncertainty and, at worst, complete inertia when it comes to financial decision-making," said Mr. Ferik.
"Those of us in the financial services industry know that solutions already exist for people at every stage of life to enhance their economic security. The decision-making tools and financial advice are available. Our challenge is in breaching the cacophony of information and helping people move past inaction. That is the conversation we have started today, and it's one that we must continue, because our society's future may well depend on it."
The full research study may be viewed here.
About Guardian
A mutual insurer founded in 1860, The Guardian Life Insurance Company of America and its subsidiaries are committed to protecting individuals, business owners and their employees with life insurance, disability income insurance, dental insurance products, and offer annuities, funding vehicles for qualified retirement plans, and other financial products. Guardian operates one of the largest dental networks in the United States, and protects more than six million employees and their families at 120,000 companies. The company has approximately 5,000 employees in the United States and a network of over 3,000 financial representatives in more than 80 agencies nationwide.
For more information about Guardian, please visit www.GuardianLife.com.
Meeting the Challenge of Longevity Risk
Taking steps to insure that increasing life expectancy remains a positive for society
By Daniel Ryan
Mr. Ryan is Head of Research & Development for Life & Health at Swiss Re.
Increasing life expectancy is one of the greatest successes of the 20th and 21st centuries. The Organization for Economic Cooperation and Development (OECD) estimates that, in Canada, the ratio of people aged over 65 was 7.9% in 1970, rose to 14.1% in 2010 and will reach 26.3% by 2050. A similar picture exists in most countries around the world, with China's over 65 ratio rising from 8.4% to 23.7% over the next 40 years; Brazil's from 6.7% to 18.8%; and Germany’s from 20.4% to an incredible 31.5%.
These improvements illustrate just how far society and science have come. Medical and healthcare advances, improved living conditions, and healthier lifestyles, have all helped to extend people's lives.
However, increased longevity is not without its problems and will result in significant financial pressure for providers of retirement income. The difficulty stems from trying to calculate how long people will live in the future; this is what is referred to as longevity risk.
History has shown us that the past is not a good guide for predicting future improvements. Longevity risk is an issue that has to be addressed now. Underestimating life expectancy by just one year 'a seemingly small miscalculation' can increase a pension fund's liabilities by up to five percent
A recent study by Swiss Re, A window into the future: Understanding and predicting longevity, notes that the past two decades have seen a far greater proportion of people living into their 70s and 80s throughout the industrialized world. Greater awareness of the dangers of smoking and developments in the treatment of heart disease are key reasons behind this trend, while potential advancements in the treatment of cancer and dementia could lead to further improvements in life expectancy.
The report explores the need to develop robust, predictive approaches to longevity forecasting that use forward-looking scenarios that consider aspects such as social factors and medical treatments. This would require a collaborative approach between medical experts, actuaries and demographers.
A predictive, forward looking mortality model will not solve the potential financial problems caused by dramatic increases in life expectancy throughout the world. However, we believe that such an improved approach to assessing future longevity is one of the essential components needed to create an overall solution to the financial effects of our aging society.
Once we are more confident in predicting longevity we will be in a better position to manage the associated financial risks.
Financial costs
At present, more than $20 trillion of pension assets around the world are exposed to longevity risk, primarily in the US, Canada and Europe.
More and more governments are taking action through raising retirement ages and looking at ways to transfer the burden of pension provision from the state to the individual. What's more, there are many examples of employers who once provided defined-benefit pension schemes passing on the risk of funding a retirement income to an individual through defined-contribution plans.
These trends will, over time, increase the demand for private solutions. The US government, for example, is planning to delay retirement benefits until age 67 by 2022 thus placing the onus on individuals to make sufficient provision for their retirement and their dependents.
The good news is that there are currently practical solutions for pension funds and life annuity writers in order to help them manage their longevity risk. One which people are becoming more and more aware of is longevity insurance, or an 'indemnity style' longevity swap. With this solution only the longevity risk liabilities are transferred from pension plans to an insurer. The pension plan retains control of its investments and assets but is freed from its longevity risk in exchange for premium payments over, say, 60-years, rather than up-front payments.
Reinsurers can provide insurers with additional capacity for taking on longevity risk, and thus far reinsurers have been the ultimate holders of longevity risk for most of the longevity swaps that have concluded.
Reinsurers are the natural home for this risk as longevity is an obvious offset to the mortality business on their books. It is also uncorrelated to reinsurers' risks in the property & casualty market making them uniquely positioned to accept this risk.
Another potential solution is a 'derivative' longevity swap, which is a more traditional banking solution. However, unlike longevity insurance, this option is likely to be for shorter terms than the full lives of pension fund members or annuitants. They are also based on a population mortality index which carries a greater degree of basis risk or tracking error.
Next steps
Insurers need to continue to work together through their industry bodies and in partnership with their reinsurers to manage longevity risk effectively. As regulatory regimes, such as the European Union's Solvency II, recognize reinsurance as appropriate mitigation against longevity risk, this will help them support capacity for annuities and other innovative products to fund people's retirement.
Employers and pension plan managers who currently provide a guaranteed retirement income for their employees need to examine their options carefully. They should appreciate the risk of under-reserving against member longevity and should consider ways to mitigate against future, increased liabilities.
Employers and pension plan managers need to assess their potential longevity exposure and decide whether it is best to retain it or pass some, or all, of it onto a third party that may be better placed to take on, and aggregate, the risk. Such a third party should have made the appropriate investment - in terms of both funding and resource - into an effective mortality model and hold the financial capacity to manage such a long-dated commitment.
Stakeholders and their advisors should consult widely before entering into any decision and make sure that any solution is durable as well as adaptable in the long term.
While at present there is substantial longevity capacity available for reinsurers, it is finite, and is dwarfed by accrued global exposures. It is widely recognized across the industry that it will not be adequate in the long term. As more and more longevity exposure holders seek to hedge their risks, current capacity will come under additional strain. This increased pressure on capacity will push prices upwards in the medium term unless a suitable alternative home for the risk can be found.
The capital markets can offer probable capacity because they can bring investors, who want to access longevity as an asset class, together with the holders of longevity exposures. But this market is still in its infancy and will only develop over time. The challenge is to create a sufficient momentum through the current infrastructure so that capital market capacity can be established by the time insurance capacity starts to become scarce.
By insurers working with reinsurers, and, in the wider world, with pension plans and governments, the trend for increasing life expectancy can be addressed financially; thereby remaining a positive point for society as a whole.
For more information on longevity, and access to a number of reports on the topic, please go here.
The Hartford launches simple, patented solution
for generating guaranteed retirement income
Offers revolutionary design that provides pension-like retirement income in $10 monthly increments
Simsbury, Conn., The Hartford has launched The Hartford Lifetime Income, a simple, patented income solution delivered through 401(k) plans to provide a guaranteed paycheck for life.
"We expect Hartford Lifetime Income, with its revolutionary, simple design, will change the retirement income game," said Patricia Harris, the actuary who designed the product for The Hartford. "It offers predictable income backed by a fiduciary guarantee and it's portable, so no matter what obstacles emerge on the road to retirement, you can have confidence that Lifetime Income is guaranteed to last as long as you do."
Patented for its revolutionary design, Hartford Lifetime Income simplifies income planning for retirement savers. Retirement plan participants can purchase income shares that provide $10 of guaranteed monthly income for life. That means 50 income shares will generate $500 a month.
The cost of each income share varies with the plan participant's age and current interest rates, and is predicated on retirement at age 65. The amount of income from each unit can increase if the participant retires later or can decrease if the participant retires earlier. Retirement plan participants can invest in Hartford Lifetime Income through regular payroll deductions or lump-sum payments.
"The simplicity of design - particularly the concept of $10 income shares - helps make retirement income planning easier for 401(k) plan participants," Harris said. "With assistance from our income planning tools, participants can quickly and easily assess how much monthly income they need in retirement. You can then use Hartford Lifetime Income to build a fixed stream of income, share by share," she said.
The income shares are portable, which means that a plan participant can retain the shares and the guaranteed income they provide if he or she changes employers, or the plan sponsor changes providers or recordkeepers. Guarantees are based on the claims-paying ability of Hartford Life Insurance Company.
Hartford Lifetime Income is a fixed deferred annuity imbedded as an investment option within 401(k) plans, which means it is not affected by volatility in the equity markets. The investment option is also included in the Fiduciary Assure program, an optional, third-party co-fiduciary service provided by Mesirow Financial at no additional cost.
Hartford Lifetime Income is initially available to retirement plan sponsors newly contracted with The Hartford and their plan participants.
The U.S. Government Accountability Office (GAO), noting the growing risk of Americans outliving their assets as life expectancies increase, has encouraged the use of income products such as annuities in defined contribution plans. "With the declining availability of DB (defined benefit) plans and the lifetime retirement income they frequently provide, a default annuity in DC (defined contribution) plans would help to promote lifetime retirement income for more (plan) participants"” the GAO reported.
"Americans are living longer than ever, and that means their retirement income needs to last longer," Harris said. "Hartford Lifetime Income is a highly efficient way to create a predictable, pension-like retirement income that you cannot outlive."
About The Hartford
The Hartford Financial Services Group Inc. (NYSE: HIG) is a leading provider of insurance and wealth management services for millions of consumers and businesses worldwide. The Hartford is consistently recognized for its superior service and as one of the world's most ethical companies. More information on the company and its financial performance is available at www.thehartford.com. Join us on Facebook at www.facebook.com/TheHartford. Follow us on Twitter at www.twitter.com/TheHartford.
Americans' Trust in Retirement Reaches a Tipping Point
-Retirement confidence drops nearly 20% in 2011, hitting four-year low;
- One in five working Americans plan to never retire;
- Owners of annuities, long-term care insurance feel more confident
WELLESLEY, Mass. - American workers' trust in their future retirement has reached a four-year low, according to yesterday's U.S. release of the Unretirement Index, a poll of nearly 1,500 working Americans by Sun Life Financial Inc. (NYSE:SLF, TSX:SLF). After remaining stable for three years, retirement confidence dropped nearly 20% this September compared to a year earlier, according to the survey.
"we believe the higher confidence of respondents across all wealth levels who own either variable annuities or long-term care insurance vehicles provides a positive wake-up call: Americans can take action to help secure their future and feel more secure about their golden years."
Sentiment compared to last year deteriorated in all five of the Index’s components, with the greatest drop (-31.7%) occurring in confidence about the benefits needed to retire, including defined benefits plans and employee health benefits.
Highlights:
- Only 23% of working Americans feel very confident that they will meet basic living expenses in retirement, plunging from double that number (42%) last year.
- One in five working Americans say they will never retire.
- Confidence in the future of Social Security has plunged over the last four years, to 9% in 2011 from over double that (22%) in 2008.
- Confidence about Medicare benefits has also plummeted, to 8% in 2011 from over double that (20%) in 2008.On the positive side, at all wealth levels, respondents who expect to receive guaranteed lifetime income from annuities by age 67, or who own long-term care insurance products, feel significantly more confident about retirement.
"This represents the most significant drop in retirement confidence we've seen in the four years we've compiled the Sun Life Unretirement Index," said Wes Thompson, President, Sun Life Financial U.S. "Although the recession officially ended in 2009, average Americans feel that the downturn has not ended for them, which is substantially eroding their trust in their retirement future."
"However," added Thompson, "we believe the higher confidence of respondents across all wealth levels who own either variable annuities or long-term care insurance vehicles provides a positive wake-up call: Americans can take action to help secure their future and feel more secure about their golden years."
More Trends in the Unretirement Index
The Unretirement Index is scored on a scale of 0 to 100, with 100 reflecting highest confidence about retirement. The Index score dropped from near the midrange (44) in September 2010 toward the bottom third of the scale (36) in September 2011, down 18.2%.
The overall Index is a composite score based on five subject areas, which all revealed declines in confidence compared to last year. On a year-to-year basis, confidence dropped as follows in the following subject areas: employee benefits (-31.7%), the economy (-25%), government benefits (-21.6%), personal finances (-13.9%), and personal health (-13.2%).
The fall in sentiment across all five subject areas in 2011 represents a stark contrast from 2010, when confidence dropped regarding the economy and personal finances yet rose regarding personal health and employee benefits.
Methodology
Sun Life Financial created the Unretirement Index in 2008 to gauge how changes in the economy, financial markets, societal forces, and public policy affect working Americans’ confidence about retirement. The margin of error is +/-2.5% at a 95% confidence level.
In September 2011, Interviewing Service of America conducted telephone interviews using a random digit dial (RDD) sampling method. Quotas and weights were applied to gather a sample of 1,499 people working full-time, part-time, or in job transition, which was representative of the U.S. working population between the ages of 18 and 66. The sample was also representative in terms of gender and four-region census break. Analysis and construction of indices involved the application of factor analysis. Final indices were based on summated averages across the attributes making up an index.
You can see the full report here
About Sun Life Financial
Sun Life Financial is a leading international financial services organization providing a diverse range of protection and wealth accumulation products and services to individuals and corporate customers. Chartered in 1865, Sun Life Financial and its partners today have operations in key markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China, and Bermuda. In the United States and elsewhere, insurance products are offered by members of the Sun Life Financial group that are insurance companies. Sun Life Financial Inc., the holding company for the Sun Life Financial group of companies, is a public company. It is not an insurance company and does not offer insurance products for sale in the United States or elsewhere, and does not guarantee the obligations of its insurance company subsidiaries. Product offerings may not be available in all states and may vary depending on state laws and regulations.
As of June 30, 2011, the Sun Life Financial group of companies had total assets under management of US$492 billion. For more information, please visit www.sunlife.com/us. Sun Life Financial Inc. trades on the Toronto (TSX), New York (NYSE), and Philippine (PSE) stock exchanges under the ticker symbol SLF.
Guaranteed Income in Retirement Trumps Having 401(k) Plan
Survey Finds Non-Retirees Searching for Certainty
MINNEAPOLIS - As financial markets continue to fluctuate and place retirement portfolios at risk, non-retired Americans are showing a clear desire for guaranteed income in retirement according to a survey by Allianz Life Insurance Company of North America (Allianz Life). When asked to rate several factors related to creating a more secure retirement, the most popular selection was 'having a guaranteed stream of income in retirement' (86 percent), outranking 'having a 401(k)/403(b)/457 plan' (71 percent).
When asked to rate their own personal needs, nearly half (47 percent) of non-retirees rated a guaranteed stream of income as the top retirement need they have yet to acquire in order to feel more secure. This was deemed far more important than the next highest selection- 'a job that gives me a 401(k)/403(b)/457 plan' (27 percent) - and more than twice as important as 'having a diverse portfolio of investments' (22 percent).
"Especially in an environment where equity markets - and therefore 401(k) balances - can swing wildly within a week or a day, it is not surprising to see Americans expressing far more interest in the need for guaranteed retirement income versus the balance of their retirement account," said Allianz Life President & CEO Gary C. Bhojwani. "Although the idea of a guaranteed stream of income continues to resonate with Americans, most pre-retirees don’t own annuities or are apprehensive about adding one to their retirement plan. The simple fact is that annuities are the only retirement income products that pool risk, and thereby can guarantee that all annuity owners will have income for the rest of their lives, regardless of how long they live."
The contrast between a desire for guaranteed income in retirement and the number of non-retirees who actually have some form of guarantees is alarming. Only 8 percent of non-retirees say they own an annuity and less than a quarter (18 percent) have guarantees through a pension. Nearly 40 percent indicate they own no retirement or investment products of any kind. Furthermore, 26 percent say they still have no idea what they need to acquire in order to feel their retirement will be secure.
"Our survey results are confirming that Americans want more guarantees in retirement but simply don't know what to do to create financial certainty," added Bhojwani. "More education is clearly needed about annuities and how they can help protect a portion of savings and provide steady, predictable income throughout a person’s retirement."
About Allianz Life
Allianz Life Insurance Company of North America has been keeping its promises since 1896. Today, it carries on that tradition, helping Americans achieve their retirement income goals with a variety of annuities and life insurance products. As a leading provider of fixed index annuities, Allianz Life is part of Allianz SE, a global leader in the financial services industry with nearly 155,000 employees worldwide. Based on its revenue, Allianz SE is the 20th largest company in the world (Fortune Global 500, August 2010).
Increased Awareness of Longevity is Not Matched
with Knowledge of Expenses and Income Needed for Retirement
New MetLife Retirement Income IQ Study
WESTPORT, Conn. - Recent findings from the 2011 MetLife Retirement Income IQ, a 15-question quiz on retirement issues conducted by the MetLife Mature Market Institute, shows Americans have quite a way to go to learn what they need for a financially secure retirement. Of the 1,213 pre-retirees aged 56 to 65 who took the quiz, the majority answered only five of the 15 questions correctly, leaving persistent misperception and misunderstanding in a number of core areas, such as life expectancy, inflation, retirement income/savings, long-term care insurance and to some extent Social Security. In the 2008 version of the study, most respondents correctly answered six of the 15 questions. The 2011 study also asked a number of questions related to additional aspects of Americans' post-retirement income needs.
Everyone knows they're likely to live longer, but most don't realize that can mean living past age 85 and they fail to calculate how much money they will need for a steady and lasting income
On the positive side, respondents are recognizing that they will live longer and that they will be dependent on Social Security and other steady lifetime income for their prolonged retirement. An increased number of respondents feel Social Security and Medicare are more important compared with five years ago (45% in 2011 vs. 33% in 2008), and 45% of those surveyed said they are likely to work longer than previously planned. However, only 17% knew that delaying the collection of Social Security by three years would add 24% to the amount they receive.
Only 45% knew that experts believe retirees will need 80 to 90% of their pre-retirement income to maintain their current standard of living. Nearly three in ten (29%) respondents incorrectly believe that retirees should limit the percent they withdraw from their savings each year to 7 to 10%, and 11% believe they should plan to withdraw between 11 and 15%. In reality, experts recommend limiting the percent retirees withdraw from their savings each year to 4 to 6 %.
The respondents' average estimate of what a couple would need in pre-retirement income to cover their essential living expenses (i.e., housing, food, health care, transportation, insurance and taxes) was 61%, very close to informal estimates that about 60% is needed to take care of the absolute basics. Yet, the biggest concern expressed was having enough retirement income to cover them.
"Everyone knows they're likely to live longer, but most don't realize that can mean living past age 85 and they fail to calculate how much money they will need for a steady and lasting income," said Sandra Timmermann, Ed.D., director of the MetLife Mature Market Institute. "The 'replacement ratio' of the percent of pre-retirement income necessary to manage essentials, including basic expenses, in retirement is often underestimated and too many people overestimate how much of their savings they can safely withdraw each year. Employers and others advising Americans should be helping pre-retirees to 'connect the dots' so, given the uncertain economic climate, they can have a clear picture of their prospects and the financial income strategies needed."
Key findings from the study include
- Sixty-two percent of those surveyed in 2011 realize that the greatest financial risk facing retirees is longevity, compared with 56% in 2008 and 23% in 2003.
- When asked about concerns during retirement, the number one answer, by far, was having enough income to cover essential expenses (32%), followed by the ability to afford health care (18%).
- The majority (87%) of respondents have taken steps toward ensuring adequate income for retirement, such as increasing their contributions to retirement plans or extending their working years. Just under two-thirds (62%) of them are currently seeking financial product advice.
As the options for retirement income sources have expanded, more attention is being given to products such as reverse mortgages, but there is still a general lack of knowledge. Almost one-quarter (24%) correctly identified that a reverse mortgage is accessible only to homeowners age 62 or older, but more than half (54%) were unaware that a reverse mortgage can be used to purchase a primary home.
After years of public education on long-term care costs, 42% of Americans still incorrectly believe that health insurance, Medicare or disability insurance will cover the costs of long-term care.
Pre-retirees are especially hard-pressed to make decisions based on inadequate information and knowledge, and do not fully understand the need for planning that accounts for both savings to fund their retirement and create an income strategy that will last their lifetimes.
Methodology
The 2011 MetLife Retirement Income IQ, which included 15 intelligence-quotient questions and an additional set of nine questions to address respondents' retirement security and planning, was conducted by the MetLife Mature Market Institute and administered online by GfK North America to 1,213 pre-retirees in June 2011. Participants aged 56 to 65, working full-time, within five years of retirement, who were the co- or primary household financial decision-maker qualified for the survey. Data were weighted based on gender, education and occupation. The margin of error for the survey was +/- 3 percentage points.
The MetLife Mature Market Institute
The MetLife Mature Market Institute is MetLife's center of expertise in aging, longevity and the generations and is a recognized thought leader by business, the media, opinion leaders and the public. The Institute's groundbreaking research, insights, strategic partnerships and consumer education expand the knowledge and choices for those in, approaching or working with the mature market.
The Institute supports MetLife's long-standing commitment to identifying emerging issues and innovative solutions for the challenges of life. MetLife, Inc. is a leading global provider of insurance, annuities and employee benefit programs, serving 90 million customers in over 50 countries. Through its subsidiaries and affiliates, MetLife holds leading market positions in the United States, Japan, Latin America, Asia Pacific, Europe and the Middle East. For more information, please visit: www.MatureMarketInstitute.com.
Playing Catch-Up in the 3rd and 4th Quarter
by Herbert K. Daroff, J.D., CFP
Mr. Daroff is affiliated with Baystate Financial Planning, Boston. He can be reached at hdaroff@baystatefinancialplanning.com
Current Strategies for Accumulation and Income
For people with a shorter window, within 10 years, for example, the recent volatility in the financial markets may have resulted in them losing sizable portions of their retirement funds. What are the options available to play catch-up?
Let's start with some basic science. If you have a portfolio value of $100,000 and lose 20%, you now have $80,000. It takes 25% growth ($20,000 on $80,000) to recover to $100,000. It takes more 'work' to recover after a lose (lift it back up) than it takes to minimize the risk of it falling in the first place.
It's actually worse than that. If you have a portfolio with an anticipated 10% return (very hypothetical), then you expect your investment of $100,000 to be $110,000 at the end of period one and $121,000 at the end of period two. However, if at the end of period one, you are at $80,000 (having lost 20% instead of gaining 10%), you need more than a 50% return to get you back to $121,000 (50% return on $80,000 is $40,000, which results in $120,000 and your track was expecting $121,000).
What do many investors do? They frequently get too aggressive and try to make up the difference in one year. That puts even greater risk of loss on the portfolio. It is important to remind these clients that even if they are within 10-years of STARTING to take retirement income, they don't need the full recovery on the first day of distributions. Their time horizon may still be 20-30 years, or more (e.g., 55 year old retires at 65, but lives to 85-95). It is worth mentioning that buying when the market is down is a good idea. So, accelerating planned retirement contributions before the end of the year should be considered.
The other paths, of course, are things like:
- Delay retirement (not a very popular choice, but should be considered)
- Reduce current standard of living (also not very popular) and set aside more into retirement funds
- Reduce planned retirement standard of living (still not popular) by taking smaller distributions over the planned years between retirement and death or reducing your retirement expenses by
1. Taking fewer trips
2. Moving in with your children
3. Taking tenants into your home
4. Replacing reTirement with reHirement by planning to receive some form of compensation during retirement
5. Living a shorter amount of time (not realistic) - but, if you move in with your kids, you may want to add:
-Winning the lottery
-Marrying wealth
Since it takes more effort to recover, how do you minimize the downside in the first place?
1. Invest for Safety. Shift assets to cash and bonds. The problem with this strategy is that it typically results in loss of purchasing power net after income taxes and inflation.
2. Buy financial hedges (e.g., puts, calls, stop/losses/ collars, etc.).
a. With mutual funds, this is very difficult to do, if not impossible.
b. With individual securities, it can be very expensive to protect each position.
c. With ETFs/ETNs, it is both easier and less expensive to protect the downside.
3. Invest in Absolute Return portfolios (vs. the traditional relative return investments).
a. Relative Return (traditionally) compares itself to the S&P 500 and/or other indicies. For the most part it tracks up and down with the markets (i.e., it is correlated with the market).
b. Absolute Return invests in assets that are NOT correlated with the S&P 500, for example. It looks at 'alternative' investments, commodities, real estate, etc. It is more heavily invested outside of the U.S. than a relative return portfolio. For example, a relative return allocation may include 5-25% international, an absolute return portfolio may allocate 40-70% international.
4. Take advantage of the lifetime benefit riders in variable annuities. These can lock in the periodic peaks in the portfolio and/or compound the peaks at a guaranteed rate even if the market value of the holdings in going down.
NOTE: Please remember, this is a conversation about retirement income, not about withdrawals of large amounts (liquidity).
Then, there is life insurance.
Life insurance can be used to replace the value already lost in the retirement accounts. It enables the retiree to access PRINCIPAL as well as income, knowing that the principal will be replenished upon death for a surviving spouse and/or heirs.
So, what should your do?
Be patient. Don't try to 'catch up' too quickly. That could reduce your portfolio even further. As I have described in previous articles, I have developed four portfolios for my retirement planning, instead of the traditional two.
1. One of the two traditional portfolios works best when tax brackets are lower for any of my retirement years. Of course, these are qualified retirement plan accounts (e.g., profit sharing, 401(k), 403(b), IRA, SEP, SIMPLE, etc.). You contribute before tax dollars (take the tax deduction now). Accumulations are tax-deferred. However, distributions are subject to ordinary income taxes on principal and growth. These portfolios are based on the assumption that retirees are in lower tax brackets when they retire because they need to take lower income during retirement than they did during their working careers. The problem with this logic today, of course, is that we have been living in a period of the 3rd lowest top tax bracket in our history. Only 1986 at 28% and 1929 at 25% are lower than the 35% current top tax bracket. Years ago, when I was making about one-third of what I am making now, I was in a 50% income tax bracket. So, you need to diversify your retirement income portfolio by adding other portfolios that have different characteristics.
2. The second of the two traditional accounts works best when investment markets are up in any year during retirement. Most everyone has a savings and/or investment account for their net after expenses accumulations. You contribute net after tax dollars that accumulate with current taxation (i.e., you receive 1099s and K-1s every January and pay taxes on interest, dividends, long and short term gains). Because you paid taxes all the way along, you typically can access the account principal tax-free and may only have to pay capital gains on the growth that has not already been taxed.
3. One of the new portfolios works best when investments are down. Rather than bailing out of the market when it goes down (remember buying HIGH and selling LOW is not a good strategy), developing a hedged portfolio allows you to protect against most, if not all, of the full downside of financial markets. As described above, this can be accomplished with financial hedges, absolute return portfolios, and lifetime benefit riders available through variable annuities. These hedging benefits can be a stand-alone portfolio or be part of your other portfolios.
4. The other new account works best when income tax brackets are up. These accounts are Roth and Roth look alike accounts. There are only four financial vehicles that allow you to contribute after-tax dollars that accumulate tax-deferred and are then distributed tax-free. These are:
a. Roth IRA - but, many clients still do not qualify based on their income. At least for now, the income limits have been lifted for Roth Conversions. So, IRAs can be converted to Roths. After-tax contributions to an IRA can subsequently be converted to Roth, as well.
b. Roth 401(k) - does not have the income limits. Yet, very few 401(k) plans offer the Roth alternative. This is because very few people recognize the math
i. Contributing before tax dollars that accumulate tax-deferred and are distributed taxable as ordinary taxable income:
EQUAL
ii. Contributing after tax dollars that accumulate tax-deferred and are distributed tax-free
PROVIDED
Income tax brackets remain the same during contribution and distributions
iii. the Roth account is better if tax brackets are higher in retirement than when the funds were contributed
c. 529 Plans - not very good retirement accounts, but work the same way for distributions of qualified higher education expenses
d. life insurance cash value - is both a 529 Plan alternative and a Roth alternative. And, life insurance death benefits can be used to pay the income taxes on a Roth conversion in the year of death. If my financial plan says that I have $1M in qualified retirement plan accounts, then my wife has the use of $5-600,000 net after taxes, depending on future tax rates. However, if I have $4-500,000 of life insurance, then we can convert my retirement accounts to a Roth in advance of my death and pay the income taxes (April 15th of the following year) with the insurance proceeds. Remember, inherited IRAs are not eligible for a Roth Conversion.
Since I already had all four of these accounts in place, with the hedges, my blood pressure did not vary during the ups and downs of the recent volatile markets. I continued to fund my 401(k), in fact, I looked for opportunities to buy LOW by accelerating some of the contributions.
Of course, my retirement plan is very basic. I plan to work until I die and my wife will live off my life insurance.
Perilous Paradox: Women and retirement planning
Unique risks and inadequate planning threaten retirement security
WESTPORT, Conn. - Women who take charge, do the math, plan for contingencies and work with their partners and/or financial advisors have a better chance of securing their finances in retirement than those who shrink from the process, according to a new study from the MetLife Mature Market Institute.
"The risks and costs of 'living long and living female' call for an 'affirmative action' plan. We find that those who plan for a steady stream of income, along with some flexibility for the unexpected, are best prepared for what can be an extended future."
The MetLife Study of Women, Retirement, and the Extra-Long Life: Implications for Planning shows women face a number of unique risks - including longevity, aging single, lower retirement incomes, greater healthcare costs and added caregiving responsibilities - and have not planned adequately to address these concerns, leading to a significant shortfall.
The study examines the thinking and practices of mature women, ages 50 to 70, in the context of the 'extra' challenges they may experience in retirement. According to the report, women expect to live until age 85, some until age 90, and are more concerned than men about affording health care, long-term care and outliving their assets. Yet, slightly more than half of the women surveyed know the likely amount of their retirement income/assets and only 44% have calculated the amount of their essential expenses. Approximately one-in-six (16%) reported that they have or plan to delay retirement, on average, four years.
The data suggests that women who work collaboratively with spouses, partners, financial advisors and even knowledgeable friends, report higher confidence in their retirement security. It shows that those who employ what is known as the 'Three Cs' approach: Communication + Compatibility = Confidence, have better results. Among men and women, men are more likely (65% vs. 55%) to calculate retirement income.
"The combination of risks for women and their relatively inadequate retirement planning has become known as the 'perilous paradox,' but the message is clear that women are able to avoid that," said Sandra Timmermann, Ed.D., director of the MetLife Mature Market Institute. "The risks and costs of 'living long and living female' call for an 'affirmative action' plan. We find that those who plan for a steady stream of income, along with some flexibility for the unexpected, are best prepared for what can be an extended future."
The MetLife Mature Market Institute has also created a video featuring women who were asked about their retirement plans and concerns. These profiles illustrate the dichotomy between their aspiration of enjoying their retirement years and their fear of not being prepared financially, emphasizing the importance of immediate action. Click here for the video.
Kathryn B. McGrew, Ph.D., research fellow at the Scripps Gerontology Center at Miami University, said, "For themselves and their families, women can do a better job of taking charge, planning for contingencies, gathering information, calculating their income/expenses and getting serious about retirement strategy. Their spouses and partners can do their part by engaging in a joint strategy that serves the interests of both parties with various retirement scenarios. They should give particular consideration to the fact that most women will outlive their spouses."
Longer life for American women (8% longer than men on average) is accompanied by a number of additional costs and financial constraints that can lead to greater financial challenges in retirement. As of 2009, women age 65+ had significantly lower annual retirement incomes than men, $21,500 vs. $37,500. American women are more likely to experience retirement alone since many never marry or are widowed or divorced. Women spend more on health care since they pay greater attention to their health and tend to have less adequate insurance. Women provide more long-term care to others (parents, spouses), costing them in lost wages, Social Security benefits and pensions. They are more likely to need long-term care themselves with a lifetime cost of $124,000, nearly three times that of men ($44,000).
More than half of the women (54% vs. 44% of men) report that they are very or somewhat concerned about outliving their retirement resources. Of women who were at least somewhat confident about their ability to live comfortably in retirement, 66% attributed this to having a guaranteed stream of income (70% of males concurred). Of those not confident, 61% said they lacked sufficient savings to last their anticipated lifetime (58% of males agreed).
The study recommends the following:
Take Charge - Women who take responsibility for their retirement are in a better position to reduce the specific risks of being female. They should be aware of gender-longevity differences and their implications and seek, not generic, but gender-specific information and advice. Couples should work together on information-gathering and calculations. Note to men: If your spouse/partner are inclined to assume less responsibility for decision making in your household (or if one of you tend to dominate the planning), commit to equal involvement through shared information gathering and calculations.
Plan for Contingencies - Have a Plan B, including calculations and details for various contingencies. Be sure they account for expenses like long-term care and the health costs related to a woman’s longer life. Plan for emergencies; don't defer for 'if and when they happen.' Consider the implications of 'cashing out' resources prematurely, like retirement plan benefits, guaranteed income joint-and-survivor options and Social Security benefits. Note to men: Be sure your contingency plan accounts for the needs of your partner and that benefits and insurance account for your spouse's life expectancy, assuring guaranteed lifetime income for both of you.
Do Your Own Math - Calculating your needs and resources is the key to planning and saving enough assets. Make sure your income and assets will last your expected lifetime. Use gender-specific estimates and calculations.
Act Now - The most affirmative action is timely action. Take a deep breath, consider your specific concerns and start planning with a variety of scenarios in mind. Act now, as if your (later) life depends on it. It does. Note to men: If you haven't taken into account the extra long-life of your spouse of partner in your retirement planning, don't delay. Now is the time to take action and to make any necessary adjustments.
The report includes a number of resources women can tap, including Financial Planning for Women: Retirement Calculator (AARP), What Today’s Woman Needs to Know and Do: The New Retirement Journey (MetLife Mature Market Institute), What Every Woman Should Know (Social Security Administration, U.S. Department of Health and Human Services) and WISER’s Financial Planning Workbook: A Collection of Worksheets and Factsheets to Help You Take Control of Your Finances.
Methodology
The MetLife Study of Women, Retirement, and the Extra-Long Life: Implications for Planning reports additional findings from Best-Case Strategies for a Flexible Retirement: The MetLife Study of Thinking About Retirement in Uncertain Times. A total of 1,007 men and women between the ages 50 and 70 with $50,000 or more in household income, and $100,000 or more in investable assets were surveyed online by Harris Interactive in November 2010. Data were weighted for age, sex, race/ethnicity, education, region, and household income. Propensity score weighting was also used to adjust for respondents’ propensity to be online. The survey explored behaviors and attitudes related to retirement planning with a particular focus on planning for unexpected expenses and life events in retirement.
The MetLife Study of Women, Retirement, and the Extra-Long Life: Implications for Planning may be downloaded from www.MatureMarketInstitute.com. Also available is the helpful guide, What Today's Woman Needs to Know and Do: The New Retirement Journey. The publications can also be ordered through Contact Us on the MetLife Mature Market Institute Web site, or by writing to: MetLife Mature Market Institute, 57 Greens Farms Road, Westport, CT 06880 or MatureMarketInstitute@metlife.com.
Scripps Gerontology Center, Miami University
Scripps Gerontology Center is a research and training center with a broad research agenda, including health, disability, and longevity; long-term care systems and services; workforce and retirement issues; caregiving; technology and aging; and demography. Applied research is conducted for policy makers, public administrators, planners, service providers, academics and the general public. www.scripps.muohio.edu
The MetLife Mature Market Institute
The MetLife Mature Market Institute is MetLife's center of expertise in aging, longevity and the generations and is a recognized thought leader by business, the media, opinion leaders and the public. The Institute's groundbreaking research, insights, strategic partnerships and consumer education expand the knowledge and choices for those in, approaching or working with the mature market.
The Institute supports MetLife's long-standing commitment to identifying emerging issues and innovative solutions for the challenges of life. MetLife, Inc. is a leading global provider of insurance, annuities and employee benefit programs, serving 90 million customers in over 50 countries. Through its subsidiaries and affiliates, MetLife holds leading market positions in the United States, Japan, Latin America, Asia Pacific, Europe and the Middle East. For more information, please visit: www.MatureMarketInstitute.com.
Women Lack Retirement Preparedness Confidence
While Married Women are More Confident than Un-Married Women,
Half of all Women Feel They Need Assistance in Managing Their Finances
WASHINGTON, D.C. - The Insured Retirement Institute (IRI) today released its exclusive report Women, Retirement, and Advisors: Concerned About Meeting Retirement Expectations, Female Boomers Seek Expert Advice. The report found that when compared to men, women are less confident that they will have enough money to live comfortably throughout their retirement, with 34 percent of women expressing confidence, compared to 41 percent of men. While half of all individuals with at least $500,000 in investable assets are women, five out of ten women feel they need assistance in some areas of managing their finances.
The report also found that guaranteed retirement income is the most important trait Boomer women are looking for in a retirement investment, followed by rate of return and principal protection. When selecting a financial advisor, seven out of ten women (71%) value professional designations and 61 percent cite of women cite the qualitative factor of trust and respect most prominently.
"While more than half of all working women are employed in professional occupations, with a quarter of them earning more than their husbands, our report found that women are less confident about their retirement plans than men," said IRI President and CEO Cathy Weatherford. "The encouraging news is that women who use financial professionals are more content about their financial future when compared to those who do not engage a professional, underscoring the vital role advisors can play in helping women reach their retirement savings goals. And by incorporating guaranteed retirement income strategies within a retirement plan, advisors can help address the potential retirement shortfalls that face even the most affluent women."
IRI's Women, Retirement, and Advisors report also found that:
- Marital status is a significant factor in the need for retirement income advice, with 44 percent of married women believing they are doing a good job of preparing for their retirement years, compared to 23 percent of unmarried women.
- he role of financial advisors plays a prominent role in the level of confidence women have, with 53 percent of married women having contacted a financial planner for retirement income advice compared to 32 percent of unmarried women.
- Overall, married women are more likely to be better prepared for retirement than unmarried women, with six out of ten married women saying they have tried to determine the amount of money they will need to save for retirement, compared to four out of ten of unmarried women.
- Married women are more likely to have contacted a financial planner for retirement income advice, with 53 percent stating they have done so, compared to 32 percent of unmarried women.
- Forty percent of women believe they are doing a good job of preparing financially for retirement, compared to 48 percent of men.
- Nearly half of unmarried women expect Social Security to be a major source of retirement income (49 percent) compared to 39 percent of married women.
The full findings of Women, Retirement, and Advisors can be found here.
About the Insured Retirement Institute
The Insured Retirement Institute (IRI) is a not-for-profit organization that for twenty years has been a mainstay of service, commitment and collaboration within the insured retirement industry. Today, IRI is considered to be the authoritative source of all things pertaining to annuities, insured retirement strategies and retirement planning. IRI proudly leads a national consumer education coalition of nearly twenty organizations and is the only association that represents the entire supply chain of insured retirement strategies: our members are the major insurers, asset managers, broker dealers and more than 75,000 financial professionals. IRI exists to vigorously promote consumer confidence in the value and viability of insured retirement strategies, bringing together the interests of the industry, financial advisors and consumers under one umbrella. IRI's mission is to: encourage industry adherence to highest ethical principles; promote better understanding of the insured retirement value proposition; develop and promote best practice standards to improve value delivery; and to advocate before public policy makers on critical issues affecting insured retirement strategies and the consumers that rely on their guarantees. Visit www.IRIonline.org today to experience the vast resources of the Insured Retirement Institute for yourself.
Americans more likely to stay invested in stock market
with guaranteed products
New data from The Prudential 'Retirement Red Zone'
NEWARK, N.J. - With individual investors increasingly wary of investing in the stock market in the current economic downturn, a new survey of Americans in The Retirement Red Zone , the critical years before and after retirement, shows that financial products with guarantees are likely to keep people invested in the stock market even in the face of short-term losses.
Almost nine out of ten (84 percent) of the '2006 to 2011: Changing Attitudes About Retirement Income' survey respondents indicated that if they had a retirement investment product with guaranteed income, they would likely stay in the stock market even if they were to experience short-term losses, and 76 percent said that they would stay invested for the longer-term horizon. Both of these measures are higher than in 2006 by 10 and four percentage points, respectively.
"When investors take risk off the table by getting out of the stock market, they potentially increase the risk that they will not be able to generate the returns they need to achieve their retirement goals," said Stephen Pelletier, President of Prudential Annuities. "While annuities and other products that guarantee a stream of income can help meet Americans' retirement income needs, this research demonstrates that such products are also more likely to keep people invested in the stock market -with the potential for higher returns, protection from market declines and benefits to the economy overall."
Underscoring investor concern about the financial markets, '2006 to 2011: Changing Attitudes About Retirement Income' shows that over the last five years Americans have become more worried about retirement investment strategies. Almost six in ten are concerned about how much income they will need in retirement; 56 percent question whether their investment strategy is right for their retirement needs (a jump of 11 percent compared to 2006), and more than two-thirds (68 percent) say they are more cautious than ever before. Nearly three-quarters (73 percent) are concerned about a significant decline in the stock market immediately before or after their retirement.
Almost half (47 percent) hesitate to invest more in the market despite future growth opportunities. Reflecting a more cautious mindset, 60 percent feel that investing too aggressively is a greater risk to their retirement security than investing too conservatively, an increase of nine percentage points compared to 2006. More than eight in ten (84 percent) are concerned about inflation eroding the value of their retirement savings.
"The growth we have seen in the annuities market over the last two years reflects the increasing recognition of the value of guaranteed income products as part of an overall retirement planning portfolio," added Pelletier. "The financial industry has been responding to increased demand for guarantees with innovative products and increased capacity to meet investors' needs."
The survey shows increased awareness of guaranteed retirement income products and strong interest in them. Three quarters of investors find these products appealing and more than eight in ten (82 percent) see them as a valuable addition to their portfolio. More than half (52 percent) say that having stable income in retirement is a leading concern.
For financial advisors, the survey underscores the value investors place on getting good advice; it also highlights a five year trend of investors becoming more self-reliant. While half (48 percent) said they want guidance on the financial issues they need to be thinking about and the solutions that may be best for their situation, the percentage of do-it-yourself investors over the past two years has grown from 23% in 2009, to 32% in 2011. Today, more than three-quarters of investors report they hold themselves more accountable for investment decisions (78%).
Prudential’s study, '2006 to 2011: Changing Attitudes About Retirement Income,' polled 1,001 Americans in an online survey from May 4-12, 2011. The study compared data on investors' retirement planning attitudes and concerns, to similar studies conducted in 2009 and 2006.
The study's participants are a national random sample of heads of mass affluent households selected from panelists in the Research Now U.S. Consumer Panel. Prudential targeted respondents considered to be 'Retirement Red Zone Investors. ' The participants were primary or joint decision-maker for household financial decisions, between the ages of 45-75 with household income and investable assets of at least $100,000 ($50,000 income if retired) and retirement savings of at least $100,000. The study has a margin of error of ±3.1% at the 95% confidence level.
Prudential Financial, Inc. (NYSE: PRU), a financial services leader, has operations in the United States, Asia, Europe, and Latin America. Prudential’s diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management, and real estate services. In the U.S., Prudential’s iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century. For more information, please visit us here.
Americans' Concern About Financial Future Rises Dramatically
Fad or fab, workers try online deals and coupons to save
DES MOINES, Iowa - The number of Americans who are concerned about their long-term financial future rose dramatically- to 67 percent in the third quarter for retirees (from 43 percent last quarter) and to 68 percent for workers (from 63 percent) - according to new research from the Principal Financial Well-Being Index.
While many Americans are feeling doom and gloom over the present economy, this is a wake-up call. Those who take steps to save for and protect their financial future may be better prepared to achieve their long-term financial dreams.
The Principal Financial Well-Being Index, which surveys both American workers at growing businesses with 10 to 1,000 workers and retired Americans1, is released quarterly by the Principal Financial Group and is conducted online by Harris Interactive.
Americans are not only worried about the long-term. Short-term concerns also grew in the third quarter with 28 percent of workers and 36 percent of retirees reporting they are pessimistic regarding the economic outlook for the rest of 2011, up from 20 percent for workers and 21 percent for retirees last quarter. Looking beyond 2011, 58 percent of retirees and 46 percent of workers say the economy will worsen in 2012.
"Continued economic challenges have given many pause, signaling we may be a long way from home on the road to recovery" said Luke Vandermillen, vice president of retirement and investor services at The Principal. "While many Americans are feeling doom and gloom over the present economy, this is a wake-up call. Those who take steps to save for and protect their financial future may be better prepared to achieve their long-term financial dreams."
Professional help propels confidence in adequate retirement savings
While long-term financial future may be top of mind, only a quarter (26 percent) of workers say they are saving enough money to live comfortably in retirement. This number increases significantly for those workers who seek the help of a financial professional: 42 percent of workers who use an advisor say they are saving enough money in order to live comfortably in retirement, compared to 22 percent who do not use an advisor.
Workers also report mixed views on how much they need to put away in order to have enough money coming in during retirement:
- 22 percent think they need to save 1-8 percent of their pay (including any employer match)
- 56 percent think they need to save 9 percent or more of their pay (including any employer match)
But in practice, more workers (42 percent) report saving 1-8 percent of their income, including any employer match, than those who say they are saving 9 percent or more (30 percent).
"The disconnect in what people think they should be saving versus what they are actually saving indicates more Americans need to get on track, develop a plan and seek help to start preparing for their retirement," Vandermillen said. "In order to help ensure sufficient retirement income, we believe most retirement plan participants should be saving 11-15 percent of their pay- including any employer match- throughout an entire working career."
Additional findings
Fad or fab, online deals and coupons influence how Americans spend
- Thirty percent of workers report making purchases from daily discount websites such as Groupon or Living Social in the past year.
- The top reasons workers are likely to purchase from these websites include getting a good deal (75 percent), purchasing items they would buy anyway at a discounted price (58 percent) or trying out new items/services at a discount (43 percent).
- Coupon clipping is reported by four out of five workers (80 percent). Top coupon-clipping items include food, personal care products, cleaning products and restaurants.
- Education expenses pile up for many who struggle to save in the slow economy
Among workers and retirees who have children that are not already out of school, 39 percent of workers and 26 percent of retirees are saving for their children's college education.
Seventy-four percent of workers and 59 percent of retirees report that the economy has made it more difficult to save for their children's future college education.
Nearly three quarters of retirees (72 percent) who are saving for their children's college education are satisfied with their level of savings while only 30 percent of workers who are saving are satisfied.
For workers, the top reasons for not saving for their children's college education are finances (53 percent), followed by the expectation their children will pay via student loans (26 percent) or through scholarships (25 percent).
See the full report and past results at www.principal.com/wellbeing. For more news and insights from The Principal, connect with us on Twitter at http://twitter.com/ThePrincipal.
Methodology
This Principal Financial Well-Being Index survey was conducted online within the United States by Harris Interactive on behalf of the Principal Financial Group between July 28 and August 8, 2011 among 1,150 employees and 549 retirees. Propensity score weighting was also used to adjust for respondents' propensity to be online.
This is one in a series of quarterly studies to identify and track changes in the workplace of small and mid-sized (growing) businesses. The first Principal Financial Well-Being IndexSM survey was conducted in the United States in 2000.
About the Principal Financial Group
The Principal Financial Group is a retirement and global asset management leader. The Principal offers businesses, individuals and institutional clients a wide range of financial products and services, including retirement, investment services and insurance through its diverse family of financial services companies. A member of the FORTUNE 500, the Principal Financial Group has $335.8 billion in assets under management and serves some 16.5 million customers worldwide from offices in Asia, Australia, Europe, Latin America and the United States. Principal Financial Group, Inc. is traded on the New York Stock Exchange under the ticker symbol PFG. For more information, visit www.principal.com.
About Harris Interactive
Harris Interactive is one of the world's leading custom market research firms, leveraging research, technology and business acumen to transform relevant insight into actionable foresight. Known widely for the Harris Poll and for pioneering innovative research methodologies, Harris offers expertise in a wide range of industries, including health care, technology, public affairs, energy, telecommunications, financial services, insurance, media, retail, restaurant and consumer package goods. Serving clients in more than 215 countries and territories through its North American, European and Asian offices and a network of independent market research firms, Harris specializes in delivering research solutions that help clients stay ahead of what's next. For more information, visit www.harrisinteractive.com.
Managing & Maximizing Your 401(k) Today...And Tomorrow
MassMutual Retirement Services to Host RetireSmart Participant Seminar on September 21
Join Farnoosh Torabi as She Demystifies the 401(k) Plan
MassMutual Retirement Services continues its web-based RetireSmart participant seminar series with Managing & Maximizing Your 401(k) Today...And Tomorrow," featuring special guest Farnoosh Torabi, independent Generation Y money coach, best-selling author and personal finance journalist.
MassMutual's live online seminar is scheduled for Wednesday, September 21 at 12:00 p.m. ET. During the 30-minute presentation, Torabi will explain how investing in a 401(k) plan can help Americans better prepare for retirement. Specifically, Torabi will cover the advantages of investing in a 401(k), strategies based on age and risk tolerances and the difference an early start can make. The session will conclude with information on catch-up provisions for those participants over 50 years of age followed by a 30-minute interactive question and answer session.
Interest in the online education series continues to grow, with registrations doubling for MassMutual's previous seminar, Measuring the Success of Your Retirement Strategy. A demonstration of MassMutual's RetireSmart Ready online tool was featured, an online analysis engine exclusive to MassMutual Retirement Services designed to provide participants with an instant assessment of their preparedness for retirement and prompt action to improve their outlook based on personal preferences. A replay of this seminar can be accessed from www.retiresmart.com.
"Through the RetireSmart interactive participant education series, we strive to provide topics that are most impactful to our retirement plan sponsors and participants," says E. Heather Smiley, chief marketing officer for MassMutual's Retirement Services Division. "Our collaboration with Farnoosh Torabi brings the value of the 401(k) to life and helps participants take action to improve their overall financial fitness and retirement readiness," adds Smiley.
Space is prioritized to retirement plan sponsors and participants on MassMutual's platform. MassMutual retirement plan clients can register by logging in to their retirement plan account at www.retiresmart.com. For more information about MassMutual Retirement Services, please contact your retirement plan advisor or call MassMutual at 1-866-444-2601.
Farnoosh Torabi is an independent speaker and is not an employee of MassMutual Financial Group. The information within this presentation is solely the opinion of the speaker, an independent orator, who is not an employee of MassMutual Financial Group.
About MassMutual
MassMutual's Retirement Services Division has been serving retirement plans for 65 years. It offers a full range of products and services for corporate, union, nonprofit and governmental employers' defined benefit, defined contribution and nonqualified deferred compensation plans. It serves approximately 1.3 million participants.
The Vision of Longevity
Today's pre-retirees are more acutely aware of the need for careful, viable income planning
by Matthew M. Grove
Mr. Grove is vice-president of Retirement Income Security for New York Life Insurance Company. He can be reached at retirement_income@newyorklife.com
In the wake of the 'Great Recession,' financial professionals are finding that many clients have begun to understand the importance of retirement income planning before they retire. The advisor/client dialogue about retirement income has improved thanks to increased awareness about the need to begin planning during the accumulation phase, but a challenging economic climate has only made planning more difficult.
Clients who are less than 10 years away from retirement may be seeking an efficient income generating vehicle that guarantees retirement income for life without unwanted market exposure. It may have been difficult for financial professionals to find a product that provides the flexibility to structure a retirement income stream and the guarantees these Baby Boomers are seeking - until now. Deferred income annuities, sometimes referred to as Guaranteed Future Income, offer consumers the guarantees they seek, while creating 'pension-like' stream of retirement income to meet their lifetime income needs. As with other products that offer guarantees like this, they are subject to contract terms and sometimes have exclusions or limitations. The payouts are based on the claims paying ability of the issuer so it is important to find a financially strong insurer.
Pre-Retirement Risk Considerations
When considering income in retirement, pre-retirees often worry that their assets could decline, due to market risk. They also worry about the sequence of returns, a risk of market declines occurring early in retirement which could deplete their retirement portfolio, and longevity risk if they fail to plan for income that will last their entire life. In addition to these risks, pre-retirees face another set of risks:
Asset-allocation risk: Pre-retirees concerned about losing their retirement savings due to market risk may over-allocate to more conservative, lower performing asset classes, including cash. This strategy will avoid market risk but, over time, could result in consumers not accumulating enough assets to meet retirement income needs or offset inflation.
Savings risk: Accumulating enough money to live on in retirement takes discipline. As retirement nears and expenses related to mortgages and children's education decline, pre- retirees need to properly save and invest. Without a dedicated retirement income vehicle, consumers are at risk of not saving enough.
The Changing Marketplace for Income Planning:
Most of consumers' financial lives are devoted to accumulation - ensuring that they save enough money to provide for their needs in retirement. Increasingly, they may face roadblocks to this approach as they near retirement.
Generally a traditional retirement asset allocation model reduces the portfolio's exposure to market risk as the consumer ages, while still taking enough risk to provide growth potential. In recent years, as consumers react or, at times, over-react to uncertainty in the market, they've further reduced their market exposure, thus preventing the opportunity for future gains. 2010 data from Macro Monitor shows that consumers are keeping 35% of their assets in cash or cash equivalents, which offer little or no return. This overly conservative approach threatens the very thing they are acting to protect - building a substantial portfolio to fund retirement.
Not all consumers have turned to cash to provide short-term protection in the latter part of their earning years. Some have turned to Variable Annuities with guaranteed minimum withdrawal or income benefits. These products can provide consumers with needed market exposure and some of the downside protection they seek in the form of a guaranteed stream of income.
But most insurance companies that issue Variable Annuities, and the financial professionals that recommend them, suggest to their customers that Variable Annuities with living benefits have the potential to deliver greater overall value the longer they own the product. Unfortunately for consumers, in the past 5 years financial pressures have led nearly 40% of VA buyers to begin taking income benefits earlier than the 10-12 years required to take full advantage of their product's income features. As a result they may not receive the retirement income they initially expected. (Source: LIMRA).
These actions suggest the need for a retirement income product optimized for short deferrals. In other words, consumers are calling for a financial solution that provides guaranteed income in the near future while reducing or eliminating market exposure.
Guaranteed Future Income in the Form of a Deferred Income Annuity
To provide conservative options for consumers to allocate their retirement savings without compromising their long-term ability to provide income in retirement, life insurers have turned to the deferred income annuity.
The deferred income annuity provides all the benefits consumers have come to expect from immediate income annuities, including income they cannot outlive, high payout rates , optional inflation protection feature, and cash refund settlement options. Deferred income annuities allow consumers to pick an income start date of their choice, generally any time 3, 5, 10 or more years in the future and also allow additional premium payments to purchase more income. Because deferred income annuities provide the benefit of exposure to longer duration bond portfolios, the benefit of compounding, include return of premium and have additional mortality credits, they can have substantially higher payout rates than other fixed income investments.
Accumulating Retirement Income- An Opportunity for Financial Professionals
Given consumer need for retirement income and consumer behavior making the case for deferred income annuities, financial professionals well versed in various retirement income solutions will see significant opportunities.
In recent years, many financial professionals have used Variable Annuities with income benefits to provide their clients with retirement income. As we've discussed, many clients are using these products for short deferrals and not receiving the income they originally planned on. In many cases deferred income annuities may have been more suitable and could have provided more income. In addition, we already know that many consumers are avoiding the market and deferred income annuities provide financial professionals with the opportunity to offer their clients a potentially higher, fully guaranteed income stream.
There is also a significant opportunity to talk to consumers who have retirement accounts they rarely actively manage. Many have applied a set-it-and-forget-it philosophy to a substantial portion of their retirement savings in these accounts. With deferred income annuities now in the market, financial professionals have the ability to show their clients how rolling over those accounts to a deferred income annuity can provide a guaranteed lifetime income stream beginning on their desired income start date. Deferred income annuities are also ideal vehicles for IRA rollovers.
Ideal Decumulation Begins During Accumulation
With many pre-retirees already planning for income in retirement, the dialogue around asset decumulation needs is growing. Financial professionals need to increase the level of information provided to existing clients and prospects about retirement income. Retirement income workshops are an excellent way to help consumers understand that deferred income annuities provide flexibility through a customized insurer-secured income stream that is guaranteed for life. As part of a comprehensive financial plan, a deferred income annuity helps give Baby Boomers the peace of mind they seek no matter how the rest of their portfolio performs.
A Better Prognosis for the Medical Professional's Financial Plan
Highly focused, highly motivated
but often insulated from practical matters, such as sound financial planning
by Mickey Rosenzweig
Mr. Rosenzweig is founder, president and CEO of Rosenzweig Financial Services**. He can be reached at mickey@rfsny.com
Some of us wanted to be cowboys. Some of us wanted to be firemen. Some of us wanted to be singers or athletes or astronauts or to find buried treasure. As time goes by, we let thoughts of those professions pass and we settle into what we like and what we are good at. Chances are, though, that a doctor has always wanted to be a doctor.
Many doctors, dentists and other healthcare professionals have pursued the same single-minded commitment for as long as they can remember. We are, and should be, grateful for that commitment. However, their focus often comes at great cost to them. If you talk to a doctor just finishing up an internship or a residency don't expect to discuss what movies you've both seen lately, whether or not you've been to the hottest new restaurant, or who needs pitching help on the way to the World Series. They won't have any idea what you're talking about.
Since about 8th grade they've been studying harder, working harder and competing harder than most of us. Just getting into any medical school requires an enormous effort. Once there, that effort gets magnified still further. Then there is an internship or residency where 80 hour weeks are perfectly normal, a life where the food is always fast and you get sleep wherever and whenever you can. These are grueling regimens, and it is also the only thing they've ever wanted to do.
Despite an obviously high level of intelligence, doctors and their healthcare brethren remain remarkably ignorant about some of the things the rest of us have been exposed to. That's particularly true when it comes to finance - of all the sciences they've had to master, economics surely isn't one of them.
This level of ignorance, coupled with the idea that they should be smarter than the rest of us, leaves them vulnerable and/or unprepared for the rest of their professional lives. The smartest healthcare professionals there are can be the victims of affinity fraud. Many make unwise investments in things they really know nothing about. And, worst of all, they can mismanage financial plans that directly influence both their practices and their families. It is easy to overlook because of their earning potential, but healthcare professionals have very unique financial profiles that require real expertise from an advisor.
For one thing, they often begin their careers mired in debt.
Yes, it's true that most graduating college students have some debt these days but for healthcare professionals that debt is substantial. According to 2010 statistics compiled by the American Association of Medical Colleges, 86 percent of U.S. medical students graduated with some debt, and of those, the average debt was almost $160,000, up from $129,000 in 2006 and only $87,000 in 2002. The level of debt is often a determining factor for doctors in their area of practice. If you’re wondering why there aren't that many family doctors around any more, consider the income gap between primary care doctors and specialists. A specialist averages $300,000 per year while a primary care doctor averages less than $200,000.
There are consequences to those practice decisions for primary care doctors, dentists and other healthcare professionals who choose to practice independent of large medical centers or other support systems. In the case of primary care physicians, for example, they’re certainly entering a world of increased demand. Indeed, the American Academy of Family Physicians predicts a shortfall of almost 40,000 primary physicians by 2020.
The issues are often not their understanding of their chosen professions. It is the entrepreneurial, business side of those decisions. Medical and dental schools have not prepared them for this and they haven’t had the time to prepare on their own. Once they are out on their own, setting up what are businesses with the same sets of demands of any business while also establishing families, they are often at sea. When we first start to work with healthcare professionals it is our primary responsibility to establish a plan for them that recognizes their unique profiles.
That is more than extraordinary debt and earnings potential ratios. Healthcare professionals often have goals, aspirations and intended legacies that are different from ours. They may want to fund a free clinic or endow a chair at a medical school or practice in a way that requires real financial planning. We see healthcare professionals running along two related, but often separate, tracks. The first is their lives as individuals and heads of families. There at least four areas where we help them plan.
Financial Protection
The first of these is life and disability insurance. Healthcare professionals know all about the trials and tribulations of health insurance because they've learned that from patients. They often don’t know anything about life insurance, the protection it can afford their growing families, the advantages of permanent versus term insurance or its living benefits.
Healthcare professionals, especially those going into private practice where there is no employer coverage, need a very careful financial plan that includes disability insurance. A healthcare professional is no more immune to illness or injury than any other profession. We believe that nothing is more important than a full understanding of this primary, foundational tool in providing peace of mind through protection and building wealth. It must come before other investments. It needs to be regularly reviewed, funded and appreciated over the span of a professional life. The choices to be made include how much life and disability insurance, as well as what type of ownership and beneficiary and beneficiaries.
Money Management
For healthcare professionals, asset allocation and portfolio management must recognize and plan for the retirement of education debt. While retirement of such debt quickly is the admirable goal of many graduating healthcare professionals, it should never be allowed to drive unacceptable risk. For many healthcare professionals, the protection of assets is a primary consideration as they advance in their careers. Spending time to review risk tolerance, asset allocation, modeling and fees and asset protection over time is a valuable periodic consultation.
Higher Education Funding
Unlike the occupants of most executive suites, whose education investment ends with an MBA, education for the healthcare professional is often an ongoing, predictable and necessary expense.
Estate Planning
Healthcare professionals tend not to spend much time perusing, for example, the latest pending tax legislation. They'd rather read your x-rays. Yet they have a set of aspirations for their families and their legacies that require specialized attention. To fulfill their obligations and the goals they've set as legacy gifts requires the same concern that they give patients.
Retirement Planning and Qualified Plan Design
Healthcare professionals, in our experience, truly love serving patients and medicine and rarely think about retirement. Often, they don't retire and pursue other careers but, instead, work in another variation of medicine. A surgeon, for example, might move to a less physically demanding part of medicine or a dentist may wind up teaching at a dental school. All such change requires specific planning exercises.
For those healthcare professionals who are establishing their own businesses or partnerships there is a desperate need for financial advice in areas where they have had no previous experience, or interest. Taking time to analyze the best way for a busy doctor to accumulate retirement funds in concert with changing tax rules and market opportunity is essential.
Employee Benefits
Healthcare businesses require employees, whether it’s a secretary/receptionist or dental assistant. The creation of plans for employee benefit programs is an exercise of offsetting benefits and costs that most healthcare professionals are grateful to hand over to a qualified planner. What they're looking for is a plan that is considerate, of value and is cost-effective.
Executive and Supplemental Benefits
The best employees in a doctor or dentist’s office are in high demand. To retain the best employees in a competitive healthcare market requires unique sets of rewards that are cost effective. Rewarding employees through cost-effective creative alternatives requires a professional aware of current practices.
Business Succession Planning
An excellent working partnership can often be torn asunder without a succession plan that carefully evaluates, and periodically reevaluates, the business, its real assets and its intangible assets. Very few healthcare professionals can, or would, do this without expert assistance.
The End Goal
What is important for the professional financial advisor when assisting healthcare professionals is gaining knowledge of their special circumstances, the attitudes and motivations that drive uneducated decisions, and the very real idea that a healthcare professional who is better prepared financially is a better healthcare professional for patients.
Once a healthcare professional equates sound financial planning with periodic check-ups to the regimens they recommend for patients, their prognosis is bound to improve.
**Registered Representative of, and Securities and Investment Advisory Services offered through Hornor, Townsend & Kent, Inc., (HTK), Registered Investment Advisor, Member FINRA/SIPC, Paul E. Vignone, Susan Cooper, 2 Park Ave., Suite 300, New York, NY 10016.
IRI Exclusive Report
Middle-Income Boomers Market Remains Untapped
Nearly 60% of Middle-Income Boomers are In Need of Retirement Planning Advice
WASHINGTON, D.C. - The Insured Retirement Institute (IRI) has released its exclusive report Middle-Income Boomers and Retirement: Tapping the Significant and Underserved Middle-Income Market. The report found that Middle-Income Boomers, those with income between $30,000 and $74,000, recognize the need for retirement planning, yet only 50% have determined their financial need for a comfortable retirement. Additionally, while roughly one-half (48%) say they lack the confidence to maneuver the ins-and-outs of investing, less than 50% have contacted an investment advisor, according to an IRI survey. Of those needing advice, only 43% have contacted an investment advisor, leaving a substantial gap for advisors to fill.
"The middle-income Boomer market provides a great opportunity for advisors to grow their client base while helping a large segment of the population reach their retirement goals," said IRI President and CEO Cathy Weatherford. "Our research shows that although Boomers have the means to save for retirement, they do not believe they have the knowledge to select the best investment vehicle to meet their future needs. Clearly, financial professionals have the knowledge and expertise to serve this market and can provide the needed guidance to Boomers looking to fund and build their retirement nest egg."
IRI’s Middle-Income Boomers report also found that:
- Boomers who use advisors believe they are doing a good job preparing financially for their own retirement, with 90 percent stating so, compared to 63 percent of those who do not use advisors.
- Of the middle-income Boomers who have consulted a planner, most do so to seek their expertis, whether it's in building a plan or validating a plan that the Boomers have constructed themselves.
- When asked to identify the most important trait they look for when selecting a retirement investment product, middle-income boomers identified principal protection (19% of respondents) and guaranteed income (17%).
- Middle-income boomers have numerous concerns about retirement savings and income; 49 percent have not tried to determine the amount of how much money they will need to live comfortably during retirement and 48 percent question their knowledge of investing and investments.
- Most middle-income Boomers can expect to receive an inheritance during their lifetimes, increasing assets by approximately 30% of their current wealth.
The full findings of Middle-Income Boomers can be found HERE.
About the Insured Retirement Institute
The Insured Retirement Institute (IRI) is a not-for-profit organization that for twenty years has been a mainstay of service, commitment and collaboration within the insured retirement industry. Today, IRI is considered to be the authoritative source of all things pertaining to annuities, insured retirement strategies and retirement planning. IRI proudly leads a national consumer education coalition of nearly twenty organizations and is the only association that represents the entire supply chain of insured retirement strategies: our members are the major insurers, asset managers, broker dealers and more than 75,000 financial professionals. IRI exists to vigorously promote consumer confidence in the value and viability of insured retirement strategies, bringing together the interests of the industry, financial advisors and consumers under one umbrella. IRI's mission is to: encourage industry adherence to highest ethical principles; promote better understanding of the insured retirement value proposition; develop and promote best practice standards to improve value delivery; and to advocate before public policy makers on critical issues affecting insured retirement strategies and the consumers that rely on their guarantees. Visit www.IRIonline.org today to experience the vast resources of the Insured Retirement Institute for yourself.
Elder Financial Abuse
The crime of the 21st century.
by Sandra Timmermann, Ed.D.
Ms. Timmermann is a nationally recognized gerontologist and Executive Director of the MetLife Mature Market Institute. The Institute is MetLife's center of expertise in aging, longevity and the generations and is a recognized thought leader by business, the media, opinion leaders and the public. The Institute's groundbreaking research, insights, strategic partnerships and consumer education expand the knowledge and choices for those in, approaching or working with the mature market. Dr. Timmermann can be reached at stimmermann@metlife.com The viewpoints represented in this article belong to the author and are not necessarily those of MetLife.
The High Cost of Elder Financial Abuse
According to a new study, The MetLife Study of Elder Financial Abuse: Crimes of Occasion, Desperation, and Predation Against America's Elder, by the MetLife Mature Market Institute, conducted in collaboration with the National Committee for the Prevention of Elder Abuse and the Center for Gerontology at Virginia Tech, the annual financial loss by victims of elder financial abuse is estimated to be at least $2.9 billion dollars. This is a 12% increase from the $2.6 billion estimated in Broken Trust: Elders, Family, and Finances, in 2008.
This staggering amount is a very conservative estimate, as it represents only the tip of the iceberg. For each reported case, four-to-five were unreported. Elder financial abuse also results in other 'hidden' costs; for example, legal and investigative charges, increased health care expenditures and social services.
The Victims and the Perpetrators
The victims of elder financial abuse are twice as likely to be women rather than men. Most victims are between the ages of 80 to 89, live alone, and are likely to require some kind of assistance with health care or home maintenance. The perpetrators are more difficult to identify. Most are men between the ages of 30 and 50. The female perpetrators tend to be younger, between the ages of 30 and 49.The perpetrators come in many guises, with most elder financial abuse cases perpetrated by strangers (includes home repair scams, phone scams, criminal robbery, burglary and people previously unknown to the victim). The second highest category (34%) is by family, friends and neighbors (also includes caregivers paid and unpaid) and 'befriending.' The business sector, which includes insurance, banking, attorneys, contractors, nursing home administrators, and other legitimate business enterprises, accounts for 12%. Medicare and Medicaid fraud represents 4%.
Portraits of Financial Abuse
Elder financial abuse affects victims of all income and asset levels and socioeconomic status. It is indiscriminate, touching celebrities such as Mickey Rooney and philanthropists such as Brook Astor, as well as those who have few assets and resources. Yet, there are common denominators. Elder financial abuse is often accompanied by emotional stress and embarrassment, and by physical abuse.
Here is a sample of the cases reported in the study:
- Two elderly women were beaten to death with a crowbar by their trusted handyman. He took and pawned all of their valuables.
- A woman was exploited for her Social Security checks by a live-in caregiving couple. She was neglected so severely that she was malnourished and weighed 80 pounds, had bed sores infested with maggots, and gangrene in both feet, which she lost to amputation after the abuse was finally discovered.
- The daughter of a healthy, active 78-year old woman convinced everyone that her mother had Alzheimer's to gain power of attorney and financial control during the mother's temporary recovery from a broken arm. The mother thought her daughter was offering care and support at a difficult time.
- A man extorted money from a senior couple for a year by using terrorist threats of violence and death.
Understanding Elder Financial Abuse - What to Look For
The cases mentioned above point to the difficulty that family members or professionals who have older clients face when they suspect financial abuse. There are some things to be aware of, however, that might serve as 'red flags.'
Often, there is a change in the mood or appearance of the possible victim. While changes in behavior may not be specific to abuse, they should be investigated to determine what is causing them. Changes to watch for include hesitation in speaking openly, agitation, fear, anxiety and in sleeping and eating behaviors. Financial motivation may be the mitigating factor behind other forms of abuse.
More specific signs of elder financial abuse include abrupt requests to change a will or financial documents, unexplained transfers of money or assets to a family member or someone outside of the family, and the discovery of the older person's forged signature on a check, financial document or titles in their possession.
Individuals with cognitive impairment are especially vulnerable to elder financial abuse. A decrease in the ability to manage daily activities, pay bills, remember appointments and use sound judgment are often signs of cognitive difficulties and could trigger vulnerability. Symptoms of Alzheimer’s disease or other dementias also present ethical issues in regard to executing new plans and agreements to make sure that the older family member or client fully understands the implications of the actions they take.
Suspicions of Elder Financial Abuse - What to Do
Physical, financial and sexual abuse, constitute crimes and are subject to prosecution. Many times, family members or others may suspect that financial exploitation has taken place, however, due to embarrassment, false trust in a new friend or neighbor, or other reasons, the victim does not always admit that there is a problem. Many older people, who grew up in an era where they could put trust in a repairman, caregiver or a telephone solicitor, may find that they have been swindled by someone they thought was honest or who represented themselves as someone entirely different than who they really are.
For example, a phone scam that has gotten attention lately involves a call from someone pretending to be a grandchild. The caller says they are in an emergency situation and asks the older person to wire them money, and it's done. When the truth comes out, the victim feels foolish and often hates to admit the mistake they made.
A conversation with older friends and clients can be helpful in making elders aware of the telemarketing scams like this one, or fraudulent solicitations for such things as unneeded home repairs. Specific suggestions such as having them add their names and phone numbers to the National Do Not Call Registry or encouraging them to use their caller identification (ID) to screen calls can make it easier to raise the issue.
Also addressing the need to have legal documents in order such as wills, durable powers of attorney, and advance directives for health care, to do direct deposit of Social Security checks and to have regularly monitor financial statements can avoid problems later on. It is, of course, critical to begin the conversation while the older person is in good mental and physical health.
While it may seem logical to report any suspicion of elder financial abuse to a family member, that may not be a good solution. As the data indicates, family members are often the perpetrators. They may be the ones, even those who are providing care, who are forging checks, transferring assets and threatening or even physically abusing their older parent or relative. Therefore, reporting suspected abuse to an adult child or other relative should be done with the utmost caution.
All states have reporting systems to accept and investigate allegations of abuse. Most frequently, abuse is reported to Adult Protective Services (APS). State Departments of Health and Human Services have listings of local APS offices. Another source is the Eldercare Locator, 1-800-677-1116, which can direct the caller to the local Area Agency on Aging. Other organizations that have resources that can help include the National Center on Elder Abuse (www.ncea.aoa.gov) and the National Committee for the Prevention of Elder Abuse (www.preventelderabuse.org).
Unfortunately, many of us suspect that something might be wrong but are reluctant to report it. However, taking action is the right thing to do, so that we can protect our vulnerable friends, family members and clients. Elder financial abuse can decimate incomes, both great and small, fractures families, reduces available healthcare options and increases rates of depression among elders. Despite the growing public awareness, it still remains unreported, under recognized and under prosecuted.
Tip sheets on preventing elder financial abuse, one for family members and the other for older adults, as well as a guidebook with resources are available from the MetLife Mature Market Institute website, www.maturemarketinstitute.com. The research report, The MetLife Study of Elder Financial Abuse: Crimes of Occasion, Desperation and Predation Against America's Elders, is also available for download.
Boomers: Legal Separation Instead Of Divorce?
Much of the business of private investigators comes from spouses engaged in pre-divorce planning
by Lili Vasileff
Ms. Vasileff, CFP, CDFA, is President of Divorce and Money Matters, LLC, and President of the Association of Divorce Financial Planners. She can be reached at lvasileff@aol.com.
Divorce is a complicated process, emotionally, legally and financially. Thoughtful planning and patience, however, can make your decision to divorce and the process itself smoother. Planning should begin from the moment you have a single notion about getting a divorce. Trust your instincts that divorce may be in the cards and begin to plan logically while you still can.
Take note for example, that much of the business of private investigators comes from spouses engaged in pre-divorce planning. Savvy divorce lawyers tell prospective clients to find out as much as possible - as early as possible - before the papers are even served. Divorce lawyers Steven Fuchs and Sharon Sooho advise women to 'win' the divorce battle with the ancient Chinese tactics of strategic planning, stealth and deception.
However, along with the idea of preparing for divorce, there is the real risk of forfeiting critical financial benefits by Boomers that could be preserved instead with a legal separation. Therefore, planning and preparing for any kind of separation, divorce or legal, is the key to preserving financial security and achieving an equitable outcome.
What is the difference between divorce and a legal separation? A legal separation does not end a marriage or domestic partnership. With a legal separation, the marriage or domestic partnership remains intact, and the parties may not remarry or enter a new domestic partnership.
Legal separation is an option for couples that do not wish to divorce, but want to separate their finances and property. You remain legally married while choosing to live separate lives. The grounds for legal separation are the same as those for divorce. To file for legal separation, one party must reside in the county where the papers are filed at the time the case is started. There is no required length of residency.
A couple is legally separated after petitioning the court to recognize their separation. Simply living apart does not constitute a legal separation. All states except Delaware, Florida, Georgia, Mississippi, Pennsylvania, and Texas recognize legal documentation of separation. In some states, legal advice is required to make a separation agreement legally binding. Your attorney will make application to the court so that a judge can sign the agreement. If you come to an agreement with your spouse without making it court ordered, you will have no legal protection should your spouse decide not to follow the agreement.
Be aware that the separation agreement also sets precedence for the divorce that may follow. If you divorce after a separation and your case goes to court, a judge is likely to assume that since you were satisfied with the legal separation agreement, the agreement should carry over to the divorce settlement agreement. For that reason, it is important that you come to a separation agreement you can live with long term.
What are the advantages of a legal separation? As Boomers approach their fifties and sixties, these years usually represent the peak years for earning capacity, which impact retirement benefits. At this stage of life, just shy of retirement, Boomers may find it important to evaluate the benefits of a legal separation versus a divorce. The reasons are several.
Dividing Assets
The breadwinner spouse may generate significantly and disproportionately to pension benefits in the last employment years prior to retirement. Divorcing prior to this period may leave the ex-spouse nonemployee sharing a percentage of a much reduced total benefit. This is because pension benefits are usually divided and valued as of date of divorce. Similarly, the breadwinner who earns supplemental executive benefits, such as free annual physicals, financial planning and tax preparation services, and travel and housing allowances, may be able to share these at no cost with the nonemployed spouse because they remain legally married.
Health insurance
If the nonemployee ex- spouse falls short of Medicare eligibility by more than 36 months (COBRA term for health insurance continuation for divorced spouse), they are at risk of having to purchase coverage at advanced age on a private basis. Many issues for consideration include: cost, availability, insurability, quality of coverage, pre-existing health conditions.
Tax Incentives
When spouses are legally separated, it can affect both the state and federal income tax returns in certain situations.
A legally separated person without a divorce decree or agreement that is recognized under state law MUST file as married, either filing jointly or separately. In this situation, a spouse may still protect their individual tax liability and apply for relief from tax, interest, and any penalties owed on a joint tax return. This type of relief is called separation of liability. Spouses who still live together when the return was filed, however, will not qualify for this relief. Another type of relief is called the innocent spouse relief, may be applied for by a separated person who has lack of proof or personal knowledge of owed taxes. This is rarely awarded easily
Persons who are legally separated under state law with a formal agreement or have a temporary divorce decree are still considered married by the IRS, and the tax rules for married couples apply. However, there are special circumstances that allow a separated couple to be considered unmarried.
A separated person may be considered unmarried if they file a separate return, maintain a separate residence for more than half the year, and the other spouse lived elsewhere for more than six months.
Potential tax savings may exist. If one spouse is paying support for the other, the payer can deduct that money from his or her income for tax purposes. The payment will then be considered taxable income to the recipient. If the payer is in a higher tax bracket than the recipient, this will reduce the couple's combined tax liability. In any case, it will reduce the payer's taxes and raise the recipient's.
In summary, legal separation offers the benefits of legal clarity akin to divorce orders. You and your spouse lead separate financial lives apart from one another. The formal separation order under state law protects assets, some benefits, and may achieve tax savings. Set up a starting position to create a favorable settlement. Build your skills in the financial arena and negotiate from a position of empowerment. Ensure your financial security with a divorce financial planning expert on your team and pave the way for your transition with confidence and knowledge.
from IRI & Morningstar
Creating Portfolios that Confront Retirement Risks
Primarily Driven by Five Factors; Guidelines For Advisors and Retirees
on Allocations to Guaranteed Retirement Strategies
WASHINGTON, D.C.- The Insured Retirement Institute (IRI) today released exclusive retirement risk analysis by Peng Chen, PhD, CFA, President of Morningstar's Global Investment Management Division, that offers guidelines about how much the average American retiree might want to allocate to guaranteed retirement strategies. In Confronting Retirement Risks featured in the latest edition of the Insured Retirement Institute (IRI) Chen advises investors of key risks and five factors to consider when planning for retirement. He highlights two key risk- longevity risk and financial market risk- as pivotal issues investors face in managing their retirement portfolios.
In his analysis, Chen notes that roughly half of retirees will live longer than their life expectancy. Estimation of how long each investor may live due to the significant amount of variation in how long one may live. This may cause investors to plan for too short of a life expectancy and not save enough or to plan for too long of a life expectancy and spread their savings too thin. Chen also highlights how the natural ups and downs of the stock market have an impact on an investor's savings, especially once they enter retirement, creating financial market risk. If a retiree's portfolio is made up of stocks and bonds, it is significantly more sensitive to market fluctuations and a severe downturn can dramatically lower their savings consequentially impacting their standard of living.
"Fortunately investors and advisors have access to effective tools to combat these risks," explains Chen. "Investors can mitigate both longevity and investment-performance risk with a carefully constructed combination of longevity-insurance products...which offer investors a guaranteed income stream and traditional assets, such as ETFs and mutual funds."
In the article, Chen cites five factors investors should consider when selecting how to allocate their retirement savings including age, financial market risk tolerance, wealth versus retirement expenses, risk preference toward longevity and bequest goals.
"As millions of Baby Boomers prepare to enter retirement, they are increasingly concerned about whether they will have enough financial resources to last throughout their retirement," said IRI President and CEO Cathy Weatherford. "With life expectancies continuing to increase, and coupled with the uncertainty in the markets over the past few years, longevity and financial market risks clearly are two of the most imminent concerns Boomers have regarding the security and stability of their retirement savings. Encouragingly, IRI research shows that nine out of ten Boomers who own insured retirement strategies have a higher confidence in the financial stability of their retirement. As Peng points out in his analysis, properly allocating a portion of retirement savings to guaranteed income solutions can help investors achieve the secure financial future they are seeking."
Confronting Retirement Risks by Peng Chen can be read the August edition of IRI Insight which is available online at www.myIRIonline.org and in Financial Planning, On Wall Street and Bank Investment Consultant.
About the Insured Retirement Institute: The Insured Retirement Institute (IRI) is a not-for-profit organization that for twenty years has been a mainstay of service, commitment and collaboration within the insured retirement industry. Today, IRI is considered to be the authoritative source of all things pertaining to annuities, insured retirement strategies and retirement planning. IRI proudly leads a national consumer education coalition of nearly twenty organizations and is the only association that represents the entire supply chain of insured retirement strategies: our members are the major insurers, asset managers, broker dealers and more than 75,000 financial professionals. IRI exists to vigorously promote consumer confidence in the value and viability of insured retirement strategies, bringing together the interests of the industry, financial advisors and consumers under one umbrella. IRI's mission is to: encourage industry adherence to highest ethical principles; promote better understanding of the insured retirement value proposition; develop and promote best practice standards to improve value delivery; and to advocate before public policy makers on critical issues affecting insured retirement strategies and the consumers that rely on their guarantees. Visit www.IRIonline.org today to experience the vast resources of the Insured Retirement Institute for yourself.
from The Raymond James Practice Insights
Identifying your client's decision-making and investment style
The Behavior Profile
by Denise Federer, Ph.D.
Ms. Federer is a clinical psychologist, executive coach and founder of Federer Performance Group. She has been a consultant to the financial industry for 25 years. Contact her at 813-876-7191, or visit her site: fpmg.info
Do you consider yourself an expert on your clients' behavior? Before you pick up the phone to contact your clients, are you confident of the reaction they will have to your suggestions? How often do you think about your clients' typical response style to financial decision-making? If their behavior veers from the norm, would you recognize something was not quite right and be able to respond to them with appropriate, but probing questions to learn more about their reactions?
Identifying your clients' financial decision-making and investment style is important in communicating with them effectively. Research in the relatively new field of behavioral finance confirms the influence of emotional reactions on financial decision-making. Knowing whether people are more cognitively or emotionally influenced in their decision making style and understanding their financial history can help you create an effective approach for having client discussions.
In this article we will look at different clients' investor styles and strategies for having client conversations with these different financial profile types. By exploring your clients' money beliefs and allowing these concepts to shape your conversations, you will be able to enhance your ability as an advisor to guide clients toward sound choices and make financial decisions consistent with their goals.
Emotional vs. Cognitive Investors
Regardless of the content of a decision, there are some critical response styles that impact how we decide. When evaluating your clients' decision-making process, the first concept to consider is whether they are more emotionally or cognitively influenced. Do they generally make decisions based on their 'gut reactions' or are their decisions empirically based? Both styles can potentially present difficulty unless you understand strategies for interacting effectively.
Emotional investors can be challenging because they may not initially respond to rational explanations of your recommendations. However, once they feel comfortable discussing emotional issues with their advisors, they will take action. When they do feel confident to take financial action, they may want to alter their portfolios frequently as market conditions change and be unduly influenced by high-risk investments that their friends or associates recommend. Additionally, they may be difficult to manage if they have experienced losses, and as a result might be resistant to basic investment principles such as diversification and asset allocation. Nevertheless, emotional investors can become your best clients, because they value professionalism, expertise and objectivity. In dealing with them effectively, the best approach is to take control of the situation by demonstrating the impact that financial decisions have on family members, lifestyle and the family legacy.
Cognitive investors can potentially create a challenge because they often follow friends, colleagues or advisors about investment decisions. They want to be in the latest, most popular investments, without regard to a long term plan or the risk of entering an investment that is peaking. They can be overly influenced by the 'talking heads' on financial news shows. Advisors must recognize that this type of client tends to overestimate their risk tolerance. They don't like the ambiguous situations that may accompany the decision to enter an asset class when it is out of favor, and they tend to say yes too quickly and then regret their decisions.
In working with cognitive decision-makers it is important to collaborate with them, instead of directing them. Advisors should back their recommendations with data. Since their biases are cognitive, a steady educational approach on the benefits of portfolio diversification and sticking to a long-term plan are effective and will generate client loyalty and adherence to investment plans. Cognitive investors are usually grounded enough to listen to sound advice when it is presented in a way that respects their independent views.
Five Financial Behavioral Styles
After acknowledging your clients' general approach to decision-making, the next step is to explore their individual histories and learn about their financial approaches to money. In my work with advisors, I have found that one of the following five behavioral styles usually reflect a client's approach to their monetary decision-making: financial initiator, financial analyzer, financial collaborator, financial avoider and financial dreamer. There are four primary behavioral characteristics that differentiate these client types from one another: independence, knowledge, confidence and initiator vs. avoider.
When you understand the factors that drive a client's financial decision-making process, it enables you to formulate a plan that addresses his or her particular values and needs. Take a moment and think about one or two of your key clients. Consider which profile best describes your client and how individual history, values and concerns might influence his or her financial decisions.
Financial Initiator
Financial initiators are self-assured, empowered and optimistic in most of their endeavors. They ask sophisticated questions, but chances are they have pre-researched some of the answers. They are extremely knowledgeable and thrive on the power to understand financial solutions and make financial decisions. They will want to make an informed choice about the financial professional they engage, based on credentials and depth of experience. As an advisor, it is important that you are confident, explaining in detail the basis of your financial recommendations, and comfortable collaborating with them on final decisions.
Financial Analyzer
Financial analyzers have a good understanding of household finances and take initiative in thoroughly researching investment opportunities and tracking results. They have good, basic questions and are financially knowledgeable enough to understand possible solutions and implement decisions. They are comfortable with the power of making financial decisions and are analytical and disciplined in their approach. When working with them as a financial professional, it is important to set clear goals and acknowledge their desire to be an active part of the process. They need to feel both independent and 'in control' in order to feel comfortable working with you as an advisor.
Financial Collaborator
Financial collaborators are extremely balanced in their lives and provide their families with financial comfort and stability. They are cooperative and trusting in their relationships. They ask intelligent questions and are capable of understanding solutions. However, they prefer not to be the primary decision-maker. If they are married or in a relationship, they will promote their partners, and are comfortable creating the illusion that they are 'taken care of.' As their financial advisor, don’t make the mistake of underestimating their financial intelligence or independence. Be sure to indicate your respect for their financial role by speaking with them often and including their input in all important financial decisions.
Financial Avoider
Financial avoiders are concerned about their current finances and financial future. They will ask enough financial questions to create overwhelming anxiety for themselves, but don’t feel confident or knowledgeable enough to explore issues in depth in order to create solutions or make informed decisions. In addition to their excessive worrying, they are easily intimidated and often overwhelmed. They can be unrealistic in their expectations and as a result can be 'blamers,' viewing themselves as victims when things don't go as they would like. As an advisor, you need to educate them in a nonthreatening way and guide them through financial decisions.
Financial Dreamer
Financial dreamers have never expressed the confidence or desire to take control of their financial world. In fact, they 'expect' to be taken care of by those around them and are resistant to being independent. They are in denial about financial realities and think everything will be fine because 'it just has to be.' Their refusal to address financial issues in a responsible manner results in an immature approach to money and investing. They avoid unpleasantness at all costs, and are unlikely to ask questions or seek the services of a financial advisor. Should you become the financial advisor of a financial dreamer, you must be willing to invest time to develop a trusting, mentor relationship for the outcome to be successful.
Advisor-Client Best Fit
According to the October/November 2009 edition of Morningstar Advisor, in order to become an effective financial mentor, advisors need to conduct a thorough interview with clients. The goal of this interview is to identify their traits, determine risk tolerance, identify behavioral investor type and biases, and tailor advice to a client's behavioral type.
However, as important as identifying the behavioral and investment style of a client is, being clear about what client type is a best fit for you and your practice is just as crucial. Do you enjoy 'nurturing' your clients? If so, you may do well meeting the needs of financial dreamers. Or perhaps you work better with informed, independent individuals who want to be a partner in their money decisions. If so, you may work better with financial collaborators or financial analyzers. Those professionals that embrace this approach of identifying their own 'best fit' clients and are willing to become 'experts' in their clients' behavior will clearly have another tool for maintaining their competitive advantage.
SOURCE: Raymond James Practice Insight
When the market's up: Time to retire? Not so fast...
Study shows Americans choosing risky times to retire
NEWARK, N.J. -A new University of Missouri study, sponsored by Prudential Financial, on the timing of individual retirement decisions from 1992 to 2008 demonstrates that Americans are more likely to retire after periods of strong equity market performance, following the retirement of a spouse, or if they participated in a defined benefit (DB) pension plan.
"The study clearly shows that the stronger the equity market performs over any period, the more likely it is that near-retirees will, in fact, retire," said Professor Rui Yao of the University of Missouri, who conducted the study for Prudential Financial. "A 10 percent increase in the S&P 500 index results in a 25 percent increase in the likelihood that individuals will retire, compared to a year in which the S&P 500 index performance was flat–all other factors being equal."
An analysis of the historical returns of the S&P 500 index from 1926 to 2010 conducted by Prudential Financial shows that the stronger equity markets perform over a prior three-year period, the more likely it is that they will fall in the subsequent year. As a result, according to the study, Americans are more likely to choose to retire at a time when there is more risk that their retirement assets will decline in value just after retiring.
"Market losses in the early years of retirement are much more detrimental to retirement security than losses experienced later in retirement, assuming a retiree has begun to draw upon his or her assets. So this is a significant issue that individuals approaching retirement need to consider," said Christine Marcks, president of Prudential Retirement. "This risk outlined in the study can be addressed if plan sponsors include a guaranteed income option in their defined contribution plan which protects retirement income from market downturns both before and during retirement."
The study also found that pre-retirees with only defined benefit plans are almost twice as likely to retire in any given year versus those covered only by a defined contribution plan. Furthermore, pre-retirees with a retired spouse are almost two-and-one-half times as likely to retire in any given year as their counterparts with a working spouse.
"The study's findings highlight the risk individuals take if they retire and haven't protected their assets or converted retirement savings into guaranteed income during retirement," said Stephen Pelletier, president of Prudential Annuities. "Americans need to think beyond reaching a retirement savings objective by understanding the risks associated with the timing of their retirement decisions and evaluating ways to secure their savings before they retire."
A Prudential white paper on the findings of the study and its implications for individuals and financial advisors, Why Do Individuals Retire When They Do and What Does it Mean for Their Retirement Security? is available here. The University of Missouri's academic paper on the research is expected to be published in the coming months.
The research is based on the analysis of voluntary retirement decisions of a cohort of pre-retirees and retirees tracked by the Health and Retirement Study, a national biannual panel survey that tracks the retirement, health, insurance and economic status of a sample of individuals over age 50 and their spouses/partners.
Past performance is no guarantee of future results.
Prudential Financial, Inc. (NYSE: PRU), a financial services leader, has operations in the United States, Asia, Europe, and Latin America. Prudential's diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management, and real estate services. In the U.S., Prudential's iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century. For more information, please visit here
Americans Optimistic About Personal Finance
More Saving For Retirement; New study shows increased participation in 401(k)s
and other defined contribution plans, especially among boomers, Gen Xers and men
SIMSBURY, Conn. -Despite a sluggish economy, more Americans say they are confident their personal finances will improve during the next 12 months. This trend is translating into more people saving for retirement, according to new research from The Hartford.
"Americans are known for their optimism and that is being reflected in their increasing participation in retirement plans, even as the economy continues to struggle," said E. Thomas Foster Jr., vice president for The Hartford's Retirement Plans Group. "More people say they are saving for retirement and focusing on reaching their retirement savings goals. It's a promising time for employers and financial advisors to promote the importance of retirement savings."
The Hartford found that participation in 401(k)s and other defined contribution retirement plans by employed adults rose to 76 percent overall in 2011, up from 71 percent from a year ago and up 63 percent from two years ago. Three demographic sub groups of respondents showed the biggest gains:
Participation by boomers - those closest to retirement - rose to 79 percent, up from 71 percent in 2010 and from 63 percent in 2009;
77 percent of Gen Xers or those ages 32-46 contributed to their employer's retirement plan in 2011, an increase from 71 percent in 2010 and from 67 percent in 2009; and
Participation by men jumped to 81 percent, up from 71 percent last year and from 66 percent two years ago.
The only disappointment in the findings was that participation by younger employees ages 19-31 showed a slight decline and participation among women overall was flat. Seven in 10 women contributed to their employer's retirement plan, unchanged from the previous year when women showed greater improvement than men. Participation in retirement plans amongst Gen Y declined by 2 percent.
Overall, most Americans were surprisingly optimistic about their financial future. When asked about the next 12 months, 34 percent of study respondents said they were 'extremely' or 'very confident' that their lives would improve. Those expressing optimism cited expected improvements in their personal finances:
- 53 percent said reducing debt and increasing savings were part of their financial goals;
- 52 percent indicated they were 'extremely' or 'very' confident their personal finances would continue to improve; and
- 42 percent said securing their financial future was their primary goal.
The Hartford's research also discovered that Americans are feeling better about their lifestyles as well. More people (26 percent) said they 'live comfortably' in 2011, an increase from 19 percent in 2010. Nearly half of all respondents (48 percent) said they 'meet my expenses with a little left over for extras.'
"As Americans feel better about their personal finances, they are looking to the future, particularly as it relates to planning for retirement,"Foster said.
The study, conducted in spring 2011, polled 1,000 employed adults ages 18-65 who had a minimum household income of $25,000.
About The Hartford
The Hartford Financial Services Group Inc. (NYSE: HIG) is a leading provider of insurance and wealth management services for millions of consumers and businesses worldwide. The Hartford is consistently recognized for its superior service and as one of the world's most ethical companies. More information on the company and its financial performance is available at www.thehartford.com. Join us on Facebook at www.facebook.com/TheHartford. Follow us on Twitter at www.twitter.com/TheHartford.
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Retirement time-lines fade amid uncertainty...
...As more American stay on the job
NEW YORK/ July 12, 2011 / Shifting and uncertain target dates for retirement are becoming the norm in the American workforce, making it harder for employees to establish meaningful financial plans, recent MetLife research indicates. According to the company's 9th annual Employee Benefits Trends Study, four out of ten employees have changed their predicted retirement date since last year, and 30% raised their expected retirement age. Furthermore, this trepidation about hitting retirement goals could be accelerating – 59% of workers in the study expect to work beyond age 65, compared with 52% one year ago.
Given these indistinct targets, many employees lack confidence in their ability to prepare for the culmination of their working years, with only 39% feeling assured about managing the funds in their employer-sponsored retirement plan. Over half (54%) of workers have not calculated how much annual household income they will need in their retirement. Of those that have not done calculations, 29% don’t understand how to undertake this task. Forty-four percent of employees do not know how many years they have planned for retirement, and only one in five feels confident they know how much annual income they will receive from their retirement savings.
A Map and Directions
"When it comes to retirement planning, the U.S. workforce needs both a map and directions, but employees should recognize that they do not have to be alone in their journey towards a secure retirement," said Robert E. Sollmann, executive vice president, Retirement Products, at MetLife. "A trained financial professional, an HR representative and online tools are all good resources to consider for guidance." More than half of study respondents expressed concern about having a steady income in retirement, and Sollmann pointed out the importance of determining how much retirement income will be needed to cover essential expenses, such as housing, food and transportation.
Because they don't have a handle on their financial needs in retirement, many employees feel unprepared and unsure about their savings efforts- more than half (52%) are behind where they had hoped to be in building up retirement savings. The same percentage is concerned about outliving their retirement money, and even more (54%) are worried about having enough steady income during retirement to cover costs of medical insurance and/or out of pocket medical costs.
Employers Can Help
"There are additional ways employers can help employees," noted Michael K. Farrell, executive vice president, Distribution, for MetLife. "Almost half of employees are interested in their employer automatically enrolling them in a savings program, such as a 401(k), 403(b) or 457. Over 60% believes it would be very helpful if their organization provided a statement that shows how much income the employee's savings would provide in retirement, and 45% would like their employer to offer an annuity as part of their 401(k) or similar plan. Offerings at work such as these can have a strong influence on employees' preparedness for retirement."
Following are tips for employees and others who want to take a closer look at their retirement plan and make sure it's on course:
Focus on making saving a simple and achievable goal
Through the first two decades of your working life, make every effort to save the maximum allowed by a 401(k) plan, but be sure to at least set aside enough to get the employer matching contribution. If already making the maximum contribution, consider funding an individual after-tax IRA. If you change jobs, consider rolling your existing 401(k) into your new plan if the plan allows it or into a traditional IRA and not taking a lump sum distribution- lots of younger workers make this mistake.
Take steps to create reliable income
There is no magic number, but 60% of pre-retirement income before tax is a good starting point for reliable income to cover essential expenses in retirement. Social Security and pensions are great sources of dependable income, but most people will need more stable, lifelong income. There are simple, small steps you can take. Start protecting your future income by putting a portion of your savings into an annuity with income guarantees and adding to it over time, or purchase an income annuity when you retire to cover any remaining expense gaps.
Look for ways to save that give you access to cash but also give you growth
Having cash on hand for the unexpected is smart. There could be an unexpected expense, such as a health need, a job loss or a change to your income- perhaps from an earlier than planned retirement date. But keeping too much cash in the bank earning little interest can be detrimental to your retirement savings. There are a number of financial products that can let you access some cash when it's needed and still keep your money working hard for you. Speak with a financial services professional who can suggest solutions to help meet your needs.
To help assess your retirement income needs, go here:
Methodology
The 9th Annual MetLife Study of Employee Benefits Trends was conducted during the fourth quarter of 2010 and consisted of two distinct studies fielded by GfK Custom Research North America. The employer survey comprised 1,508 interviews with benefits decision-makers at companies with staff sizes of at least two employees. The employee sample comprised 1,412 interviews with full-time employees age 21 and over, at companies with a minimum of two employees.
About GFK
GfK Custom Research North America is part of the GfK Group, one of the world's largest and most prestigious market research organizations, operating in more than 100 countries. Headquartered in New York City, with 10 offices in the U.S., GfK Custom Research North America provides full-service market research and consulting services in the areas of Customer Loyalty, Product Development, Brand & Communications, Channels, Thought Leadership, Innovation, and Public Affairs.
About MetLife
MetLife is a subsidiary of MetLife, Inc. (NYSE: MET), a leading global provider of insurance, annuities and employee benefit programs, serving 90 million customers in over 60 countries. Through its subsidiaries and affiliates, MetLife holds leading market positions in the United States, Japan, Latin America, Asia Pacific, Europe and the Middle East. For more information, visit www.metlife.com.
Guarantees apply to certain insurance and annuity products or contractual riders (not securities, variable or investment advisory products) and are subject to product terms, exclusions and limitation and the insurer's claims paying ability and financial strength.
Allianz Life Awards $475,000
to Local Organizations Supporting Financial Literacy
BestPrep and Junior Achievement each receive $100,000 as part of Ongoing Partnership
MINNEAPOLIS, July 7, 2011 -Allianz Life Insurance Company of North America (Allianz Life) today awarded $275,000 in financial literacy grants to 15 organizations throughout the Twin Cities area. Organizations providing financial literacy and retirement planning education received grants ranging from $5,000-$25,000. In addition, BestPrep and Junior Achievement each received $100,000 grants as part of an ongoing financial literacy partnership.
This year’s grant recipients include:
- CLUES - supporting their Financial Empowerment program
- Climb Theatre - supporting their play, 'Emma and the Allianz Cash Cow'
- WomenVenture - supporting their Financial Education program.
- Emerge - supporting their North Minneapolis Financial Opportunity Center
- People Serving People - supporting their Financial Fitness program.
- Phyllis Wheatley Community Center - supporting their Financial Literacy program
- LaConexion des las Americas - support their Financial Achievement Process (FAP).
- Neighborhood Development Center - part of new Entrepreneur Training and Technical assistance program.
- Twin Cities RISE! - supporting their Financial Empowerment I and II classes
- LifeTrack Resources - supporting their Financial Literacy program
- PPL - supporting their Employment Training - Financial Coaching program
- Freeport West - supporting their Life Skills program
- Accountability - supporting their Financial Literacy curriculum
- Admission Possible – supporting their Integrated Financial Services and Education at Tax Time
- CommonBond Communities - supporting their Career Advantage - Financial Literacy Program
"Allianz Life is passionate about financial literacy and supporting organizations that strive to bring attention to the topic," said Suzanne Zeller, Chief Human Resources Officer for Allianz Life. "In addition to assisting these programs financially, our grant and partnership platform gives Allianz Life employees a chance to see the difference they can make through volunteering."
Organizations were chosen by the Allianz Governance Committee, which directs the Grants Program and oversees Community Relations activities to ensure the practices and procedures are in line with Allianz Life's Core Values.
The BestPrep and Junior Achievement financial literacy partnership is in the initial year of a three-year commitment. In the first-year of participation, more than 500 employees participated in some capacity. The funds contributed by Allianz Life help both organizations serve youth in need of their programs and services. Programs implemented as part of the partnership include: JA in a Day; JA Weekly Delivery; eMentors/Job Shadow; Financial Matters Initiative; The Stock Market Game; JA Finance Park; JA Biz Town; JA BIG Bowl and Minnesota Business Venture Resident Business Leaders.
For more information about Allianz Life’s community giving programs, visit Allianz Corporate Commitment.
About Allianz Life
Allianz Life Insurance Company of North America has been keeping its promises since 1896. Today, it carries on that tradition, helping Americans achieve their retirement income goals with a variety of annuities and life insurance products. As a leading provider of fixed index annuities, Allianz Life is part of Allianz SE, a global leader in the financial services industry with nearly 155,000 employees worldwide. Based on its revenue, Allianz SE is the 20th largest company in the world (Fortune Global 500, August 2010).
Consistent Saving, Access to Financial Advice
and Workplace Retirement Plans
Are Prime Drivers of Successful Retirement Preparation
at All Income Levels
New Research from Putnam Investments Finds Strengthening and Expanding Public and
Private Retirement Systems for Working Americans Remain a Critical Challenge
BOSTON (BUSINESS WIRE) In a recent survey of nearly 3,300 working Americans to help determine current levels of retirement preparedness, Putnam Investments identified three key variables that drive successful outcomes. The most powerful factor, regardless of income level, is a pattern of disciplined, long-term savings and investing. Households with access to a workplace savings plan and those that work with financial advisors were also significantly better positioned for retirement than their counterparts.
The Putnam Lifetime Income Score research is believed to be one of the most thorough and comprehensive studies conducted to determine retirement preparedness of Americans. The research looks at behavioral tendencies, mortality factors and current retirement and non-retirement assets, such as investment securities, annuities and cash value life insurance, to estimate the level of income that U.S. households are currently on track to replace in retirement. Overall, the study found that American households are on track to replace 64% of their current income in retirement.
"While promising in some areas, these findings tell us, clearly, that U.S. households still need to save more to reach sufficient income for successful retirement. It is critically important to strengthen public and private retirement systems and broaden access to workplace savings for all working Americans," said Putnam Investments President and CEO Robert L. Reynolds.
"The data also demonstrates, unmistakably, the valuable role that financial advice plays in helping individuals prepare for retirement, as well as the behavioral changes needed for success. Overall, we hope this body of research will encourage individuals, their advisors, employers and policy makers to take the steps needed to achieve greater retirement security for this nation," noted Reynolds.
The research also provided a window into the overall importance of Social Security to the country’s income replacement trajectory:
- The national Lifetime Income Score of 64% replacement dives to 30% when Social Security is not factored into the mix;
- Without Social Security, households with income below $50,000 are on track to replace barely 17% of their pre-retirement income;
- Individuals age 50 to 65 have Lifetime Income Scores of 60% replacement, but without Social Security that score drops to 28%; and,
- The scores of young workers age 18 to 34 drop from 73% replacement to 33% if Social Security is removed from the equation.
"The American dream of a dignified and secure retirement is at risk for millions of people. The Putnam Lifetime Income Score analysis suggests that if we want to avoid a major increase in elderly poverty over the next generation, we have to act now to make Social Security solvent and to raise personal retirement savings across the board. Enacting auto-IRA payroll deduction to help make workplace savings programs available to all working Americans and maintaining tax incentives to encourage strong participation by individuals in 401(k) plans and IRAs more broadly are significant pieces of solving the retirement puzzle as well," said Reynolds.
Key findings of the study include:
Individuals who appeared to be on the best track to replace current income (those on track to replace 100% or more of their pre-retirement income) and individuals who seem to be the worst positioned (those on pace to replace less than 45%), have exactly the same mean household income, $93,000 annually. A clear difference maker appears to be behavior around savings.
The significance of employer-sponsored retirement plans was underscored by the study. The best-prepared Americans are participants in 401(k) or other defined-contribution plans who currently are contributing 10% or more of their income to their plan: They have a Lifetime Income Score of 124%. Those who are currently contributing 4% to 10% of their income to their retirement plan still score 84% replacement. But those who do not defer any of their income scored only 58%.
The least-prepared Americans are households that are not eligible for an employer-based retirement plan, currently nearly half of the population, which have an average Lifetime Income Score of 46%. Those who are not eligible for employer-based plan, are even further unprepared for retirement if Social Security is excluded, as their overall score plummets from 46% to 8%.
Demonstrating the value of professional advice, those with a paid advisor had a Lifetime Income Score of 82%, while those without a paid advisor scored 61%. Those with an advisor scored higher than those without an advisor at every level of household income. Furthermore, those with a paid advisor still managed to score 51% without Social Security, while those without an advisor scored just 23% without Social Security.
Higher Lifetime Incomes Scores are closely correlated with retirement confidence. Those with Lifetime Incomes Scores of 100 or more are far more confident that they know how much money they will need for retirement and that they are financially ready for retirement than those with scores of 45% replacement or below. They are also more likely to expect that they will live as well or better in retirement than they did while working, that they will have enough to pay for healthcare and that they will be able to leave a legacy to their heirs than those with lower Lifetime Income Scores.
The study also found that American workers are realistic about their retirement income prospects, with few deluding themselves about their outlook. One third of Americans say they are considering delaying retirement beyond their original target age, including majorities of those currently age 55 to 59 and age 60 to 65; half of America's workers say they expect to work at least part time in retirement; four in 10 say they will have to reduce their standard of living in retirement; and, one in four fears running out of money entirely in retirement.
Men are much more prepared for retirement than women. Men averaged a Lifetime Income Score of 73%, while women scored 60%. Women are also far more reliant on Social Security, they scored 21% once Social Security was removed from the equation, compared with men, who scored 41%.
About the Survey
The Putnam Lifetime Income Survey, with research methodology provided by the Putnam Institute, was conducted online by Brightwork Partners and completed in the first quarter of 2011. The survey of 3,290 working adults age 18 to 65 was weighted to U.S. Census parameters for all working adults.
About Brightwork Partners LLC
Brightwork Partners is a specialty research and consulting firm focusing primarily on the retirement services market. Founded in 1999, the firm routinely conducts custom and multi-client research among advisors, consultants, plan sponsors, third party administrators and participants on behalf of major providers in the industry.
About Putnam Institute
Putnam Institute is a research and educational organization funded by Putnam Investments. Its focus is primarily on investment theory and practice related to retirement and educational savings and the provision of lifelong income. It aims to critically examine key investment theories, strategies and assumptions and suggest changes that can achieve better outcomes for companies, institutions, plans sponsors, investment advisors and individual investors. The full body of current research from Putnam Institute is available at www.putnaminstitute.com.
About Putnam Investments
Founded in 1937, Putnam Investments is a leading global money management firm with over 70 years of investment experience. At the end of May 2011, Putnam had $129 billion in assets under management, including mutual fund assets of $70 billion and institutional assets of $59 billion. Putnam has offices in Boston, London, Frankfurt, Amsterdam, Tokyo, Singapore and Sydney. For more information, visit putnam.com.
Money Trumps Age When Determining Start of Retirement
New Study Reveals Middle-Income Boomers most effected
Chicago, IL., June 28, 2011 -Three out of four (73 percent) of our nation’s middle-income Baby Boomers say that their financial situation, not age, is now the key trigger for when to retire, according to a recent study conducted by the Bankers Life and Casualty Company Center for a Secure Retirement (CSR).
The Middle-Income Boomers, Financial Security and the New Retirement study, which focused on 500 middle-income Americans between ages 47 and 65 with income between $25,000 and $75,000, found that one-third expect to retire after the traditional retirement age of 65 and 31 percent are uncertain at what age they will be able to retire.
A majority of middle-income Boomers feel that they are behind where they had expected to be at this point in their lives in terms of saving for retirement and two in three (67 percent) thought that they would be in a better financial position for retirement than they are now.
The CSR's study reports more than half (52 percent) are not confident that they have saved enough to live comfortably in retirement, 38 percent are only somewhat confident and only one in ten (10 percent) are confident that they will have enough money to live comfortably in retirement.
Although the adequacy of retirement income carries heightened importance for this generation of retirees, the study found that more than half of middle-income Boomers have saved less than $100,000 for retirement, 19 percent have saved less than $10,000 and 14 percent do not have a pension, 401(k), IRA or any other type of retirement savings account.
The ups and downs of the economy have caused women to rethink their retirement age more so than men and according to the study, they will rely more heavily on their financial situation to decide when it is time to retire.
"On the new road to retirement, the majority of Americans can now retire only when they feel they can afford to do so," said Scott Perry, president of Bankers Life and Casualty Company, a national life and health insurer. "Now is the time to examine your financial expectations for retirement and make adjustments that can help to improve your financial security and, ultimately, the enjoyment of your retirement years."
Methodology
The Bankers Life and Casualty Company Center for a Secure Retirement’s study Middle-Income Boomers, Financial Security and the New Retirement was conducted in March 2011 by the independent research firm The Blackstone Group. The complete report can be viewed here.
About the Center for a Secure Retirement
The Bankers Life and Casualty Company Center for a Secure Retirement is the Companys research and consumer education program. Its studies and consumer awareness campaigns provide insight and practical advice for how everyday Americans can achieve financial security during retirement.
Established in 1879 in Chicago, Bankers Life and Casualty Company focuses on the insurance needs of the retirement market. The nationwide company, a subsidiary of CNO Financial Group, Inc. (NYSE: CNO), offers a broad portfolio of life and health insurance retirement products designed especially for seniors.
Study Reveals Americans' Discipline
for Long-Term Planning in an Age of Immediacy
'Stick With It' study shows top strategies to stay on track:
take baby steps, expect setbacks, never let yourself off the hook
MILWAUKEE- According to a national study just released by Northwestern Mutual, a leading provider of financial security, three out of four Americans (74%) feel the pace of today's society is making it harder for them to focus and remain on track toward achieving long-term goals.
The research, called the Stick With It study- also reveals how some people are successfully remaining focused over time. The No. 1 strategy that works is 'setting small interim goals,' with nearly seven out of 10 people (67%) reporting this as a key step to ensure a long-term goal is achieved. The two next most common strategies seemingly go hand-in-hand: 'allowing yourself to make mistakes' (62%) but 'holding yourself accountable' (60%). See 'Strategies for Success' here.
"Achieving long-term goals is particularly challenging at a time when just about everything around us is getting more immediate," said Greg Oberland, Northwestern Mutual executive vice president. "The good news is that Americans appear to be adapting. The people who participated in this study said loud and clear- the best way to stay focused is to take baby steps, expect setbacks, and never let yourself off the hook. In short: don't expect it to be easy, but stick with it."
Scoring Goals in America
The Stick With It study, conducted by independent research firm Market Probe, uncovers wide-ranging insights into how Americans prioritize their goals and pursue them over time. Among the key findings:
When it comes to setting goals, money trumps family. When asked what areas people set goals in, financial goals come out on top:
- Financial (72%)
- Family (62%)
- Fitness (57%)
- Work (55%)
- Diet (54%)
When it comes to the self-discipline required to achieve goals, family and work trump money. When asked what areas people have the most self-discipline in, the responses were:
- Family (77% reporting 7 or higher on a 1-10 scale)
- Work (70%)
- Financial (55%)
- Diet (38%)
- Fitness (36%)
People need the most help with finance, fitness and diet. When asked what areas people feel they could use more self-discipline in, the responses were:
- Fitness/Diet (62%)
- Financial (47%)
- Work (20%)
- Family (18%)
In other words, the best link between goal-setting and self-discipline, or 'stick-with-it-ness,' comes in people's family lives and careers. Yet, there are substantial disconnects in three areas- financial lives, fitness and diet- in which people acknowledge needing more self-discipline. See related data on 'Goal Setting & Self-Discipline'.
Financial goals
Among financial goals, the desire for long-term protection is clear. The top financial goals include:
- Maintaining a comfortable standard of living during retirement (78% reporting 7 or higher on a scale of 1-10)
- Not falling below your current standard of living (73%)
- Protecting your income in the event of a disability (60%)
- Protecting your family's standard of living in the event that the household breadwinner passes way unexpectedly (55%)
These numbers came in notably higher than other common goals such as:
- Building a sizable investment portfolio (47%)
- Making a major purchase such a car, boat or furniture (30%)
- Financing your children's college education (29%)
"Success is not about where you stand; it's about where you're going. It's about the road you're on. All across America, people have become more risk-sensitive and are pursuing financial security on a more realistic path. The challenge now is sticking with it," said Oberland. "As with anything else that is difficult, for those who have the discipline and the patience, the rewards can be extraordinary. Whether it is finances, career, diet or fitness, sticking with it pays dividends."
Allianz Life CEO Identifies America's New Retirement Paradigm
Research paper shows Americans now seeking guarantees versus market risk
MINNEAPOLIS -Allianz Life Insurance Company of North America [last week] released a research paper that finds America has entered a new wave of retirement thinking focused on 'guarantees' and 'lifetime income,' replacing a previous wave that was more concerned about 'rate of return' and 'control.'
Authored by Allianz Life President & CEO Gary C. Bhojwani, 'Rethinking What's Ahead in Retirement' identifies three waves of retirement thinking since World War II. In the first wave just after the war, baby boomers' parents focused on financial 'safety,' with the bulk of their assets held with banks and life insurers. The boomer-led second wave centered on rate of return and asset mix, leading to the rise of mutual fund investing. Today, concerns about market risk have led to a surge in demand for 'guaranteed lifetime income' in retirement planning.
'The three-legged stool of retirement funding- government via Social Security, employers through defined benefit plans, and individual savings- is less reliable than ever before," Bhojwani said. "Two of the three legs are shaky, which means personal assets are taking a bigger role to keep the stool upright. Boomers now know they may outlive their assets and thus must learn how to convert those assets into guaranteed retirement income."
Using proprietary research, as well as government and industry data, Bhojwani identifies land mines dotting the retirement landscape. Longer life expectancies and ongoing medical breakthroughs mean Americans will likely need their assets to last longer than they expected. Health care costs continue to rise, putting more pressure on retirement savings.
But perhaps the least understood risk is the impact of sequencing of returns. Even with a solid nest egg at retirement, Bhojwani shows that depending on the timing of the initial withdrawals and how the market performs during those years, a person could face a gap of up to 13 years in how long their money will last.
"While it is hard enough to accurately project an average annual return over an extended period of time, it is essentially impossible to project specific returns each year and determine how they will affect a distribution strategy in retirement," Bhojwani writes.
The paper suggests that insurers are in a unique position to pool overall longevity and financial risk and are thus able to give people the opportunity- in the form of annuities- to guarantee a stream of income that can last throughout retirement. Guarantees are backed by the financial strength and claims paying ability of the issuing insurance company.
"Americans have come to grips with the new reality that it is nearly impossible to feel secure about retirement income if some of it is not guaranteed," Bhojwani said. "The fear about outliving one's assets is very real. This is fundamentally changing the behaviors of all consumers and is a catalyst for new thinking."
Download a copy of the white paper here.
Allianz Life Insurance Company of North America has been keeping its promises since 1896. Today, it carries on that tradition, helping Americans achieve their retirement income goals with a variety of annuities and life insurance products. As a leading provider of fixed index annuities, Allianz Life is part of Allianz SE, a global leader in the financial services industry with nearly 155,000 employees worldwide. Based on its revenue, Allianz SE is the 20th largest company in the world (Fortune Global 500, August 2010).
IRI Releases Redesigned Advisor Fact Book
A comprehensive authority on 'insured retirement strategy'
WASHINGTON, D.C. - The Insured Retirement Institute (IRI) this week released the tenth anniversary edition of the IRI Fact Book. The 2011 IRI Fact Book has undergone a complete redesign and renaming to better reflect the mission of IRI, featuring nearly 200 pages of the most reliable, comprehensive data and information on insured retirement strategies, including fixed and variable annuities. The overall focus of the new IRI Fact Book has been expanded to include practical information to help financial professionals better understand, and serve, their clients by addressing subjects beyond annuities - a first for this publication. While the Fact Book continues to be a reliable, trusted source for information regarding the annuity industry, readers now will also have access to practice management tips and information, as well as the latest consumer research regarding retirement planning, among other newly included topics.
"The redesigned Fact Book marks yet another important milestone in not only the growth of our association, but the insured retirement income industry as a whole," said IRI President and CEO Cathy Weatherford. "Through our expanded lineup of issues, information and data, this year’s publication is truly comprehensive. As the industry's preeminent reference guide, the Fact Book sets the bar in terms of content and scope, and this edition is no exception."
Highlights from the IRI 2011 Fact Book include:
- New statistics and authoritative analysis from renowned industry leaders;
- Editing and rewriting of every chapter from nearly two-dozen expert contributors;
- Ten new topical areas, including the changing face of retirement, and planning for rising healthcare costs;
- Five new research areas, with an entire chapter dedicated to consumer use and attitudes towards annuities;
- Several completely new and proprietary chapters, including one on practice management which addresses strategies to help manage assets in retirement; and
All the latest industry data and trends, among many other items.
Click here to read the table of contents from the 2011 IRI Fact Book.
Set the Dial to 'Senior Citizen Me'
Closing the gap between present self and future self
by Jay DeVivo
Mr. DeVivo is a principal with String Financial, LLC., and develops applications to enable DC plan participants to better prepare for retirement. He can be reached jrdevivo@gmail.com
Improving retirement savings behaviors is ultimately an exercise in helping people learn how to delay gratification. Convincing people that they can surmount the discomfort that comes with deferring pleasure for the benefit of their future selves is, well, really, really hard.
In a recent Wall Street Journal article, Jason Zweig covered an interesting project at Stanford University that aims to 'close [the] gap between the present self and the future self.'
Researchers have identified a 'Proteus effect'; differences in real-world behavior based on changes in how we are physically represented in a virtual world. In an exercise reminiscent of Calvin and Hobbes transmogrifier, researchers use software to 'age-morph' photographs of young adult volunteers to create senior citizen avatars of the college-age study participants.
In one study, participants who saw their gray-haired future selves reported they would save twice as much compared to those who did not.
In another study, participants were shown avatars of themselves that smiled when the saved more and frowned when they saved less. Participants 'whose avatars were morphed into retirement age said they would save 30% more than those whose avatars were not aged.'
Hal Ersner-Hershfield, a psychologist studying how emotion and time perspective impact long-term financial decision-making, and currently a visiting professor at Northwestern University's Kellogg School of Management, led the study.
Any number of real-world applications might come out of the Stanford research. Dan Goldstein of London Business School, another psychologist who worked on the project, suggested an interesting one; '[a]n employee's ID photo could be age-morphed and placed on the benefits section of a company's website.'
Jason’s article mentions several other experimental ideas from academic laboratories that show promise. One finding that could form the basis of a host of applications comes from research sponsored by ING Financial and conducted by Shlomo Benartzi of UCLA, Sheena Iyengar of Columbia University, and Alessandro Previtero of the University of Western Ontario.
Their research illustrated that when participants were asked to think about their retirement in specific terms, they were more likely to take positive action. They found “that when people spend three to five minutes imagining and writing down how they would feel in a comfortable and worry-free retirement, they become roughly 25 percentage points more likely to increase their savings on the spot.
Given the disjoint between retirement savings behaviors people pledge to adopt and the actions they actually take (Jason mentions a couple interesting gaps in his article), the clear impact of the imagining and writing exercise is all the more impressive in its results.
Transition To Retirement
Five touch-points to help you move your clients from accumulation to income
by Dana Pedersen
Ms. Pedersen is a vice president for The Phoenix Companies, Inc, responsible for annuity product development and pricing. She can be reached at dana.pedersen@phoenixwm.com
Instead of looking forward to retirement with excited anticipation, many retirees are fearful. They'e afraid they'll outlive their assets and be restricted financially by inflation and soaring healthcare costs. Add in the controversy over Social Security and Medicare and it's easy to see why Baby Boomers are concerned.
More than half of retirees, ages 55-79, are fearful that changes to Medicare and Social Security, as well as tax increases, will affect their ability to fund their retirement, according to recent LIMRA research.
Giving up a steady paycheck, especially in an uncertain economic environment, can be stressful. Many people also don't have assistance from a professional financial advisor, LIMRA reports. By going it alone, people can be at a significant disadvantage when it comes to making the transition from asset accumulation to retirement income.
Whether that means taking a 401(K), IRA or other lump-sum investment and creating a dependable income stream through an annuity or other insurance product, sorting out the options can be daunting. There are so many variables to consider, from longevity to market volatility. Retirees can miss out on the broad range of insurance products that can help ease the transition and provide long-term security.
The challenge for advisors is to match the clients' available resources to their income needs and help them develop a comprehensive financial plan that encompasses income, growth and long-term care elements.
Build Business by Being Proactive
But first advisors need to be proactive and reach out to clients and prospects. One strategy is to identify various 'touchpoints' when potential clients are more likely to focus on the future, and make contact with them at those critical points. Touchpoints might include personal milestones, such as a 50th birthday, or external forces, such as a layoff, steep market decline or new threats to government programs.
For advisors who are willing to be proactive, the demographics are favorable. Older Baby Boomers have already started to retire and many more will move toward retirement over the next couple of decades.
What follows are five common touchpoints advisors can use to tap into this market and help their clients build a bridge to a secure retirement.
1. Propose an Initial Check-In: Open the conversation. An initial touchpoint could be an invitation to talk about a client's or prospect's current situation and how they perceive the future. Are they hoping to retire within a year or do they plan to work another 15 years? Some clients may not have a good sense of what their future holds. An unexpected job loss, the possibility of a layoff, investment declines or health issues can all add uncertainty. A comprehensive assessment is the foundation for transition and retirement planning.
2. Build a Timeline of Milestones: Every case is different but there are some recognizable ages that are easily understood and can provide a useful structure for identifying key milestones. For example, at 50, people can begin putting catch-up funds into IRAs and other retirement accounts. At 59½, the penalty for early withdrawal from retirement accounts expires. While people can collect Social Security at 62, it's often wise to wait as long as possible to maximize benefits. Medicare eligibility begins at 65, and at 70½, minimum distributions from qualified retirement plans become mandatory.
Since most of these milestones apply to a majority of people, they are significant and convenient touchpoints.
3. Organize and Review Assets, Resources and Expenses: Offer to review clients' documents and help them organize their current financial position. Many people have their assets scattered among pensions, 401(k)s, IRAs, savings and investment accounts. They may be unclear about how much income a pension or Social Security will generate. They may also have no clear sense of how much money they will need upon retirement. By exploring and calculating all essential and discretionary expenses during retirement and comparing them to available income sources, advisors and clients can identify gaps or shortfalls.
4. Gauge Risk Tolerance: Any event that shakes the economy or financial markets or increases political instability can be a reason to talk a client about acceptable and unacceptable risk. Advisors must determine where clients fall on the risk and reward continuum. The potential for higher returns typically comes with more risk and volatility. A more stable and consistent guaranteed income offers security but often does little to address inflation. Typically, the more predictable the income level, the less flexibility, liquidity and inflation protection.
For instance, a single premium immediate fixed annuity will provide immediate income, with the most stability and in many cases, the highest level of guaranteed income available. However, immediate annuities can lack flexibility and the potential for income to increase based on potential market-upside. At the other end of the spectrum are variable annuities; they provide guaranteed income, but also offer the possibility for guaranteed income to increase if the market performs well. Indexed annuities tend to fall in the middle.
The advisor's job is to help clients determine how much uncertainty and market volatility they can handle financially and psychologically.
5. Identify, Alleviate Fears with Up-to-the-Minute Solutions: This is the point where it all comes together and you're able to provide transition solutions. Clients may still be worried and allaying those fears is essential. They may have a hard time fully understanding their options if their perceptions are clouded by fear. Assure them that the insurance industry has kept pace with the needs of Boomers and they can choose among a variety of insurance products including annuities, long-term-care policies, guaranteed lifetime withdrawal benefits, inflation protection and enhanced death benefits, and more. Often, the best solution will involve layering products and riders.
Variable and Indexed Annuities that offer Guaranteed Lifetime Withdrawal Benefits (GLWB) are currently very popular. For clients concerned about longevity, annuities with GLWBs can offer cost-effective protection. In situations where accumulated assets are lower than a client anticipated, some GLWBs offer an immediate increase or bonus to the income base used to compute the guaranteed withdrawal amount. For those clients who can afford to delay taking income, the income base may further increase through deferral bonuses or roll-ups. In addition, as a result of positive account performance, the income base may increase which in turn provides an increase to the guaranteed withdrawal amount.
With healthcare and long-term care costs expected to rise sharply in the next few decades, clients are also looking for long-term care solutions. LTC riders offered in combination with annuities provide a range of benefits and may give clients access to a higher percentage of their account value without early withdrawal charges or allow an accelerated payout, depending on the product's design.
Touchpoints Provide Roadmap for Helping Clients
With such a great, unmet need in the marketplace, advisors need to proactively define and utilize relevant touchpoints. From an initial check-in to the relatively complex arena of annuities and benefits, there are opportunities for numerous touchpoints. With many people on their own when it comes to making vitally important decisions, the need for skilled advisors to help clients transition from accumulating assets to creating a retirement income stream has never been greater.
If advisors can help them make the transition successfully, they can be assured that powerful word-of-mouth will help their businesses grow.
Shedding a Light On Retirement
ING: In today's world for today's consumers
The History of Retirement- Relatively Recent
Historically speaking, retirement is a relatively new concept, and given the rapid pace of change that has existed since 'the dawn of retirement,' it is no surprise that so many individuals feel in need of help in achieving this critical financial goal.
For context....
'In the beginning, there was no retirement. There were no old people. In the Stone Age, everyone was fully employed until age 20, by which time nearly everyone was dead, usually of unnatural causes. Any early man who lived long enough to develop crow's feet was either worshiped or eaten as a sign of respect. Even in Biblical times, when a fair number of people made it into old age, retirement still had not been invented and respect for old people remained high. In those days, it was customary to carry on until you dropped, regardless of your age group, no shuffleboard, no Airstream trailer. When a patriarch could no longer farm, herd cattle or pitch a tent, he opted for more specialized, less labor-intensive work, like prophesying and handing down commandments. Or he moved in with his kids.'
'As the centuries passed, the elderly population increased.'
'As industrial society developed, people continued working until their health failed.'
Generally, they had no options; there was no social mechanism or system to financially support them if they stopped working. This posed a problem for employers focused on workplace productivity, and for younger workers who found opportunities for employment blocked by older workers who could not afford to abandon their positions in the workforce, but were perceived as being less productive.
Social Security was introduced in 1935 as a way to make workers pay for their own old-age insurance, providing a safety net for older individuals to 'retire' at age 65 (or, more accurately, for current workers to fund longer-than-expected life expectancies of past workers). Hence the widespread concept of Retirement was born, but it's relevant to note that, at the time, average life expectancy was younger than retirement age of 65. Interestingly, as life expectancies have increased dramatically, the 'magic number' of 65 has remained sacrosanct throughout the 20th century and well into the 21st.
Ensuing decades saw a rise in employer paternalism, evidenced by the defined benefit pension system. Employers rewarded worker loyalty and longevity (to a point) with a gold watch and a pension income for life. Employees remained loyal to employers in anticipation of this income. Pensions, combined with Social Security, provided a potentially adequate retirement income for many individuals, including many of today’s pre-Baby-Boomer retirees.
As life expectancy grew and the concept of retirement became a possibility for more and more Americans, a concept known as 'the three-legged stool' took hold in the U.S. The concept espoused a three-pronged approach to retirement security: Social Security income, a pension from an employer, and personal savings.
To boost the personal savings component of ones' retirement, Congress passed the Employee Retirement Income Security Act (ERISA) in 1974 to encourage individuals to save for their own retirement. Defined Contribution plans were introduced as an 'add-on' benefit that gave workers, generally higher paid workers, from a practical perspective, a nice tax benefit for saving something extra for retirement.
The final quarter of the 20th century (roughly coinciding with the availability of wide spread employer-sponsored retirement savings arrangements) brought changes to the world, the workplace, and certainly to the very fabric of American life that would probably astound the creators of Social Security and even of ERISA. These changes have only multiplied in the first years of the 21st century. Individuals, workers, face stresses and uncertainties we couldn’t have anticipated 30 years ago. These changes bring us to a point where the workforce is fluid and mobile and the employer-paid pension system is becoming rapidly.
Download the entire report (PDF)
Three devastating events that can cause retirement plan to fail
And how to insure they won't leave you without money when you need it the most
by Philip Davis
Mr. Davis is president and founder of Corporate Compensation Plans, Inc., in Danbury, CT. He can be reached at ptdavis@corpcompinc.com
When it comes to money, there is only one thing that counts
The only thing about money that counts is not how much you have today, it is how much you have when you stop working either because you have to or because you want to. That is the reason, of course, why it is critically important to create a retirement plan that has certainty built into it that doesn't leave you at the mercy of events that can leave you without money when needed the most.
Here are three of those events that can do just that:
1. Another market sell-off causes a major loss of your investment assets.
2. You become disabled before age 65 and, as a result, contributions to your retirement plans stop.
3. You or your spouse need an extended period of health care because of a serious injury or stroke, or from illnesses such as cancer, Parkinson's and Alzheimer's.
Let's see why any of these three events can ruin your chances for financial security and then we'll talk about how to insure against them.
Devastating Event 1: A market sell-off causes a major loss of your retirement assets
The past three years have been a reminder that the market has its ups and downs, and the problem with the downs is that you may not have enough time to make up for the losses you have suffered.
For example, let's assume you have $1,000,000 today, but tomorrow the market tanks (think three years ago) and all of a sudden your $1,000,000 is worth $650,000, a 35% loss. And now you want to find out how much time it will take to get your million back. Here is the answer:
Years required to make up your $350,000 loss
At 5%, it will take you 9 years just to get back to your original $1,000,000. But that's just the half of it because, during that period of time, your $1,000,000 would have grown to $1,551,000 at the 5% rate had there not been a bear market:
- $1,000,000 in 9 years at 5%: $1,551,000
- $650,000 in 9 years at 5%: $1,000,000
- Loss: $551,000
In other words, it is impossible to make up for a market loss given equivalent rates of return on your investment portfolio.
Devastating Event 2: You become disabled before you retire and, as a result, contributions to your retirement plans stop
Here is a truism about 401k and other defined contribution plans:
If you don’t make contributions to them you are not going to accumulate any money.
Here is another truism:
When you become disabled and cannot work, contributions to your 401k and 403b plans will stop and you are not going to accumulate any new money. In addition, you may have to withdraw money from your investment and retirement plans just to maintain your family’s standard of living and pay uninsured medical bills due to your disability.
In other words, an almost guaranteed way not to have a secure retirement is to become disabled.
Devastating Event 3: You need an extended period of health care after you retirement
It is a waste of time debating the odds that you or your spouse will ever need long term health care because your chances of needing it will either be 0% or they will be 100%. But one fact is not debatable: An unfortunate health care event such as a serious stroke or injury or an incurable disease such as Alzheimer's can cost over $1,000,000.
There are only two ways you can pay these costs: (1) from your income or (2) by liquidating your assets and here are the consequences:
1. A lower standard of living for your family if costs are paid from income.
2. Less money for your family at your death if costs are paid by liquidating assets.
3. The potential for additional taxes if you have to sell assets or take distributions from your qualified plans to pay care costs.
4. The possibility that your family could completely run out of money all together.
Two solutions to these three events
There are two ways to deal with these three devastating events that can devastate your retirement and investment plans:
1. The Hope Plan: I hope I won't lose a great deal of money in the market, I hope I won't become disabled before I retire, and I hope I won't need long term health care after I retire.
2. A Guaranteed Retirement Security Plan that contains these components:
- A special annuity insurance plan that guarantees your equity accounts against market loss.
- A special disability insurance plan that continues your retirement contributions when you become disabled so your assets will grow just as if you were working.
- A special disability insurance plan that provides this long term health care value proposition:
- It will pay your costs if you need care.
- It will refund your premiums to your family if you don' t need care
- It, if you qualify, can use tax subsidies to pay a significant portion of your premium.
These components put certainty into your retirement plan and transfer potentially catastrophic risks from your investment accounts to where they belong with an insurance company.
Conclusions
Investors need to spend less time chasing yield and more time remembering the two rules of financial success that have been attributed to Warren Buffet:
Rule 1: Don't lose your money.
Rule 2: Don't forget Rule 1.
Notes and Observations from the 2011 Retirement Industry Conference
Looking outside of our fishbowl
by Jay DeVivo / posted at The Retirement Report on 21 April 2011 at 12:02 am
Last month, I attended the Retirement Industry Conference in Las Vegas sponsored by LIMRA, LOMA, and the SOA. Below are my notes and observations on three themes that ran through the conference: 1) looking to different disciplines and industries to spark innovation; 2) becoming more customer-centric; and 3) the use of technology and social media.
At the end of my post, I also include some notes on a very interesting case study of Eddie Bauer's 401(k) plan. Two key takeways from that presentation:
The most important brand may be the employer's not the plan providers.
There will be greater use of 'tactile' applications to increase engagement and a continued shift from focusing on participant 'education' to changing participant behavior.
Next week, I will do case study of 401(k) plan makeover that I will be presenting at the 2014 Retirement Industry Conference.
_________
Looking outside of our fishbowl
Several presenters across multiple panels cited the need to employ behavioral science and to look to industries outside of financial services and insurance for innovation inspiration. Some examples:
Changing distribution. Pharmaceutical manufacturers reshaped the distribution landscape by marketing directly to consumers
Innovate like Apple. Apple was cited by at least 3 different panelists as an innovation model. Can the industry innovate like Apple? One made the point that Apple does not have focus groups. They do not ask customers what they want because their customers could never articulate the products that ultimately fly off the shelves (Apple execs often cite the famous Henry Ford quote, "If I'd have asked my customers what they wanted, they would have told me 'A faster horse'). A bullet in blog post cannot begin to describe the Apple innovation process but this article by Alain Breillatt of Pragmatic Marketing does a pretty good job.
Creating good habits requires relevant and important benefits. Robert Powell cited noted consumer psychologist Carol Berning – whose experience ranges from saving Fabreeze for Proctor & Gamble to getting Ghanaians to wash their hands after using the toilet (toilets were perceived as clean as they replaced pit latrines) to reduce disease 'that the most important principle of instilling habits in consumers is that the benefits must be relevant and important.'
Get to know our customers, then build our business around them
The retirement market is too focused on products and the customer is generally viewed as the plan sponsor as opposed to the participants.
We are ignoring most participants. 'Participants' are generally treated as though they are a homogenous group of people. To borrow Great-West's investor types, people fall across the spectrum from Do-It-For-Me to Help-Me-Do-IT to Do-It-Myself. Most products are designed and marketed toward the Do-It-Myself end of the spectrum, though that is where the smallest part of the population falls.
We don't know much about our customers. Financial services and insurance companies know very little about their customers compared to other consumer product companies. The analytics on the totality of consumers' lives simply isn't done. Companies selling investment products need to remember that their competition isn’t just other financial services companies and insurers, they are competing with Apple, Sony, and granite countertops.
We are still pushing products and too focused on lowering costs on commodity services instead of investing in differentiating services. As much as companies claim to be 'solution providers' most are not. George Walper, President of Spectrem Group, notes that most retirement management teams are focused on selling products to plan sponsors based on their firms' operational capabilities and product offerings. We are pushing people online to reduce transaction costs instead of using Skype in call centers for education. He maintains that in the future, plan design, investment management, recordkeeping, and trustee services will all be commodity services. Providers will have to differentiate themselves by providing participant-oriented solutions and relationship management. George points to the many initiatives companies employ to retain rollover assets. If you are providing them with solutions the moment they come into the plan, they don't need to decide what they are going to do with the money, they are going to leave it with you because you are the ones helping them.
Technology and social media
There was a lot of discussion about the use of technology and social media. There was a lot of debate on the use of social media, with most presenters coming down on the side that it is an ancillary tool, not a primary one. The best comments on technology came from Bill Harmon, VP of 401(k) Sales at Great-West Retirement. Here they are, paraphrased:
There are great engines and calculators online, but they are not being used. There is an app called 'Angry Birdsâ'that tons of people mindlessly use. How may people us it (about 2/3 of the room raises their hands). Why can't we build a game that people want to play? The 'hip world' is not just kids anymore, it is us. But it is 'us' when we get home, not 'us' at work. That has to change.
Two interesting applications of technology
Transamerica Retirement Services unit is using iPads to do enrollment and can have participants enrolled in as little as 3 taps.
vWise is aiming to obviate the need for enrollment meetings altogether through web videos. vWise creates content with high production values, serves participants the content relevant to them, tracks the content viewed by each participant for analytics, and makes the content truly interactive by embedding forms and participant activity inside the video. Some early results: A TPA using their system that showed first-time enrollees contributing at an average rate of 8.3% of salary and existing enrollees increasing their participation by an average of 2.3 percentage points of salary.
Eddie Bauer case study
Eddie Bauer had their 401(k) plan with a major financial services company. The plan was not well-used and the company was concerned that their employees would not be prepared for retirement. OneAmerica and Loctkon Financial Advisors teamed up to revamp the plan. Two big challenges:
Not centralized, lots of locations. Most of the locations, warehouses and retail stores, were not conducive to typical enrollment meetings
The broad demographics and large age spreads meant many different learning styles
OneAmerica set up a micro site, www.eddiebauer401k.com, that is still up today, as the enrollment portal. Eddie Bauer's brand is an outdoor active lifestyle. The enrollment portal and supporting materials were designed to reflect that brand. The companies took the approach of talking to Eddie Bauer associates in the language they used every day, language that was unique to the company. The brand that mattered was Eddie Bauer's, not OneAmerica's. A few interesting details:
Eddie Bauer's Creed and Guarantee are featured prominently on the portal's home page.
The word 'retirement' appears just once on the portal (describing a calculator) and once in the 16-page 401(k) Plan Enrollment Overview.
There are no target funds, but there are lifestyle portfolios based on investor profiles that reflect the EB brand. These profiles are: Extreme Adventurer, Weekend Explorer, Day Hiker, and Eco Camper.
The Eco Camper profile reads, in part: Recognizes the precious nature of the environment. You are more concerned about the future of our environment and society than your own financial gain. Fifteen percent of plan assets are in the Eco Camper portfolio.
50% of all plan assets are in the lifestyle portfolios.
Saving for retirement takes a back seat
as workers struggle with day-to-day expenses
Workers fear outliving retirement funds
NEWARK, N.J.--(BUSINESS WIRE)--Workers' top three concerns last year -- having job security, making ends meet and having appropriate health insurance -- remain the same as in 2009 as Americans put off thoughts of saving and planning for retirement to deal with more immediate issues. According to The Realities of Getting Ready for a Secure Retirement, the fourth in a series of research briefs stemming from Prudential's Fifth Annual Study of Employee Benefits: Today & Beyond, the need to save for retirement is not recognized as one of the top financial needs and concerns. However, 64% of workers did rank it as 'highly important.' As expected, 58-59% of those under 45 years old ranked it as 'highly important,' below the more immediate need to reduce stress levels and improve emotional well-being (67%).
In the short term, an income loss may result in the need to dip into ones savings or workplace retirement savings plan. Longer term, retirement benefits, often based upon salary amounts, may be reduced.
"The survey has seen a marked shift in responses over the last few years as workers continue to be concerned about the state of the economy and their own financial security," notes James Gemus, vice president Life Product Management, Group Insurance. "The reality is that it's even more important to plan for retirement security in uncertain times as the traditional safety nets may fall short."
According to Prudential's Study of Employee Benefits: 2007 & Beyond, in 2007 saving for retirement was rated 'highly important' by 76% of workers surveyed, 12 points higher than the most recent results. Over the same three-year period, those surveyed became increasingly concerned about having financial security if a main wage earner could no longer work due to disability (60% in 2007 vs. 67% in 2010), or death (47% in 2007 vs. 53% in 2010).
"Loss of work due to such dire events, while appearing to affect only the present, has long-term implications, as reduced income can have a serious impact on retirement funding, as well," Gemus added. "In the short term, an income loss may result in the need to dip into ones savings or workplace retirement savings plan. Longer term, retirement benefits, often based upon salary amounts, may be reduced."
While retirement savings may not be cited as one of the top priorities in the study, it still remains a concern for 72% of workers who note that it is 'highly important' that their money last through retirement. This number jumps to 85% for those over 45.
The attitude of U.S. workers toward retirement differs based on the number of years until retirement. The Realities of Getting Ready for a Secure Retirement looks at survey results among four categories based on different career and life stages from those within five years of retirement -- In the Home Stretch -- to those facing more than 20 years in the workplace -- Building the Nest Egg.
"For those farthest from retirement, not surprisingly, retirement planning is off the radar," says Gemus. "However, the near disappearance of traditional pension plans, coupled with the fact that only about 30% of employers offer insurance benefits to their retirees, mean this group has a larger stake in preparing for their own retirement security."
Among workers closest to retirement the biggest concern is for their future financial and physical health, with 90% citing it 'highly important' that their retirement savings will last as long as needed, and 91% that they have adequate health insurance once they enter retirement.
"The good news is that it's never too late for pre-retirees to find a trusted source of financial advice and take action within employer-offered retirement plans that will help secure their retirement savings," concludes Gemus.
Prudential's Fifth Annual Study of Employee Benefits: Today & Beyond was conducted via the Internet during April and May of 2010 and consists of three distinct surveys targeting plan sponsors, plan participants and brokers/consultants. The research was conducted for Prudential by the Center for Strategy Research, Inc., a Boston-based independent market research firm.
Prudential Financial, Inc. (NYSE: PRU), a financial services leader, has operations in the United States, Asia, Europe, and Latin America. Prudential's diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management and real estate services. In the U.S., Prudential's iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century. For more information, please visit go here.
Boomer Retirement Expectations Clouded
By Concern about Savings and Income
For 9 out of 10 Boomers, Annuities increase confidence in retirement security
WASHINGTON, D.C. - The Insured Retirement Institute (IRI) this week released the results of an exclusive survey that found that more than one-third of pre-retirees do not know the age at which they will retire. The research, Boomer Expectations for Retirement, also found that among this group, three out of 10 Boomers cited concern about having sufficient assets as a top issue, while over half said they will work for income in retirement (meaning they are actually not retired). However, Boomers who own insured retirement products have a higher confidence in their overall retirement expectations, with nine out of 10 believing they are doing a good job preparing financially for retirement.
Boomer Expectations for Retirement examines the impact of the recent recession on Boomer retirement prospects, analyzes the age at which they expect to retire and identifies their anticipated sources of income in retirement. The survey was released during an educational media forum hosted in New York City as part of National Retirement Planning Week.
"This year represents a watershed moment in terms of retirement planning, as the first of 79 million Baby Boomers inaugurate a nearly 20-year long Retirement Boom throughout America," said IRI President and CEO Cathy Weatherford. "However, for many of them, their retirement expectations have been hampered by recession-related financial difficulties. Uncertainty abounds as to when they can retire, if at all, with more than half stating they expect to work during what should be their retirement years. Clearly Boomers are lacking the confidence that they will be able to enjoy a financially secure retirement. Now more than ever, we must come together to help educate all Americans on the importance of holistic retirement planning, putting them on a path to a brighter financial future."
Other key data points from Boomer Expectations for Retirement include:
- The recent recession has had a significant impact on Boomers' thoughts on retirement savings and income. Nearly half of the survey respondents related that recent economic changes made it more difficult for them to pay for essential items, and one-third stopped contributing to a 401(k), IRA or other retirement accounts.
- More than one-third of pre-retirees indicated that they did not know the age at which they would retire. Three out of 10 Boomers who are uncertain as to when they will retire cited concern about having sufficient assets as a top issue.
- Many Boomers expect to work during their so-called retirement. More than half (57%) of pre-retirees expect that pay received from employment during retirement will represent a source of income.
- While two-thirds (61%) of Boomers identified a specific age at which they plan to stop work completely, nearly a quarter of them chose an age that does not make them eligible for full Social Security benefits.
- 41% of Boomers view Social Security as a major income source during retirement, while 43% stated that it will only provide a minor source of retirement income.
- Only one-third of Boomers expect personal savings and investments to play a major role in generating retirement income, a statistic that is consistent between younger and older Boomers and indicates a strong, addressable market for individual retirement products.
- More than half (57%) of pre-retirees expect that pay received from employment during retirement will represent a source of income.
- Nearly eight out of 10 Boomers who own annuities have a higher confidence in funding long-term care needs, with 86% stating they expect to live comfortably in retirement.
View the IRI survey Boomer Expectations for Retirement
Nearly Half of All Workers Have Less Than $10K in Savings
IRI, EBRI & National Retirement Savings Coalition Kick-Off Week Long Consumer Education Campaign
WASHINGTON, D.C. – The Insured Retirement Institute (IRI) today hosted a consumer retirement readiness webinar to kick-off the week long education and outreach activities in support of National Retirement Planning Week® (NRPW). Conducted by Employee Benefits Research Institute (EBRI) President and CEO Dallas Salisbury, the webinar revealed that half of all workers (50%) cite low confidence in having enough money to live comfortably throughout their retirement years. In addition, while the majority of workers are saving money for retirement (68%), nearly half (46%) have less than $10,000 in savings and investments.
NRPW is held annually by IRI and sponsored by The National Retirement Planning Coalition – a group of prominent financial industry, education and advocacy organizations that have joined together to raise public awareness of the need for comprehensive retirement planning. National Retirement Planning Week® 2011 runs from April 11-15.
“America is facing a retirement crisis, one that Boomers are realizing today and looms for generations to come,” said IRI President and CEO Cathy Weatherford. “While the good news is that workers are saving, unfortunately, they are doing so at levels that will not sustain a financially secure retirement. By bringing this coalition together – and offering financial education and information – we hope that we will be able to raise awareness around the critical need for Americans to plan holistically for retirement.”
Other key data points from EBRI include:
- Low confidence extends to health care as well, with half of all workers (50%) expressing little belief that they will have enough money to pay for medical expenses in retirement.
- Nearly half of all Boomers (47% for early Boomers and 44% for late Boomers) are “at risk” for inadequate retirement income.
- Generation X is also on pace to face retirement difficulties, with 45% determined “at risk” for inadequate retirement income.
- Only 42% of all workers have tried to calculate how much money they need to save for a comfortable retirement.
Click here to view the presentation from EBRI’s consumer retirement readiness webinar.
The National Retirement Planning Coalition is headed by the IRI, and includes the American Council of Life Insurers (ACLI), Americans for Secure Retirement (ASR), Center for Retirement Research at Boston College, Defined Contribution Institutional Investment Association (DCIIA), Employee Benefit Research Institute (EBRI), Financial Services Forum, Financial Services Institute (FSI), Financial Services Roundtable (FSR), National Association of Fixed Annuities (NAFA), NICSA, Retirement Income Industry Association (RIIA), The American College, The Aspen Institute Initiative on Financial Security (Aspen IFS) and Women's Institute for a Secure Retirement (WISER).
The Coalition recognizes that the need to educate Americans on retirement planning is an ongoing effort and is committed to making this a national priority. The National Retirement Planning Week® and other coalition activities will demonstrate that it is possible to “Retire On Your Terms” if comprehensive retirement plans are properly developed and managed. To support these education efforts, the coalition maintains a year-round website – www.retireonyourterms.org – offering resources to both consumers and financial professionals alike, in order to help them stay focused on long-term financial goals.
About the Insured Retirement Institute: The Insured Retirement Institute (IRI) is a not-for-profit organization and is the authoritative source of all things pertaining to annuities, insured retirement strategies and retirement planning. IRI exists to vigorously promote consumer confidence in the value and viability of insured retirement strategies, bringing together the interests of the industry, financial advisors and consumers under one umbrella. IRI’s mission is to: encourage industry adherence to highest ethical principles; promote better understanding of the insured retirement value proposition; develop and promote best practice standards to improve value delivery; and to advocate before public policy makers on critical issues affecting insured retirement strategies. Visit www.IRIonline.org to experience the new, vast resources of the new Insured Retirement Institute for yourself.
SunLife Financial Advisor Survey:
Investors Need Retirement Income Planning 101
WELLESLEY, Mass.--(BUSINESS WIRE)--A national survey of nearly 500 financial advisors conducted by the U.S. business group of Sun Life Financial Inc. (TSX/NYSE: SLF) reveals that many investors have to adjust their retirement income plans after entering retirement, mostly in order to meet necessary expenditures, not to satisfy lifestyle choices. Over three quarters (77%) of advisors surveyed by the Sun Life Financial Retirement Income Pulse Poll of Financial Advisors say clients need to adjust their retirement income plans, to either avoid running out of money or to meet non-discretionary costs such as healthcare.
"We need to do a better job of demonstrating to investors that a guaranteed income solution represents an important risk-reward proposition for a retirement income portfolio"
"This suggests that the investment planning and advisory community has an opportunity to help prospective retirees build more robust, versatile retirement plans before people ever retire," says Steve Deschenes, Senior Vice President of Annuities for Sun Life Financial. "That's why we've co-sponsored National Retirement Planning Week, April 11th to the 15 th, to raise awareness of the need for comprehensive retirement income planning."
Variable Annuities: the Gap Between Retirement Needs and Best Practices
Given the decline of traditional options for receiving guaranteed lifetime retirement income, such as employer-sponsored defined benefit plans, the poll explores investor knowledge of variable annuities with a living benefit, which can provide guaranteed lifetime income. The poll reveals a significant gap between investors' desire to generate guaranteed lifetime income, and their understanding of best practices to do so. For example, while the top concern of clients age 50 or older is having enough income to retire on, most advisors say that on average, over half (62%) of investors who could benefit from variable annuities don't actually own them.
Education Needed on the Basics of Guaranteed Retirement Income
The poll identifies several solutions to bridge the gap between retirement income needs and best practices. Nearly a third of financial advisors (27%) conclude that their clients aged 50 or older lack the knowledge to evaluate variable annuities. Over a third of advisors (38%) say better education would boost participation by those investors who would benefit from variable annuities. An equal proportion of financial professionals (38%) say making this asset class easier to understand would increase participation in variable annuities by those who would benefit from them.
Closing the Value/Credibility Gap
The survey also suggests that increased investor confidence in the value and credibility of variable annuities would boost participation in this asset class by those who would benefit from them. Nearly half of advisors (43%), for example, say lower fees would boost investment.
"It's up to us in the retirement income planning field to show that guaranteed retirement income solutions are worth the money given the protection they help to provide against the risk of declining interest rates, the risk of a declining stock market, and the risk (if you're are lucky enough to live a long life) of running out of money," says Terry Mullen, President of Sun Life Financial Distributors. "Investors are paying us to provide them a guaranteed income stream for 30 or 40 years. That's an important service, since for most Americans, gone are the days of defined benefit plans, where the employer provided guaranteed lifetime retirement income."
Explaining the Risk-Reward Proposition of Guaranteed Retirement Income
"We need to do a better job of demonstrating to investors that a guaranteed income solution represents an important risk-reward proposition for a retirement income portfolio," adds Steve Deschenes. "Variable annuities, for example, do more than generate guaranteed income for life. As our newly streamlined quarterly statement to clients underscores, variable annuities, when coupled with optional living benefits, help to maintain income levels, even if your underlying investment falls, and to boost income if your underlying investment rises. In some cases, living benefits also offer a guaranteed annual increase in income, to help conserve purchasing power. The more we can educate investors about the value of building a retirement income portfolio that includes a product offering guaranteed lifetime income as an asset class, the less clients will need to adjust asset allocations during retirement."
About the Sun Life Financial Retirement Income Pulse Poll of Financial Advisors
Kelton Research conducted the online Retirement Income Pulse Poll of Financial Advisors for Sun Life Financial from March 4th-11th, 2011. 477 financial advisors were surveyed, with average experience of 12 years. Roughly half (56%) require an investment of $100,000 or more. Over three quarters of respondents (83%) recommend variable annuities to clients.
Retirement Planning Education and Plain Language Communications
Committed to educating investors in plain language about retirement income solutions, Sun Life Financial has redesigned and streamlined its Variable Annuity Quarterly Statement, which reaches over 220,000 clients.
To help raise public awareness of the need for comprehensive retirement planning, Sun Life Financial has also joined with the National Retirement Planning Coalition (NRPC) to sponsor National Retirement Planning Week from April 11th-15th, 2011. In addition to dissemination of the Retirement Income Pulse Poll of Financial Advisors, National Retirement Planning Week will feature presentations on baby boomers and retirement, consumer retirement readiness, perceptions of risk management in the insured retirement market, and best practices for financial advisors to help consumers formulate plans for lifelong financial retirement health.
http://www.retireonyourterms.org/
About Sun Life Financial
Sun Life Financial is a leading international financial services organization providing a diverse range of protection and wealth accumulation products and services to individuals and corporate customers. Chartered in 1865, Sun Life Financial and its partners today have operations in key markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China and Bermuda. In the United States and elsewhere, insurance products are offered by members of the Sun Life Financial group that are insurance companies. Sun Life Financial Inc., the holding company for the Sun Life Financial group of companies, is a public company. It is not an insurance company and does not offer insurance products for sale in the United States or elsewhere, and does not guarantee the obligations of its insurance company subsidiaries. Product offerings may not be available in all states and may vary depending on state laws and regulations.
What is Retirement Income Success?
Incorporating income, growth and flexibility into the retirement equation
by Stephen L. Deschenes
Mr. Deschenes is Senior Vice President and General Manager, Annuities Division, Sun Life Assurance Company of Canada (U.S.)
Some people define retirement income success as not outliving their retirement income. Others define it as having time to do things they love. Still others define success as not worrying about losing everything. The correct definition is actually all of the above, and that's what makes building a retirement income plan so challenging.
There are three elements in any retirement plan that can really make it shine.
These elements are:
1) the certainty of protected income in down markets,
2) the opportunity in up markets to increase retirement income over time, and
3) the flexibility to adapt the plan to changing needs.
People today debate a lot about how to address potential shortfalls in retirement plans. The financial services industry focuses on four main risks that are key to a retirement income plan: lifestyle, investment, longevity, and inflation. Any of these can derail a plan, so industry players are trying to help consumers educate themselves while crafting solutions that potentially mitigate or even eliminate the effects of the risks altogether.
Today's retiree is in a unique situation. To that end, there is one thing that the industry, consultants, the financial media, and even the president of the United States now agree on guaranteed lifetime income is more important than ever before.
The reality
Those in the Boomer generation, on the cusp of retirement, are realizing that they are on the hook for funding it themselves. Their retirement could span 30 years or more. Employer-sponsored defined benefit plans have become a part of corporate America folklore, and the long-term outlook for Social Security is uncertain. The burden of funding retirement has shifted from the government and employers to consumers, who now need to understand and manage their retirement income plans.
A lack of understanding could have serious implications. A recent poll by the Employee Benefit Research Institute estimated that 47% of Boomers between the ages of 56 and 62 are at risk to run shy of the cash they'll need to pay for basic expenses and uninsured health costs in retirement.2 That's nearly half of the retirement population that will need to rework their plans, make adjustments to their lifestyles, or return to work during their "retirement."
Now, as consumers work with advisors to try to develop new sources of income to supplement current sources, they are growing more aware and appreciative of the value of annuities in order to meet this income gap. Annuities, which are long-term products designed for retirement purposes, are the only financial solution that can provide lifetime income guarantees in a down market and increase retirement income in an up market. This speaks directly to the certainty and opportunity factors, which are keys to a successful retirement income plan. Of course, all guarantees are subject to the claims-paying ability of the insurance company issuing the annuity.
Certainty: A guaranteed core
Many Boomers want a specific answer to the question: How much income do I need to live the retirement I want? It can be an overwhelming question and may be why the Insured Retirement Institute, a trade group, found that Boomers who are more than 5 years out from retiring have no idea how much they need to save for retirement.3 One of the first conversations many advisors have with their clients is about identifying needs versus wants, or in other words, core expenses versus non-essential expenses, for their retirement years.
Once clients determine their core expenses, such as mortgage payments, utility costs, food, and the costs associated with visiting grandchildren, they can plan for them by using guarantees offered with retirement income options.
As their core expenses are accounted for, worry dissipates and they can enjoy their lives. Guaranteed income earmarked for these essential expenses gives people freedom to make plans for retirement without having to worry about altering the lifestyle they are accustomed to.
"Key risks to consider when planning retirement income
Lifestyle risk relates to how most people want to enjoy certain hobbies and activities during retirement but may have to cut back their standard of living because they haven't adequately planned for the income needed to support their desired lifestyle. Sun Life's Unretirement Index found the lifestyle risk to be a real concern for a lot of individuals. Eighty percent of those people who plan to work at the age of 67 stated it was to earn enough money to live well.1
If not properly accounted for, inflation will eat away at the purchasing power of people's income or assets. For instance, assuming an annual inflation rate of 3.20%, you will need $938,780 in 2030 to replace $500,000 in 2010; that's 88% more in just 20 years.
Longevity comes into play when people outlive their assets or retirement income sources. According to the Annuity 2000 Valuation Mortality Table, life expectancy continues to climb. For a couple aged 65, there is a 50% chance of one person living to age 92 and a 25% chance of one living to age 97.
The investment risk is generally associated with asset allocation strategies or the opportunity costs of not participating in the stock market. But it's the impact that market losses have had on people's retirement savings that has many investors concerned. This is an all-too-familiar reality for many Americans: the Federal Reserve reported that households, on average, lost $100,000 in wealth from 2007 to the second quarter of 2010.
Of course, these are not the only risks that need to be considered. The impact of health care costs, withdrawing too much income and asset allocation decisions must also be factored into the overall income plan."
Certainty + opportunity = diversifying among asset classes
Experts typically suggest diversifying, spreading investment risk by making use of various assets, such as equities, fixed income, and cash, while building wealth. With market declines in consumer's portfolios over the past 2 years, many retirees who have begun withdrawing income should think of "guaranteed income" as a stand-alone asset class.
By building a retirement portfolio with guaranteed income sources and financial solutions that help grow income over time, many investors can enjoy the benefits of diversification. One approach to consider is to create a portfolio that combines a single-premium immediate annuity (SPIA), a variable annuity with a living benefit, and mutual funds. This strategy can protect and grow income, and also provides the flexibility to access more income if financial needs change. Allocating assets among these three sources of income showcases how certainty and opportunity can create a foundation for retirement income success. Please keep in mind that variable annuities and mutual funds involve market risk, including possible loss
of principal.
The advisor's role
Working with a professional advisor can provide the support and oversight necessary to fine tune a client's plan over time and make adjustments to offset risks that may get in the way of a client's success. Guarantees allow people the flexibility to live retirement on their terms. But a retirement plan with guarantees isn't necessarily on autopilot. In fact, people need to meet with advisors regularly to review their portfolio and make the necessary adjustments so they aren't caught off guard with an income gap. Mapping out current spending versus estimated spending and expected sources of income can be tedious, but it's better to uncover income gaps early instead of a few years down the road.
Companies have now developed solutions-based planning tools and materials, and advisors can use these as blueprints to help people move easily from the planning stage to making adjustments to current plans. These tools and materials connect on a different level with consumers given that retirement income planning carries with it an emotional component. Advisors can now provide solutions, not just products.
On the horizon
Consumers also need to consider three additional risks that could present challenges in developing a successful retirement income plan: health care uncertainty, not properly allocating assets, and the effect of withdrawing income. The results of the health care debate have real implications for those planning for retirement. Many retirement dreams are just one debilitating illness or severe injury away from not becoming a reality. Similarly, an individual's portfolio can be subject to adverse conditions if asset allocation isn't updated on a regular basis to align with a dynamic retirement income plan. And taking too much income can also adversely diminish future income. How much money can a person withdraw per year without depleting lifetime income? How much should one increase that withdrawal rate to beat inflation?
Consumers should discuss all of these risks with a trusted advisor, who can reveal the key to successful retirement planning: flexibility, guarantees, certainty, and opportunity.
Download the Sun Life Report -here-
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