Journal of Financial Planning: April 2013
Betty Meredith, CFA, CFP®, CRC®, is InFRE’s director of education and research. She oversees incorporation of research findings and best practices into InFRE’s certification study and professional continuing education programs to help professionals meet the retirement preparedness and income management needs of clients and employees. (email@example.com)
Many of you who read the Journal serve higher net worth clients where the mid-market doesn’t apply to your personal book of business. Your junior planners, however, should be aware of the following, because the retirement planning needs of the mid-market will be the big opportunity of their careers, in addition to health care planning.
According to LIMRA’s Retirement Income Reference Book (published in December 2012), investible retirement assets of U.S. households aged 55 and older are expected to reach $22 trillion by 2020, up from $12 trillion in 2010. That’s a whopping 83 percent increase!
Since 2000 I’ve been working with the Society of Actuaries (SOA) Committee on Post Retirement Needs and Risks (PRNR). Together, we’re contributing to the creation of a body of knowledge that identifies middle-mass and mass-affluent retirement risk and income management issues. (See www.soa.org/research for more on this work). Committee members are invited individuals from the Social Security Administration, the Department of Labor, the U.S. Government Accountability Office (GAO), and AARP; longevity, long-term care, and reverse mortgage experts; pension and product design actuaries; retirement researchers; and large consulting organizations such as Towers Perrin (now Towers Watson), among others.
Our goal is to provide clarity and direction to specific issues that stakeholders (government, product providers, advisers, employees, and consumers) can act upon regarding individual needs and risks after retirement. The work of this committee has generated new awareness of problems, products, government policies, and approaches that will benefit the retirement security of the mid-market over time.
So the challenges have been identified and defined. Now it’s our turn—the financial planning industry’s—to start acting on what we’ve learned.
We’re Still in the Trenches
“The Impact of Running Out of Money in Retirement,” a November 2012 joint report by the SOA, Urban Institute, and Women’s Institute for a Secure Retirement (WISER), demonstrates that many of the same issues identified in the first PRNR Retirement Risk Survey in 2001 (now updated every other year) are still with us today.1
We know that most Americans approaching retirement age have not accumulated enough investable retirement assets. And, most people fear running out of money more than they fear death.2
The Impact Report reflects the thought leadership of a multi-disciplinary group of retirement experts, and it concludes that for the mid-market, “running out of money is too large of a risk to self-insure.”
Ideas for Planning Approaches
Here are some planning approaches that address issues identified in the report that professionals should consider for mid-market clients when more than a 4 percent sustainable withdrawal income solution is needed.
Evaluate consumption replacement rates instead of income replacement rates as a means of measuring economic well-being. A person’s retirement spending needs as a portion of their total available retirement income and assets—or their complete inventory of economic resources—is what should be used when evaluating the adequacy of retirement income plans. This total resource concept, which is a more appropriate approach for planning for the mid-market, requires redefining how we analyze income and risk management solutions for those who have more non-investable than investable assets.
Put risk-reducing behavior and transference products in place first to prevent clients from running out of money. These may include working longer, increasing Social Security benefits for individuals and spouses, delaying pensions, conservative ways to use home equity when needed, securing long-term care coverage, securing longevity insurance for if they live past age 85, etc. Taking action in any of these areas will have a huge impact on a client’s retirement security. In other words, assets should be structured for conservation, growth, and/or liquidity only after risk transference products and behaviors are secured.
Increase your professional expertise with Social Security strategies for individuals, couples, and families. The mid-market’s largest off-balance-sheet assets are lifetime income sources, such as Social Security and pensions, according to T. Rowe Price and Social Security Administration data presented in The Impact Report. If the higher earner ($100k/year) of a couple died at age 80 and the lower earner ($50k/year) died at 95, a couple could increase their combined benefits from Social Security by 50 percent to $2.425M from $1.647M if they both delayed benefits until age 70. The 4 percent sustainable withdrawal approach ignores this valuable asset.
Improve your communication skills for helping clients understand the financial and emotional benefits of transferring their retirement risks instead of self-insuring. Studies have shown an increase in receptivity and purchase decisions when concepts such as delaying or securing additional lifetime income are effectively (and honestly) framed or positioned.3
Plan for and protect from “shocks.” According to data from the Urban Institute presented in The Impact Report, over an average nine-year period, among people over age 70, the majority of married couples and singles experienced any of the following shocks:
- Medical condition (67 percent of married couples; 50 percent of singles)
- Severe disability (29 percent of married couples and singles)
- Cognitive impairment (19 percent of married couples; 17 percent of singles)
- Enter nursing home (23 percent of married couples; 32 percent of singles)
Long-term-care coverage is therefore essential for this market. Individuals experienced a 40 percent drop in real wealth after entering a nursing home, and spouses experienced a 15 percent drop, according to the report.
Use products that protect against combined risks when possible. Interacting risks create complexity, so products that combine longevity and long-term care protection or long-term care financing and death benefit protection are essential. They are a much more efficient use of your time and your client’s money.
Hope Is on the Horizon
What is needed now is an integrated decision-making model that incorporates all the above and more, and that can be implemented through the use of software.
It’s been 12 years since I participated in the first PRNR Retirement Risk Survey. There is still not professional agreement on the “right way” to approach comprehensive retirement income and risk management planning for the mass market. I firmly believe that lack of established practice guidelines is the core reason why little progress has been made.
It is immensely refreshing to see the recent works of Wade Pfau, John Salter, and Michael Finke on alternate retirement income solutions to the 4 percent sustainable withdrawal rate for the mid-market, as well Moshe Milevsky’s and others’ product allocation work over the last 10 years. All have introduced much needed new strategies for managing the retirement assets, income, and risks needs of the mid-market.
The PRNR committee is interested in working with other organizations such as FPA to create the needed benchmarks and generally accepted practices. In my opinion, the financial planning community should be taking the lead on this initiative.
Once best practices are identified:
- Product companies can create better combination products that transfer and manage
- Software firms can incorporate the methodologies into their tools.
- Government and employers can focus on removing barriers to providing quality advice in the workplace using objective retirement planning software in conjunction with employer-sponsored plans.
- Internal operations at financial services companies can be streamlined to minimize cost and maximize productivity.
- Financial planners and other professionals can be taught how to more cost-effectively serve the retirement needs of the mid-market.
- The retirement income management needs and risks of the mid-market can then be efficiently served.
CFP Board-registered programs at universities—we need your help and that of your doctoral students to provide insight to further developing these concepts. Your students are the next generation who will benefit the most as professionals from having this guidance available to meet the needs of their future clients. Let me know if you’re interested in being part of the discussion and solution.
- Access the “The Impact of Running Out of Money in Retirement” and the bi-annual “Retirement Risks Survey” at www.soa.org/research/research-projects/pension/research-post-retirement-needs-and-risks.aspx.
- “Outliving Your Money Feared More Than Death,” Allianz Life Insurance Company of North America press release, June 17, 2010.
- Mackenzie, G. A. (Sandy). 2012. “Review of Can Annuity Purchases Be Influenced?” Society of Actuaries Pension Section News, February, issue 76.