One day, advisor Joe Lucey received a call from a commercial airline pilot who wanted to come in and talk about financing retirement. The pilot, whom we’ll call George, said he had heard Lucey talking about retirement planning on Secured Retirement Radio, a weekly show that Lucey hosts. That commentary prompted George to call for an appointment.
When George explained his purpose, he seemed calm enough, recalled Lucey, who is president of Secured Retirement Advisors in St. Louis Park, Minn. But it didn’t stay that way. George, then age 58, explained that he had been planning to retire at his airline’s mandatory retirement age of 65. But he had developed a medical problem. The resulting surgery was successful, but George realized that early retirement may now be in the cards. He and his wife had not planned for that, so his question was: “What do I do?”
It turned out that there were a lot of concerns lurking underneath that simple question: When to retire? When to take Social Security? What to do with the 401(k)? What happens if the airline’s pension plan fails? And what if his current return to good health changes quickly, even before the target retirement date arrives?
Then George’s “biggest fear” spilled out, Lucey said. That fear was, “Will we outlive our savings?”
Lucey set to work and helped the couple establish an income plan — which includes but is not limited to an annuity with a lifetime income rider — to address that very question. More on this later.
Retirement Risk and Anxiety
George is not the first to feel this anxiety and he won’t be the last. For decades, researchers have been documenting the risks people face as retirement nears. In recent years, they’ve increasingly zeroed in on baby boomers and subsequent generations, since the majority of them will not have traditional private pensions and will likely need to cobble together a patchwork of other financial approaches.
Risk isn’t always a bad thing. In small or measured doses, it can spark excitement, energy and enthusiasm. But if risk threatens to sap financial security, it can become a feeding ground for fear and anxiety. It is this threat to retirement security that policymakers, researchers, retirement plan providers and retirement advisors are addressing.
As long ago as 2006, before the last major recession, the Government Accountability Office (GAO) was warning that boomers and future generations will face serious challenges in this area.
The retirement security of these generations “will likely depend increasingly on individual saving and rates of return as guaranteed sources of income become less available” the GAO wrote in a report that year. “This reflects the decline of coverage by traditional defined benefit (DB) pension plans, which typically pay a regular income throughout retirement, and the rise of account-based defined contribution (DC) plans.”
GAO and a host of other researchers have identified a myriad of such risks over the years. They point to uncertainties about future Social Security benefit levels, declines in private-sector DB plans, difficulty in choosing and managing DC plan assets, cost increases for medical and long-term care, inflation, financial responsibilities for aging parents, outstanding loans (mortgage, school loans, credit card, etc.), rising housing and/or relocation expenses, and unanticipated “shock events,” among many others.
Is it any wonder that the Senate began a series of hearings on “Retirement (In)Security in America” in October 2010?
Five-term Sen. Tom Harkin, D-Iowa, then chairman of the Senate Committee on Health, Education, Labor, and Pensions and now retired, opened up the subject by talking about risk: “Nearly half of the oldest baby boomers who will turn 65 next year are at risk of not having sufficient retirement resources to pay for basic retirement expenditures — food, fuel, housing, clothing, that type of thing — and uninsured health care costs.”
Some people think exposure to risk is less problematic once a person enters the post-retirement period of life. But the Society of Actuaries (SOA), which tracks retirement risks closely, said risk continues.
In fact, the SOA keeps a Managing Retirement Risks chart (http://bitly.com/innm0515-soa) on its website that identifies and discusses the most prevalent risks in the post-retirement period of life. The current chart includes 15 biggies, among them longevity, inflation, interest rates, stock market, death of spouse, unexpected health care needs and costs, and ability to live independently, as well as bad advice, fraud or theft.
It’s not only retirement professionals who say these risks are weighing heavily on Americans. Consumers themselves say this. In 2013, for example, both pre-retirees and retirees told SOA researchers what concerned them most about retirement. First was keeping the value of savings and investments up with inflation (77 percent of pre-retirees and 58 percent of retirees); second was having enough money to pay for adequate health care (73 percent and 46 percent); and third was having enough to pay for long-term care (68 percent and 52 percent).
Runners-up included the possibility of depleting savings (66 percent and 41 percent) and maintaining a reasonable standard of living for the rest of life (65 percent and 41 percent).
Where Do Annuities Fit In?
Practitioners who work with annuities know that annuity products could help some consumers manage some of these risks.
These practitioners always add that annuities will not be the only solution and that, in some cases, an annuity won’t be the solution at all. But in view of the obvious need for a guaranteed income stream and the simmering consumer anxiety about how to fund retirement, advisors ask, “Couldn’t an annuity help with some of this?”
Not incidentally, the GAO touched on the point a few years back, when discussing immediate annuities.
In an April 28, 2010, letter to the Senate Special Committee on Aging, a GAO official noted, “Annuities offering lifetime income generally provide retirees more income than they would receive from conservative investments, such as bonds.” But this official also noted that, based on industry figures back then, “only 3 percent ($8 billion) of total annuities sold in 2008 were fixed immediate annuities.”
The GAO letter did name some “disadvantages” in connection with the products, presumably ones affecting the low usage. These include lack of sufficient assets to buy such an annuity, lack of liquidity, no inflation adjustment, no death benefits, and a higher cost to buyers who decide to add annuity options that address some of those issues.
The 2010 GAO letter also discussed challenges presented by several other income products and approaches, and then concluded with a statement that seems to sum up the forces driving retirement anxiety even to this day:
“Workers are increasingly finding themselves depending on retirement savings vehicles that they must self-manage, where they not only must save consistently and invest prudently over their working years, but must now continue to make comparable decisions throughout their retirement years,” the letter said.
“These decisions may prove difficult for many, as workers are faced with a large variety of available investment options, governed by a multiplicity of laws, regulations and agencies.”
Taking Annuities to Small Business
A concern for annuity practitioners is that annuities ranked near the bottom of sources that small-business owners plan to use to fund their retirement years. That’s according to a Guardian survey released a few months ago. Of nearly 1,500 respondents, only 22 percent said they will use annuities to fund their retirement.
In fact, more owners plan to rely heavily on the success of their business to fund their retirement (38 percent) and from the sale of their business (36 percent) than on annuities, Guardian said.
By comparison, Social Security came in first place at 71 percent. Second place went to savings and investments (stocks, bonds, etc.) at 68 percent, and third to individual retirement accounts (60 percent).
Agreed, Social Security is a generic form of an annuity, but the public does not view it in the same category as “annuities.” Most people consider it a “government program.” So the value of annuities gets routinely overlooked in the Social Security discussion.
The Guardian findings may be of concern to annuity professionals because the small-business market is a prime market for many insurance and financial advisors.
“The challenge for the industry is to get people to accept that the annuity is a very good tool they can use to transfer the risk of outliving their assets to an insurance company,” said Doug Dubitsky, vice president of Guardian Retirement Solutions.
It’s Like a Pension
People love the idea of having a pension plan like the one their parent had, “because it guarantees a paycheck for life,” he said.
But when it comes to their own retirement, many are so focused on accumulating money they may overlook that they don’t have a traditional pension, and they don’t think about creating their own income stream. “They retire with a big lump sum, sometimes the biggest amount of money they’ve ever had, but they don’t know if it is enough,” Dubitsky said.
That means advisors and the retirement providers have a role to play in this new retirement marketplace. This role is “helping people translate assets into income. Our role as an industry is providing the solution, not the product,” he said.
The approach he recommends is to do basic needs analysis, including the customer’s lifestyle goals (housing type, family arrangements, hobbies, travel, etc.), as well as basics such as food, shelter, clothing, etc. Look at spending and how the income plan can help the client accomplish their goals. Then help identify when to take income, how much to take and what uses will be required (i.e., long-term care expenses, death benefit, inflation factor, management of market risk, etc.).
The solutions come first, followed by products that implement the solutions, he said. “Do it in bite-sized pieces,” he suggested, adding that the resulting income plan will help deal with the risks that are triggering retirement anxiety.
The annuity tools can range from immediate annuities to annuities with living benefit guarantees and/or long-term care riders, and deferred income annuities.
If a client worries about giving up liquidity, “point out that you won’t be taking all of the assets, and that liquidity doesn’t mean the ability to pull out all of one’s money by next week. Liquidity in retirement planning means guaranteed income I cannot outlive,” Dubitsky said.
If an advisor can get that point across, “it opens up a whole new conversation, and small-business owners get it,” he continued. “They work in an environment of cash flow, so they know the importance of consistency.”
Apparently, small-business owners are actively looking to their financial advisor for retirement guidance. Nearly half (48 percent) told Guardian researchers that they spoke to their advisor in making financial preparations for retirement. Only two other actions came ahead of that — the owners said they saved money for retirement (77 percent) and invested in real estate (54 percent).
But not any old advisor will do. By a whopping 83 percent, the owners said the top characteristic they look for in an advisor is trustworthiness. They also want someone who is knowledgeable (78 percent), has integrity (74 percent), is experienced (71 percent) and listens to client needs (71 percent).
Back to George
It’s safe to say that George — the pilot who became Joe Lucey’s client — did not read the many reports and studies on retirement anxiety. In fact, Lucey said that George did not demonstrate much anxiety at all. As indicated above, George had said he just wanted to know what to do.
It’s that way with a lot of pre-retirees, Lucey said. But once they start discussing their confusion, it rapidly becomes clear that they have many fears around retirement.
One of them is resistance to making shifts. “Most people, not just pre-retirees, are afraid to change,” he said.
“We often see people who have been very conservative with their investments since 2008. Now they are still afraid to go into the markets, even though the markets are up.” But others, who stayed invested all along, now wonder if they should pull out, only to worry they might miss out on further gains if they do.
The advisor’s work ultimately ends up being about helping people address such anxieties, he said. That takes more than talking about products and services. It also takes listening, questioning, educating and enlightening.
Often it entails unpacking a client’s ideas about saving for retirement. DC plans at the workplace often encourage continuous investing, and so do mutual fund companies, Lucey said. As a result, many boomers approach retirement with the thought that they should continue investing or, at the very least, “never” take money from their 401(k) until they’re age 70.
“Our industry has done a poor job of letting people know that they can do something other than invest,” Lucey said. For some clients, a Social Security maximization program, or an annuity funded with assets from existing investments, might give them greater lifetime income, but if that involves repositioning invested assets, they may balk.
For George, the question was, where would the retirement income come from? He and his wife had pulled all their money out of the stock market in 2008 and they were still in cash in 2012, Lucey recalled.
The answer required setting the target retirement date for George plus factoring in other goals and lifestyle preferences. Due to George’s health issues, they set the retirement age at 60. The planning moved on from there.
The plan does include a fixed index annuity with a guaranteed living benefit rider for a portion of the assets. Clients who are still focused on investing tend to think of annuities as a swear word, Lucey noted. But not George. “Since he is a pilot, George also has a pension plan as well as a 401(k). Because of that, he was familiar with annuities and the concept of building a lifetime income stream.”
How’s it going? “George retired recently; his anxiety is down, and he is happy with the plan — and so is his wife,” said Lucey.
Not a Fluke
Is it a fluke? Probably not. Melody Juge, president of Life Income Management and an investment advisor representative of a registered investment advisory firm in western North Carolina, recounted seeing her own clients present with a lot of questions but no obvious anxiety. But once planning started, they too revealed uncertainties and worries.
A good many are couples who are stuck in ruts, indicated Juge, who is a RetireMentor for MarketWatch. “Many of the husbands are deeply rooted in their identity as a man who brings home the bacon and has control,” she said. “It’s hard for them to let go of work, so they keep putting off retirement for one more year. They have enough money but want to have more.”
“As for the wives, they want to travel and do things, but they hold back because of their husband’s desire to keep working — and because they too want to have more money for retirement.”
On the surface, that’s socially acceptable, Juge said. But neither one is enjoying life, neither seems especially worried and neither is making a retirement plan.
Anxiety is right behind the curtain. It comes out in the planning sessions Juge has with the couples. “This is a very soulful journey,” she explained. “It’s not about numbers. It starts with the reality that looms ahead — which is that the clients will die.”
Everything unfolds from there — the worries, the regrets, the hopes and the plan. Juge works with the couples to build a retirement plan that incorporates fun and interesting things they want to do before they get too old to do them. “It’s built around expenses and how much money the client wants to have guaranteed,” she said.
Some ask, “Can we really afford it?” Juge said she teaches them how it will work based on what is now known, and she also reminds them the future may bring unexpected developments.
At the beginning, many people seem to be disappointed in how their lives have turned out, she noted. That’s in addition to feeling fear and anxiety.
But as the couples begin to develop their retirement plan with her, the cloud begins to lift, she said. Some go on vacations, others take classes, some paint rooms that don’t need repainting and still others pull money out to spend on the grandkids. “I can see the spark in their eyes. They’ve started having fun — knowing that they are going to die later on.” And the anxiety? It goes away, she said.
Retirement Savings on Thin Ice
Where retirement savings are concerned, plenty of Americans are skating on thin ice. For instance, 36 percent said they have saved less than $1,000, according to a 2014 survey from the Employee Benefit Research Institute (EBRI) and Greenwald & Associates.
In addition, 68 percent who had annual household incomes of less than $35,000 reported having less than $1,000, the researchers said. Among those who had saved for retirement, 38 percent reported having less than $25,000.
So why didn’t they save, or save more, for retirement? Cost of living and day-to-day expenses were the reasons these Americans gave, the researchers said. Debt was a problem, too, for 58 percent of workers and for 44 percent of retirees as well.
Of course, some people do save. In fact, the EBRI/Greenwald researchers found that 18 percent of Americans in 2014 were very confident about having enough money for a comfortable retirement. That’s up from 13 percent the year before, a positive uptick from the lows of the 2009-2013 era.
Yet 24 percent were not at all confident about having enough saved for retirement in 2014, a figure that’s “statistically unchanged” from 28 percent in 2013.
In other studies, evidence keeps mounting that the retirement future for many Americans may be less than charmed.
Ownership of retirement accounts declines. Ownership of such assets as individual retirement accounts (IRAs), Keoghs, and defined contribution plans such as 401(k), 403(b) and thrift savings accounts fell below 50 percent in 2013. This continued the downward trend seen in 2007-2010 surveys, according to the Federal Reserve.
Life insurance ownership declines. The percentage of families owning cash value life insurance, other managed assets and “other” assets also declined between 2010 and 2013, the Federal Reserve reported.
Boomers expect less. Middle-income baby boomers are expecting less in retirement than the previous generation, according to the Federal Reserve. That’s less retiree health insurance from former employers (60 percent), less financial security (47 percent) and less care provided by family members (47 percent). But some expect to experience greater mental stimulation and more physical activity in retirement, according to The Bankers Life and Casualty Company Center for a Secure Retirement.
Inadequate finances continue. Baby boom and Generation X clients are struggling with inadequate savings by working longer — to age 65.3 today from age 63 a decade ago, according to nearly two-thirds (63 percent) of surveyed advisors. Client worries include job loss, fear of outliving savings, rising cost of health care and long-term care (and associated insurance policies), ultra-low interest rates, and volatile equity markets, according to First Clearing.
Pre-retirement standard of living flatlines. Over half (52 percent) of American households are at risk of being unable to maintain their pre-retirement standard of living, slightly down from just 53 percent three years earlier, reported The National Retirement Risk Index published by the Center for Retirement Research at Boston College.