them to reduce expenses, save more money, adjust their retirement plan, and
change the way they invest. You can’t do it for them, but an intervention now
could save their golden years and cement their loyalty to you.
Only 13% of workers are very confident that they will have enough money for a
comfortable retirement, according to the latest Retirement Confidence Survey
(RCS) published by the Employee Benefit Research Institute (EBRI). This is the
lowest confidence level ever recorded since the EBRI started asking the question
in 1993.
Advisors will not be surprised by these results. You and your clients have
lived through the events leading up to this devastating loss of confidence in
retirement security, and together you have been actively seeking solutions to
the crisis. According to the survey—and
most likely affirmed by your own work with clients—people say they will have to
work longer, save more, reduce expenses, and change the way they invest.
Personal responsibility for retirement planning is now complete
The advent of the 401(k) plan nearly three decades ago launched the rapid and
near complete demise of the secure, well-funded defined-benefit plan. Workers
didn’t seem to mind having responsibility for retirement planning thrust on
them, because until recently, the markets were strong and account balances were
rising.
Never mind that what they were doing wasn’t really retirement planning. Most
people never stopped to calculate how much they were actually going to need at
retirement. They never worked the numbers backwards to determine how much they
needed to save in order to have the desired income stream in retirement. They
never really understood how the balanced portfolio of stocks and bonds that they
were told to invest in would contribute to their retirement security.
And they had no provision for increased contributions if and when their
account lost value. Defined-benefit plans, in contrast, incorporate
sophisticated actuarial calculations, risk pooling, institutional investment
services, and a mandate for additional contributions when the plan becomes
underfunded—tools unavailable to the individual worker.
If people didn’t save enough or didn’t bother to calculate how much savings
they would need at retirement, they comforted themselves by noting how much of
their salary was going into the plan, the lovely pie charts showing a perfectly
diversified portfolio, and, until recently, the growing account values. People
said they accepted responsibility for their own retirement, but they didn’t
really. They were counting on the markets to help get them there.
Now, with retirement portfolio losses averaging 25% in 2008, workers know
that the markets can’t be counted on to make up for behavioral shortcomings, and
they can actually make things worse. In other words, a person can do everything
right and still end up short. Personal responsibility for retirement planning
has extended beyond personal saving and generally accepted investment strategies
to encompass recovery from events beyond a person’s control, such as recession,
inflation, and the occasional black swan. This is a lot for people to have to
take on. But take it on they must, and this is all the more reason why they need
financial advice. Indeed, 25% of RCS respondents said their loss of retirement
confidence would cause them to seek advice from a financial professional.
How you can help
As you reach out to clients and prospects in their time of need, your
challenge will be to tread that fine line between offering valuable help and
assistance while making it clear that their future retirement security remains
in their hands. As much as they might want to shift the responsibility to you,
it is really their behavior that will determine their level of comfort in
retirement. Once people understand this completely, their retirement confidence
might actually increase, because they’ll be in control.
Your advice and assistance, then, will center on the things people need to do
to restore financial stability. The numbers in parentheses indicate the
percentage of survey respondents who said they were doing such activities.
1. Reduce expenses (81%)
Spending less on vacations, meals out, and other discretionary items does two
things: it frees up money to pay off debt and/or add to savings, and it helps
clients get used to a simpler, less expensive way of life in preparation for
retirement.
Ask clients if they need help reducing current expenses and look for areas
where they can cut spending. Let them deal with the little stuff like the cable
bill, and you look for the bigger, more complex, and less noticeable areas, such
as interest and fees on outstanding debt, insurance premiums that can be cut by
raising the deductible or reducing coverage, and income taxes caused by
tax-inefficient investing or failure to fully utilize retirement plans.
Also remind clients that it’s important to reduce expenses in retirement.
There are two ways they can do this.
- Reduce debt. By far, one of the most effective actions
people can take in the years leading up to retirement is to pay off debt. In
fact, it can be argued that it doesn’t make sense to contribute to retirement
plans as long as there is outstanding debt. A multigenerational study called
“Debt: the Blind Spot on America’s Road to Retirement” concludes by saying,
“Often treated as two separate aspects of financial planning, debt and
retirement planning must be considered together.” The study found that 69% of
retirees currently have debt, and 38% of them acknowledge that their current
debt affects their financial security in retirement a great deal. Further, more
people enter retirement with debt than expect to do so. Only 26% of boomers
expect to enter retirement with non-mortgage debt, but 52% of retirees actually
had such debt when they retired. - Make tangible investments. Preparation for retirement may
include replacing the roof, the water heater, the car, the teeth, and other
tangible items subject to wear and tear. Retirees on fixed incomes have little
leeway for such emergency spending, so it makes sense to take care of these
things while they are still receiving a paycheck. Ditto for spending on
preventive health care that saves on medical costs later on.
2. Change the way they invest their money (43%)
Just one-quarter of workers (24%) responding to this year’s RCS are very
confident that they are investing their retirement savings wisely (down from 45%
in 1998).
Fewer people (48%) believe that stocks will be a very good investment in the
long run, down from 60% last year. Otherwise, the survey did not delve into
people’s exact plans for changing the way they invest their money. It’s just as
well; they probably don’t know what to do anyway. Sixty-eight percent of workers
responding to the 10th
Annual Transamerica Retirement Survey said they don’t know as much as they
should about retirement investing.
This is where you can really make a difference. Whether you go into companies
and educate whole groups of 401(k) participants or do it one client at a time in
your office, this is an opportunity to help people make sense of the investment
options available to them and formulate an investment philosophy that will serve
them from now until retirement and beyond.
What should that investment philosophy be? This, of course, will be an
individual matter between you and your clients, but do keep in mind that some
people are ready for change. They perceive their previous strategy as
ineffective, so they’re looking for something different, whether it’s a more
conservative allocation, a different rebalancing method, or more frequent
allocation adjustments. People are scared and confused right now, so give
credence to their emotions when formulating an investment philosophy, and don’t
force them into investments they don’t understand.
Do be prepared to address the lack of trust that is prevalent out there.
Sixty percent of workers said they were “not too confident” or “not at all
confident” about investment companies. However, you can distance yourself from
the faceless institutions that have wreaked havoc on the system and present
yourself as a caring individual who sincerely wants to help them reach their
goals.
3. Work more hours or get a second job (38%)
More work is a natural response to retirement setbacks that people feel are
beyond their control. What the stock market takes away, their own labors must
supply. And so, 38% of workers responding to the EBRI survey said that they
planned to work more hours or take a second job to regain confidence in their
ability to retire.
In addition, people are considering delaying retirement. Twenty-eight percent
of workers said they have changed the age at which they expect to retire, and
89% of those said they have postponed retirement. The median worker expects to
retire at age 65, with 21% planning to push on into their 70s.
Even after they retire, people are starting to seriously give up on the idea
of equating retirement with a life of leisure. Most workers (72%) responding to
the 2009 RCS said they planned to work in retirement, up from 63% in 2008.
On this point, help clients evaluate the role of work in their retirement
plans. It is interesting to note that although 72% of workers say they plan to
work during retirement, only 34% of current retirees reported that they actually
have worked for pay sometime during retirement. Explore the following issues
with each client:
- Work longer at the same job, or retire and do something else?
Clients in their peak earning years might do better to stick it out a
few more years in their present job than to retire and try to find a new job in
the current economic environment. What could make the decision more difficult is
an attractive early retirement offer. See these 10
tips for evaluating an early retirement offer, and help clients do the
calculations and weigh the alternatives. - How long can the client reasonably expect to work? Some
occupations can be performed well into a person’s 70s or 80s, while others
require too much strength or agility for aging bodies. Clients who say they will
work forever are kidding themselves. While work can be an excellent solution to
the retirement crisis, it should be viewed as a temporary solution until the
client is forced into “real retirement.” The RCS has consistently found that a
large proportion of retirees leave the workforce earlier than planned (47% in
2009). Reasons include health problems or disability, changes at their company
(downsizing or closure), and work-related reasons or outdated skills. Only 10%
of reasons were positive.
As work continues to figure prominently into people’s retirement plans, start
a resource file so you can help with this “fourth leg” of the retirement stool.
To start, see this list of the
20 fastest-growing jobs for aging boomers, and network with human resources
executives and job counselors so you can serve this need among clients and
prospects.
4. Save more money (25%)
Many workers still do not have a good idea of how much they need to save for
retirement. Only 44% of workers reported that they have tried to calculate how
much money they will need to have saved by the time they retire so that they can
live comfortably in retirement. An equal proportion—44% of workers—simply guess
at how much they will need to accumulate.
When working with people on their savings goals, the trick will be to
motivate them without causing them to give up hope. Break down their sources of
retirement income and show them that after they factor in Social Security, their
savings targets may be possible after all.
For example, if a 62-year-old baby boomer with maximum earnings waits until
age 70 to apply for Social Security, he’ll receive $3,672 per month (assuming
2.8% annual COLAs). If his annual income requirement will be, say, $60,000 (as a
result of reducing expenses, as noted above), Social Security will supply over
$44,000 of it, leaving a gap of $20,000. The lump sum required to meet a $20,000
first-year withdrawal is $400,000 to $500,000. This is a much more doable goal
than the $1,000,000+ that would be required to meet the entire spending need
from savings.
The annual Retirement Confidence Survey always serves as a wake-up call, but
this year more than ever, it cries out for advisor intervention. For years,
people have been more confident about retirement than they had a right to be,
given their low savings levels and high debt loads. Finally, people are waking
up to the fact that they must do something more than they’ve been doing if they
ever hope to retire.
They may have lost confidence in financial institutions, but they still value
the one-on-one relationship with a financial advisor who can lead them toward
their goal of retirement security. The best thing you can do is build on this
notion of self-sufficiency and offer to assist them in their efforts—but not
fall into the trap of overpromising on the dream when it is their own behavior
that will determine their success.
