Print Friendly, PDF & Email
Betty Meredith, CFA, CFP®, CRC®, Director of Education, and Research, InFRE

Betty Meredith, CFA, CFP®, CRC®, Director of Education, and Research, InFRE

By Betty Meredith, CFA®, CFP®, CRC®

I live just west of Dearborn, Michigan where Henry Ford revolutionized manufacturing in the early 1900s by creating the assembly line. Cars evolved from luxury item for the well-to-do to essential transportation for the ordinary man. Using innovative production techniques, Ford decreased the production time of a car from 728 minutes to 93 minutes.

Another industry which adopted new approaches over time to reduce costs and increase sales is the ready-to-wear clothing industry. Today, ready-to-wear clothing are standardized in size, but in pre-industrial America, most clothing was crafted at home or by professional tailors or dressmakers from individual measurements taken of each customer (sound familiar?). In the early 20th century, the growing middle class began purchasing the affordable and fashionable ready-to-wear merchandise made possible by new technology and industrialized production methods. The Mail Order Association of America (MOAA), requested that the National Bureau of Standards (NBS, now NIST) conducted a comprehensive study between 1949-1952 to develop a U.S. sizing standard for women’s ready-to-wear clothing

This standard is still used by manufacturers today to make clothing that fits a majority of our diverse female population. Over time, more studies were done to update information and to modernize the standard. This allowed the growing middle class to purchase affordable and fashionable ready-to-wear clothing made possible by new technology and industrialized production methods. How can we apply these lessons from the past to the future retirement income planning needs of the mid-market?

Where we are today

Baby Boomers are retiring at the rate of 1 every 10 seconds, and will continue to do so for the next 15 years. One of the most serious challenges facing the financial planning industry today is how to help middle market Boomers make informed retirement income decisions. Best practice guidelines are needed to help planners efficaciously help Americans retire with confidence.

In 2009, a joint survey between the Financial Planning Association and USA Today found that 60 percent of consumers in the $500,000 to $999,999 household net worth range regularly worked with a planner, compared to only 21% of consumers with less than $250,000 in net worth. In the study “Barriers to Financial Advice for Non-Affluent Consumers,” the Society of Actuaries’ (SOA) identifies and explains why financial advice is not delivered to or sought by individuals with less than $250,000 net worth. The summarized findings belowii are not surprising: advisors consider the middle market less profitable, and most firms believe they cannot afford or don’t want to make the investment needed to build a business model for this market segment.

Individual-Level Barriers

  • Many non-affluent consumers lack the basic financial knowledge that is necessary to seek and utilize financial advice.
  • There is a widespread misunderstanding among non-affluent consumers of the process and value of financial advice.
  • Non-affluent consumers often do not trust—and therefore avoid—financial advisers who also sell products due to the perceived conflict of interest.

Social-Level Barriers

  • Many non-affluent consumers only seek financial advice from informal sources, such as family and friends, because they view these sources as inherently trustworthy.
  • Professional financial advisers often do not have the necessary social relationships and community connections to access and serve the non-affluent market.
  • There is often a cultural disconnect between financial advisers and non-affluent recent immigrants.
  • Strong and pervasive gender roles often reduce financial advice utilization by couples.

Institutional-Level Barriers

  • Most financial advising firms have not traditionally focused on non-affluent consumers because they are less profitable. Further, most firms and advisers either cannot afford or do not want to make the long-term, high-involvement investment that is necessary to cultivate business with such consumers.
  • The structure of the provision of financial advice incentivizes selling products, which often sets up an inherent conflict of interest in which advisers sell more products and services to a particular client than is prudent in order to maximize profits.
  • The recent turmoil in the financial markets has significantly lowered non-affluent consumers’ confidence and trust in the financial services profession.

Segmenting the Middle Market: Retirement Risks and Solutions for Retirement Income Advice

The SOA has initiated research to help the financial services industry address this important need and reports their Phase I and II findings in “Segmenting the Middle Market: Retirement Risks and Solutions. These studies attempt to provide planners and software companies a means of shortcutting the data-gathering and solution identification processes by establishing standardized consumer retirement profiles of the mass market. The development of standardized solutions requires understanding of characteristics of mid-market consumer segments, and matching that understanding with appropriate advice, products, and services. Like tailoring a ready-to-wear suit, a planner can then efficiently personalize solutions for a mid-market client once they’ve identified which segment the client belongs to.

There are 17.9 million households between the ages of 55-74, which excludes 25% with less wealth and 15% with more as measured by income and net worth. For purposes of this research, households were divided into segments that showed marked differences in key determinants of retirement readiness, along the following parameters:

– Initial wealth level, measured by

— Current income

— Current net worth

– Household Type

— Married

— Single (including Divorced and Widowed) – Female

— Single (including Divorced and Widowed) – Male

– Age

— Pre-retirement years (typically prior to age 65)

— Retirement years (post age 65)

The middle market population is identified as twelve segments broken into two broad classes with similar household characteristics:

1) Six “Middle Mass” Market Segments, and

2) Six “Middle Affluent” Market Segments.

The total number of households in each segment and their defining characteristics are below.


Middle Mass and Affluent Segments

There are 14.9 million households in the middle mass market between the ages of 55-64, with an estimated median net worth of $130k-$348k, net financial assets of $36k-$108k, and non-financial assets (primarily home equity) of $75k-$240k.

There are also three million middle affluent segments with an estimated median net worth of $415k-$1.3 million, net financial assets of $116k-$416k, and net non-financial assets (including home equity) of $299k- $884k.

 

Middle Market Retirement Risks and Solutions

The SOA’s Phase II research report identifies retirement risks and potential solutions by using a process to identify income and asset gaps, and offers ways to think about appropriate solutions for the various mid-market segments. However, among the project’s nine reviewers (which included myself and two other CFP®s), sometimes there were differences of opinion about the best approach for a particular segment.

Analysis of the consumer segments revealed that at the midpoint for each, Middle Mass segments will depend primarily on Social Security, with additional lifetime income or earned income needed to either meet essential expenses or secure a moderate lifestyle. Making an informed decision about the timing of retirement and when to take Social Security benefits are critical decisions for the Middle Mass segments. Most Middle Mass consumers will need to delay retirement and receipt of Social Security benefits, or phase into their retirement by either continuing full-time to part-time work in their existing career, or migrating to a lower-paying job once retired. They will need to increase their savings before becoming fully retired to help fund the latter years of retirement.

The Mass Affluent segments are better prepared overall, and can afford more discretionary expenses and assume additional risk in investing; however, single mass affluent households may need additional lifetime income or earned income to secure their retirement lifestyle. For most all segments it will be necessary at some point to convert home equity into cash to pay for expenses. An in-depth analysis of the segments is described in the full Phase II report.

Next steps

How can the financial planning industry use this information to help planners put retirement income and risk management planning into practice for the mid-market?

First, committed financial planning practitioners and the academic community need to work together to identify appropriate solutions per segment (like standardized clothing sizes) that will help working Americans make their retirement assets last a lifetime. Once best practices/standardized courses of action are established for each segment, solutions for serving the retirement income needs of the mid-market could progress quickly:

  1. Like a nurse checks a patient’s vitals to collect data for meeting with a doctor, a paraplanner can utilize this info to facilitate the meeting with the financial planner in order to reduce the time and cost of providing services and solutions for mid-market clients.
  2. Product companies can develop standardized, complimentary or combination products per segment that more effectively manage a segment’s specific retirement income needs and risks.
  3. Time-segmented distribution strategies and optimized diversified model income and asset allocation portfolios can be designed that help planners protect middle market clients from longevity, inflation, healthcare, and equity, interest, and sequence of returns market risks
  4. Software companies can then incorporate the above retirement income strategies into their planning processes (see the retirement software studies done by the SOA, LIMRA and InFRE in 2003 and by the SOA in 2009… both studies concluded that most retirement planning software today doesn’t adequately account for longevity, health-care costs and other post-retirement risks, or calculation and timing of Social Security benefits when modeling and planning for retirement income.)

Second, “off the rack” strategies that require only minor tailoring will allow the financial planning industry to help more people at a lower price point and higher profit margin.

More research is clearly needed, and these initial studies by the SOA are a place to start. Productively and profitably addressing the retirement income planning needs for middle mass Boomers is a critical issue and our profession needs to take the lead in providing guidance. It’s a win-win-win for the consumer, the advisor, and the future financial strength of our country.

A shorter version of this article was published as “It’s Time for a New Retirement Model for Mid-Market,” Journal of Financial Planning, December, 2010.

Betty Meredith, CFA®, CFP®, CRC® is the Director of Education and Research for International Foundation for Retirement Education (InFRE), and Managing Member of the Int’l Retirement Resource Center, LLC.


i FPA Research Group Study, March 2009, and USA TODAY communication preferences and general financial planning survey, June 2009.
ii Barriers to Financial Advice for Non-Affluent Consumers, September, 2010, Society of Actuaries
iii Segmenting the Middle Market: Retirement Risks and Solutions Phase I (April, 2009) and Phase II (September, 2010) Reports, Society of Actuaries
iv Retirement Planning Software, 2003,Society of Actuaries, InFRE and LIMRA; Retirement Planning Software and Post-Retirement Risks, 2009, the Society of Actuaries and the Actuarial Foundation.

©2011, Betty Meredith. All rights reserved.