Still Missing in Action: Comprehensive Retirement Income Best Practices for the Mid-Market
By Betty Meredith, CFA, CFP®, CRC®
Director of Education and Research, InFRE
Serving the retirement planning needs of the mid-market will be the big career opportunity of people in the financial services industry today, in addition to health care planning. According to new LIMRA research, investible retirement assets of U.S. households aged 55+ are expected to reach $22 trillion by 2020, up from $12 trillion in 2010.i That’s a whopping 83% increase in assets in 7 years!
Since 2000 I’ve been working with the Society of Actuaries (SOA) Committee on Post Retirement Needs and Risks (PRNR), contributing to the creation of their insightful and practical body of knowledge that identifies middle-mass and mass-affluent retirement risk and income management issues.ii Committee membership is comprised of invited individuals from
- the Social Security Administration, the Department of Labor, the GAO, and AARP
- longevity, long-term care and reverse mortgage experts
- pension and product design actuaries
- retirement researchers
- and large consulting organizations such as Tower Perrin, among others.
The goal is to provide clarity and direction to specific issues that stakeholders can act upon (government, product providers, advisors, employees and consumers) 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 retirement planning industry’s – to start acting on what we’ve learned.
We’re Still in the Trenches
A new report by the SOA, the Urban Institute, and 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.iii
We all know that most Americans approaching retirement age have not accumulated enough investable retirement assets. In addition, most of them fear running out of money more than they fear death.iv The report, “The Impact of Running Out of Money,” reflects the thought-leadership of a select multi-disciplinary group of leading retirement experts, and concludes that for the mid-market, “running out of money is too large of a risk to self-insure.”
Here are some ideas of planning approaches which address issues identified in the report that professionals should consider for mid-market clients when more than a 4% 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 utilized 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. 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… taking action on any of these by themselves will have a huge impact on an clients’ 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 the lifetime income sources they have such as Social Security and pensions.v The 4% sustainable withdrawal approach ignores this valuable asset.
- Improve your communication skills for guiding clients’ thinking to help them 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.vi vii (for the table below)
- Plan for and protect from “shocks.” Over an average of a nine-year period for people over age 70, 82% of married couples and 67% of singles experienced one of the following shocks:viii
Long term care coverage is therefore essential for this market. Individuals experienced a 40% drop in real wealth after using a nursing home and spouses experienced a 15% drop.ix
- 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 clients’ 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 twelve 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 as there are in the medical and other professions. I firmly believe that lack of established practice guidelines is the core reason why little progress has been made.
The PRNR Committee is interested in working together with other organizations such as InFRE to create the needed benchmarks and generally accepted practices. Once best practices are identified:
- Products companies can create better combination products that transfer and manage multiple risks
- 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.
Betty Meredith, CFA®, CFP®, CRC® is the Director of Education and Research for the International Foundation for Retirement Education (InFRE), and Managing Member of the Int’l Retirement Resource Center, LLC. She participates in and incorporates research findings and best practices into InFRE’s Certified Retirement Counselor® certification study and professional continuing education programs to help professionals meet the retirement preparedness and income management needs of middle-market Americans. A shorter version of this article was published in the April, 2013 Journal of Financial Planning (www.FPAnet.org/Journal).
(c) 2013, Betty Meredith
i LIMRA’s new Retirement Income Reference Book (RIRB), December 2012. Insurance Broadcasting press release, February 7, 2013. http://www.insurancebroadcasting.com/news/LIMRA-2730703-1.html?utm_source=editorial&utm_medium=email&utm_campaign=Voluntary_inBrief_010411_020613
iv Outliving Your Money Feared More Than Death, Allianz Life Insurance Company of North America press release, June 17, 2010.
v Exhibit 5, T Rowe Price Social Security calculations from The Impact of Running Out of Money, SOA, Urban, WISER, page 8
vii The Impact of Running Out of Money, by the SOA, Urban, WISER, Exhibit 6
viii The Impact of Running Out of Money, by the SOA, Urban, WISER, Exhibit 7, from Johnson Mermin, Uccello, Urban Institute, 2006
ix The Impact of Running Out of Money, by the SOA, Urban, WISER, page 9
Other past issues (earn CE for 2018 and 2017 issues)