GuidePost

The GRABot BAG
by Sherrie E. Grabot, CEO

March 2009
The future of retirement income – and investing

We sometimes find ourselves a bit out of step with many investment-industry peers (we believe we’re a step ahead), because we talk about retirement income almost as much as retirement investing. But if you’re standing on the edge of retirement, especially these days, the big challenge is how to turn one into the other.

Fortunately, we’re not the only ones to focus on this important transition in our financial lives. The Retirement Income Industry Association (RIIA) makes it their business. And since our VP of Business Development Tom Condron recently attended their annual conference, we’re devoting this edition of GuidePost to some of the big-picture observations and thoughts Tom brought back from this event.

Bridging the Gap
How can everyday investors bridge the chasm between saving for retirement and paying for it? Our own Tom Condron recently spent a few days thinking about nothing else at the RIIA’s annual Managing Retirement Income conference in Boston.

The discussions during this cross-industry conclave centered on how to give retirement investors more peace of mind and better outcomes when the time comes to start turning their assets into income. Right now, many people who stand on the threshold of retirement are filled with uncertainty and faced with difficult choices. The overall picture Tom took away was that “everyone seems to have their own, focused solutions to parts of the problem, but there’s no sign of a holistic approach to address the deeper, systemic challenge. There’s a huge opportunity out there to put it all together in a way the consumer can understand.”

Success, not “solutions”
The issue affects all but a very few. “People with big money can afford to hire a good advisor,” Tom points out. “A professional can put together all the pieces, including real estate assets, estate planning, annuities, and tax efficiency, creating and managing a plan that strikes a careful balance between safety and freedom. But without a high-end advisor, most will feel confused by all the different products and tradeoffs.”

Do-it-yourself planning is just too complicated for the vast majority of people. For that matter, a plan (or a product, or a tool) is not the same as a solution. As retirement income consultant David Glickman pointed out at the conference, “clients do not want plans for a successful retirement. What they want is a successful retirement.”

Future shock
According to futurist and science fiction author Bruce Sterling, the whole thrust of our industry misses that point. He argued that our approach to meeting retirees’ needs – a bewildering variety of specialized financial products and services – confuses clients more than it helps them. What they want to know is very simple: ‘Am I ok?’ and ‘How can I retire?’ That last question applies to much more than money, and includes how to productively spend their time, connect to their communities, and cope with aging. If financial advisors don’t start thinking more holistically about retirement, he warns, some other industry will.

So how far out of line are we, really? RIIA’s COO Stephen Mitchell claims we’re very far off the mark indeed. Even the best planning tools today assume that when you retire you’ll spend a certain amount per year, consistently every year, over an arbitrary period of time. This just doesn’t reflect the actual experience of most people. What about working in retirement, changes in activity levels, and the unpredictable and potentially massive costs of health care?

Taking a broad view of the industry, RIIA’s Chairman and Executive Director Francois Gadenne praised the progress we’ve made within our various professional “silos,” and stressed the need to work together much more closely and proactively. Creating good ideas and products isn’t the problem: the challenge is how to share them with the people who need them most – through the retail and institutional distribution channels that serve the vast majority of households.

Is the 4% withdrawal dead?
On the income side of the retirement equation, expectations are changing as well, at least on the leading edge of the business. According to Glickman, “The 4% Systematic Withdrawal Plan (SWP) on a portfolio of mutual funds as the standard retirement income solution is dead!” That is, there used to be a consensus that taking 4% per year from a appropriately allocated portfolio was typically a safe bet, with a 90-95% probability that the money wouldn’t run out in the retiree’s lifetime. Now that consensus is falling apart.

That number may not be dead just yet. But it’s headed for zombie-like status, and he predicts “it won’t be long before this mode is used only by the least sophisticated investment managers, tool providers, advisors, and investors.”

What will replace it? “Nobody really knows, except that it will be defined by outcomes,” Tom says. “I expect to see a growing range of hybrid solutions like equity-indexed annuities (EIAs). The idea is to give investors some of the upside potential of the investment markets, but create an income ‘floor’ or other protection to limit the downside risk.”

This isn’t just futurists talking. Emily Pachuta, head of strategic and product marketing for Lincoln Financial, told participants that “it’s a core belief of ours that all of a retiree’s true income needs should be met by fixed sources” of some kind.

Playing well with others
“Coming from an insurance firm, I’d take that with a large grain of salt, and probably so would you” Tom notes. “But that attitude itself is part of the problem. Insurance and investment have never been able to play well together. In the very near future they’ll have to get much better at collaborating.”

Today, as Glickman admits, all the “bells and whistles” connected to annuities may seem needlessly difficult to understand, and even more so to communicate. But he also cautions that advisors had better get used to the idea, and put in the effort to figure it all out: “the choice is between embracing the complexity to better serve your clients or being left behind by those who do.”

A common goal
“Down the road, the end goal has got to be a clear, consumer-friendly, single-source way to pull together financial planning, investments, insurance, and fixed income vehicles,” Tom concludes. “In the meantime, we need to create more effective and efficient ways of using existing concepts and tools, and work toward a new set of best practices for providing retirement income.”

Ultimately the industry needs to find a neat and tidy way to package, market, explain, and otherwise sell this idea to the American people. Given the urgency of the impending Baby Boom retirement wave, the process should happen much faster than the decade or two it took for 401(k) to become a household word.

And if it’s not too much to ask, this time around, can we please come up with a better name?

About the RIIA

RIIA's is a national, not-for-profit organization whose mission is “to define the future of retirement income in America.”

They are dedicated to bringing leaders in the retirement income industry together across all the “silos” of specific industries and professions, with the goal of developing the products, processes, and advisory services Americans need to create a secure retirement. You can learn more here.

~~ Sherrie