GuidePost - Vol. 3, Issue 5 2007

The GRABot BAG
by Sherrie E. Grabot, CEO

July 2007
Retirement could last 30 years.
Start worrying now.
July always has a familiar quality, a sort of reminiscence of all the summers that came before. School’s out for some, the fiscal year is over for others, and the weather’s hot enough for everybody.

Just as this summer’s blockbuster movies and beach books tend to look much like the last crop, along comes a new retirement study that also seems vaguely familiar. It reports that Baby Boomers are as concerned about making the most of their money after they retire as they are about saving it beforehand. For example, a whopping 97% feel “a significant source of retirement income guaranteed for life” is a top financial goal. Retirement investing throughout a lifetime – where have we heard that before?

We want it all – and we want it guaranteed
A recent study commissioned by AIG Sun America and conducted by Harris Interactive looked at the financial concerns and goals of both Boomers and “matures,” or retirement-age adults. Both groups expressed a nearly unanimous fear that their retirement savings wouldn’t stretch to last 30+ years, a desire for the security and predictability of a guaranteed income, and a strong aversion to investment risk – as well as a need for continued growth of assets.

In other words, they want everything at once. The same complex, contradictory needs were revealed by our own market research back in 1999. To meet them, an investment plan has to extend throughout a long retirement, balancing current income with ongoing investment upside. This is exactly the job of a professional investment manager.

The AIG study points in a different direction: toward a new type of variable annuity that combines a guaranteed lifetime income with potential stock market growth. Expect it to take many variations under snappy brand names. The report, not unsurprisingly, looks to the insurance business as “the one industry that knows how to manage the risks inherent in that kind of guarantee.”

Now how much would you pay?
As we learned in Economics 101, avoiding risk will always cost you. So after introducing the concept of the new retirement product, the survey went on to ask how much respondents would be willing to pay for it. Two-thirds of Boomers and half of retirement-age respondents said they would give up two percent of their annual investment returns for a guaranteed income. Given that mutual fund fees often run in the neighborhood of one percent, that might not be too unrealistic – depending how much that income amounts to.

It may be a lot less than expected. Consider the implications of ranking “income for life,” “continued growth of assets,” and “protection against losses,” all as top priorities. While it’s perfectly natural to want it all (and for Boomers it’s even something of a defining characteristic), the “no free lunch” principle from economics class still applies. The problem with limiting risk is that many retirement investors are going to need all the potential earnings they can get, so they simply can’t afford to be so risk-averse.

How many people are in this position? Another statistic in the survey revealed that 44% of Boomer respondents haven’t calculated a target income goal for retirement. If they did, you can bet most of these folks wouldn’t like the results. Pick almost any study or data you wish, and you’ll find a huge proportion of investors whose savings aren’t on track to retire at all, and shouldn’t be worrying about annuities.

Back to the future
That’s not to say that sophisticated new variable annuity products aren’t a good idea. They are, and as more 401(k) money starts to move into thepost-retirement phase, retirees will need a lot more options such as these. But they’re not at all a silver bullet. Remember the Guaranteed Investment Contract (GIC)? Or the more recent Stable Value Fund? The tension between potential growth and a secure income has always been with us, and the financial industry will continue to offer “solutions” to help bridge that gap.

Any true solution, of course, requires a process, not just a product. The years or decades after retirement are just as important as the accumulation phase leading up to it. Because they may also last just as long, they require an investment strategy every bit as complex and customized. That’s why we’ve designed GuidedSavings and our upcoming GuidedSpending tools for the long haul.

We’ve always seen retirement investing as a lifelong process. So while we’re naturally skeptical of quick fixes, it is gratifying to see the financial industry come around to the idea that there is life after retirement, and that it will require some creative financial tools. The real question is this: If 97% of your customers are asking for help, what took you so long?

~~ Sherrie