Still Not Ready

Survey finds even those with advisors are unprepared for retirement--Retirement Plan Advisor, October 2006

Although they might express a strong level of confidence in their savings for retirement, when it comes to crunch time, many affluent retirees and pre-retirees find themselves ill equipped because they do not have an adequate retirement plan in place, according to a recent survey conducted by MFS Investment Management, the Boston-based asset management firm.

The survey, "Retirement Research Study," was the first of this kind conducted by MFS, with the goal of raising awareness on the importance of formulating retirement plans well in advance of retirement. Results were drawn from 442 surveys completed online by 202 pre-retirees and 222 retirees between the ages of 55 and 75, who are either working full-time or are retired; use a paid professional financial advisor; and report at least $100,000 in investable assets excluding retirement accounts and real estate.

MFS also surveyed 216 advisors serving the high-net-worth investor base. While those advisors would recommend putting together a retirement income plan at least 10 years before retirement, 52% of the survey's pre-retirees aged 55 or older reported that they do not have an income plan, and over a third of those do not expect to even discuss an income plan with their advisor for another six or more years, if ever. One in three retirees have no retirement plans in place, the survey found.

According to the survey, the escalating cost of healthcare and the rise in inflation are the biggest concern for retirees and pre-retirees. Seventy-nine percent of pre-retirees and 87% of retirees fear that these factors may cause them to outlive their savings. In addition, 57% of pre-retirees feel that they are too conservatively invested to counter the problems associated with healthcare costs and inflation.

Inflationary pressure is one of the biggest concerns for retirees and pre-retirees today, says Jim Jessee, President of Boston-based MFS Fund Distributors, and although they might be doing their best to provide for future rises in inflation, many report they're unprepared to deal with a rising cost of living.

Part of the problem is education. "When clients say that they're set for retirement, advisors need to sit them down and make them go through everything, ask them probing questions about what they have and what they will need," Jessee says. But countering the effects of rising inflation also has a lot to do with the investment choices people make, he says, and clients should work with their advisors to formulate a retirement income plan that balances their need for a reliable, steady stream of income with an investment strategy that seeks capital appreciation to lessen the effect of inflation on purchasing power.

To that end, Jessee would recommend investing in products such as MFS's recently-minted Diversified Income Fund, a vehicle that is designed to suit the risk temperament of those heading toward retirement and also provide a good hedge against future inflation. Combining conservative and yield-generating assets (namely government debt and corporate high-yield bonds, among others), the fund also allocates about 40% of its assets under management to instruments like emerging market debt and REITs, which are there specifically to counter inflation in the future.

"In our product development, we saw a need to address inflation because we saw that most affluent Americans are very concerned about inflation, and that even if they have enough now for their retirement, it won't be enough in the future," Jessee says. "We believe that the market will be seeing more products [like the MFS Diversified Income Fund] in the future, because we have moved away from finding clever ways to accumulate [wealth] toward coming up with creative ways to distribute it."

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