From the March 2007 issue of Research Magazine • Subscribe!

Beyond the Crisis

Research: We hear a lot about the future of retirement. What aren't we hearing that we need to know?

Salsbury: I will turn the finger and point to us. Largely because of the greatest bull market mankind ever witnessed, our industry became overly preoccupied with accumulation. Even though the handwriting was on the wall in the form of massive demographic shifts, the industry remained entrenched on the accumulation side of the equation; the products we developed and the expertise we worked on were overwhelmingly accumulation-focused. This massive demographic wave is not coming -- it's here. We're in the middle of it. We as an industry share part of the blame for not having prepared sooner.

Is it even possible to rescue the mass market's chances for a traditional retirement?

Yes, it is, but it won't be easy. It'll involve education, serious changes in spending and saving behavior and, in many if not most cases, lowered expectations. There's an old line out of the Jack Nicholson movie, A Few Good Men: "You want the truth? You can't handle the truth." The truth is most of the mass market doesn't like the truth on this subject at all because 40 percent of America has saved nothing at all for retirement.

How can advisors get the word out without being too scary?

The first step is recognizing the magnitude of the problem. Half of all American households have assets under $23,000, and when you look at 55-year-olds, according to EBRI's data, 75 percent of their retirement accounts have less than six figures in them. The Social Security Administration is underfunded by $10 trillion and the underfunding on Medicare is about six times that.

What should we all be thinking about?

To start with, one of the things investors need to understand (most advisors already do) is that this whole [distribution] phase is dramatically more complex than the accumulation side. Many, many more variables are involved. We need more than just simple math; we get into probability, and that's a whole different world. Life expectancy, joint life expectancy, inflation rates, tax rates, withdrawal rates, accumulation rates, legacy issues, healthcare issues -- all of those things. It becomes a very complex puzzle that often necessarily involves consultation with physicians, attorneys and other specialists. What is your life expectancy? It's not a fun topic but it's not just about you; it's your spouse. If you're 65, you have a 25 percent chance of living to see age 90, and a higher chance than that of one member of a married couple reaching age 90. These are dramatically longer retirements than previous generations experienced. When you retired at 65 and died at 70, a whole number of financial plans worked pretty well -- just throwing it in the passbook savings account was OK. Today, a bigger pot of cash is necessary. So many Americans are not connecting longer retirements to a bigger pot of cash.

And so we need to manage expectations?

Our research in this area indicates that today's prospective retirees have expectations that are very different from traditional retirees of the past. The hope of previous generations' retirees was that they would be able to retain their lifestyle in retirement. Today, more people hope to escalate their lifestyle in retirement -- take several luxury vacations a year and not just one, for example -- and all those things cost money. Aside from escalating, today's lifestyles are already far more luxurious than those pursued by retirees of the past. Today's $4 coffee is a normal thing for a lot of the boomer generation.

I sometimes get a cynic who says, "Greg, you're describing the other half of the population; those aren't my clients! My clients are more astute and better-heeled." What this means is that whatever your client thought was his number, isn't his number. If he thought he needed $2 million, I'm willing to bet he's wrong by about double. Who do you think's going to pay for that other half of the population? We're not going to let them starve in the street, but where's that money going to come from? It'll come from sales tax, income tax, property tax, school taxes, utility tax.

Anything else advisors need to know?

The best simultaneous sales and financial planning idea I could give an advisor is automatic savings and automatic investment plans. The single cleverest thing the government ever concocted was automatic withholding; ask the average American how much he or she paid in taxes last year, and they couldn't tell you. Many will even tell you they didn't pay anything because they got a refund. That's automatic withholding. It's the simplest way to escalate saving behavior, no matter how wealthy your clients already are.

Health care is the big shadow over the future of retirement. Any good stats on that front?

The rule of thumb we use is the average annual cost of nursing home care is now $70,000 a year and some 25 percent of the U.S. population will spend at least 18 months in such care. How long is that going to take to deplete a retirement account? Six figures won't even cover 18 months in one of these facilities. The last estimate I saw was that we're underfunding Medicare by $62 trillion. That dwarfs underfunding on Social Security, but receives far less attention because who wants to be in position of limiting or denying care to someone?

What role should living benefits play in an overall retirement plan?

The vast proportion of people want to be guaranteed that they will have income for the rest of their lives. That points directly to something like a living benefit, because up until now the most common retirement income solutions have been somebody's version of an asset allocation program designed to provide a high probability of having income for life, but not guaranteed income for life. In the retiree's mind, there's a real difference between saying "over the next 10 years, you have a 90 percent chance of this allocation strategy working for you" and "a multi-billion-dollar institution guarantees you X dollars per month for the rest of your life." The vast majority will choose Option B.

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Robert Scott Martin is a contributing editor of Research.

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