From the December 2007 issue of Research Magazine • Subscribe!

Opportunity of a Lifetime

Here's a wake-up jolt: The last generation of retirees couldn't manage to maintain their lifestyles beyond average life expectancy. With the right new approaches, though, financial advisors can help the next generation do better indeed. So says Mathew Greenwald, a Ph.D., who for more than 30 years has delved deeply into social and consumer behavior.

As president and CEO of Washington, D.C.-based Mathew Greenwald & Associates, he is an expert on opinion research. Baby-boomer retirement is the boomer's specialty.

With a doctorate in sociology from Rutgers University, Greenwald, 60, has conducted strategic planning and marketing research for more than 100 financial services firms, including AIG, Fidelity Investments, Merrill Lynch and Smith Barney. Before founding his firm, he spent 12 years at the American Council of Life Insurance.

Greenwald's studies have produced a wealth of findings about consumer attitudes toward both retirement planning and living in retirement that can help advisors capitalize on the boomer boom.

The key: Set goals and target objectives because "as Yogi Berra once said," Greenwald semi-jokes, "'if you don't know where you're going, you're likely to wind up some place else!'"

Research recently chatted with the consultant, who testified before both the U.S. Senate Committee on Aging, and the Securities and Exchange Commission on retirement and retirement products, and was a delegate to the 1998 and 2002 National Summits on Retirement Savings.

How much do baby boomers need financial advisors?We're at the start of the greatest opportunity facing the business in six decades. After World War II, servicemen came home to start families. That was the early stage of the baby boom, and it was a dramatic change. Today, we have those 78 million baby boomers starting to enter retirement -- with a fair amount of money saved up too. It's a diametrical jump forward, a major trend. And it's going to last for the next quarter of a century.

But don't people put their heads in the sand when it comes to retirement planning?That's part of it. I mentioned this once at a conference of wirehouse brokers, and it became apparent that most of them hadn't done any planning. Neither had the head of a financial services trade association that I spoke with.

Three in five workers have not tried to do a retirement-savings-needs calculation. People don't know their assets-to-income ratio: how much income they can sustain from a certain amount of assets.

What are the biggest challenges facing advisors in helping clients with retirement planning?Retirement is going to be very different for this generation, and a lot of the old tools and approaches just won't work. One is the idea that people have to be increasingly conservative in their investments as they age. That doesn't work when they have long retirements and are underfunded. There needs to be a new type of approach because Social Security benefits are already being cut, there are fewer defined benefit plans and more health-care costs -- and clients have higher expectations.

What do you mean "higher expectations"?Compared to previous generations, people nowadays want a higher lifestyle in retirement. But with the old approaches, a lot of clients aren't going to make it.

What new approaches do advisors need to take?One of them is helping clients have guaranteed streams of income for life. They're available in some annuity products. The amount you can get is a lot higher than it is for bonds. As a society, people are de-annuitizing; for example, the reductions in Social Security benefits. So that guaranteed stream has to be made up by other guaranteed streams.

Annuities are controversial. Why should FAs and clients consider them?There are four ways to make money, but a lot of financial advisors are using just three: dividends, capital gains and interest. They're not playing with a full deck!

What's the fourth?Mortality credits, which are available in annuities. The people who live longer than average are stressed financially. But they can get extra payments on life annuities -- money keeps getting paid every month for as long as they live.

How does that work?With a guaranteed-minimum-withdrawal benefit for life, the insurance company guarantees it will pay the original investment or whatever the investment reaches -- say, 5 percent -- for life. That way, you have a guarantee of lifetime income, but you're also participating in the market. This allows people to be more invested in equities and still have the safety of a guaranteed return should the market go down.

What's the upside for advisors?They're helping clients meet both of their main objectives: financial security and managing their money most effectively in retirement. To the extent that they bring new, more effective solutions, advisors will get more referral business.

You've said that "presuming a riskless retirement is reckless." Please explain.Typical approaches ignore all risks of inflation, market volatility, health care, long-term care, longevity. I did some research for The Society of Actuaries. Going over monthly expenses, people expected 6 percent to fill a $3,000 [income] gap after [payments from] their defined benefit plans and Social Security. They therefore thought they could afford to retire.

But they won't always be able to get 6 percent. And the next year, with inflation, they'll need more. A lot of people don't really think it through properly.

So most folks aren't future-oriented?Right. They're present-oriented. It's built into our brains. When homo sapiens wandered through the jungle, the ones that survived were present-oriented. When the tiger attacked, they weren't thinking about storing nuts for next year. They were thinking about running away -- what's good now. We have a predisposition to what's good now.

In a study, we asked, 'If you had a choice of chocolate or fruit for desert next Wednesday, what would you pick?" Seventy percent said "fruit." Then we asked, "How about tonight?" Seventy percent chose chocolate!

We did other research: "If you had to pick a high-brow or a low-brow movie to see two weeks from now, what would you pick?" The 24 films had been previously described. They all said the high-brow stuff. But for a movie to see today, they said, let's have some fun. People will do what's best for them tomorrow but not what's best right now.

How should advisors handle that orientation when the issue is retirement planning?You have to change people's behavior because they're not saving enough. And they're not spending properly when they're retired. But as one advisor told me: You can't scare clients -- you have to moderately disturb them.

People are going to come to advisors with a fair amount of money, which is great. But in some ways, they don't know how to manage it over a long period of time when there are no more earnings from work.

What's a mistake advisors make in managing longevity?Insufficient use of guaranteed-stream-of-income products. When you are accumulating, you basically need only two numbers: the target date of when you want to retire and the target amount. But people don't want to have their money last only till their target date; they want to have it last for the rest of their lives. And that requires a different strategy.

What, then, should advisors do?There are two points where they need to be clear with clients. The first is when people reach 50. At that time, they should determine a reasonable, well thought out target amount. Goals work -- but not enough people have them. The question is, "How much do you want to have by a specific time?"

The second point is when clients are a year or two away from retirement. It's then incumbent on advisors to say, "Let's make sure you really understand the trade-offs to retiring now and what you're giving up by not working that extra year." Because many people would be a lot more secure if they worked another year or two.

I just changed my own target retirement age from 65 to 66, in part because I decided to build up a little cushion for health-care costs. We can't completely rely on Medicare.

How can advisors address Medicare gaps and benefit reductions?They have to help clients figure out what kind of cushion they'll need. It's likely that there'll be cutbacks in Medicare for older people, and the affluent will have to pay more. Alan Greenspan wrote: "I predict we will have a very dramatic increase in [Medicare] co-payments with the upper-income levels experiencing 100 percent co-payments."

What can broker-dealers do concerning new approaches to retirement income planning?Provide new products. Manufacturers have to come up with a new generation of them. That is already starting. For instance, Vanguard just introduced mutual funds designed for income, not for accumulation. MetLife just came out with longevity insurance. A number of companies have good immediate annuities.

What sort of feedback about annuities do you get from advisors?Clients don't want to use them because of various and sundry things like image or giving up access to cash. There is client resistance, and advisors want to know how to deal with it.

What do they need to do?Point out that annuities provide a greater cash flow, that you can be more secure and get more money per month right away from annuities. They have to show different scenarios: This is what would happen if we used annuities; this is what would happen if we did something else. Show clients comparisons.

It's telling people how they can be better off right now and have financial independence and a stream of income later, which gives more peace of mind. It stops them from being a burden to their kids and asking for money, which now a lot of older people have to do.

So FAs need to take a more psychological tack with clients?Yes, and that's part of the difficulty they have. A lot of advisors say that you can't give clients bad news because you'll lose them. Advisors' main concern is, "How do I deal with the psychological issues?" It's a whole new thing.

What's your outlook for financial advisors?It's a fantastic time for the financial services industry. Certainly, there's a segment of the population that can do a reasonable job of accumulating money for retirement without professional advice. But the proportion of people that can manage their money effectively in retirement without professional advice is very low. Retirees need financial advisors.

They have a fair amount of money saved, but retirement is longer, more expensive and has less support now. So people have challenges they're not used to. That puts a lot of stress on the advisors.

They should do terrifically-- provided they adjust and use more advanced approaches that are fitting to the times.

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Freelance writer Jane Wollman Rusoff is a Los Angeles-based contributing editor of Research and is the founder of Family Star Productions

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