From the February 2010 issue of Boomer Market Advisor • Subscribe!

Rethinking retirement

Baby boomers have been inundated with bad news during this recession, reading headlines like "$2 trillion wiped out of retirement funds" and "retirement dreams disappear with 401(k)s." They can't escape the gloom and doom--especially when they open their account statements.

The good news, however, is that you have their attention. The financial crisis has been a great wake-up call to the unique challenges this generation of retirees face.

How did we get into this mess?

The reality is that not having enough money in retirement isn't as much a savings crisis as it is a consumption crisis. In fact, your biggest competition isn't another advisor. It's that flat screen TV, the second SUV in the garage, the vacation home.

We now have more cars in this nation than eligible drivers. Based on the current economy and what we now know about some of the business transactions over the past, we can no longer afford that kind of lifestyle.

The financial crisis didn't cause the retirement savings problem. It just exacerbated it. Even before the collapse in September of 2008, this age group was already behind in retirement planning.

This is the first generation that is expected to live longer in retirement than they will have worked. And many are planning to retire too soon with too little savings.

The Employee Benefits Research Institute found that 40 percent of workers said they have less than $10,000 in savings and investments in 2009. While that number is astounding, it's not that different from prior years. In 2008, 36 percent of workers had less than $10,000 in savings and in 2007 the number was 35 percent.

Participants near retirement had exceptionally high exposure to equities. Nearly one in four between the ages of 56 and 65 had more than 90 percent of their account balances in equities at the end of 2007, and more than two in five had more than 70 percent.

This is where financial professionals come in
The financial crisis has caused Americans to take a second look at their financial situation. As a result, there has never been a better time for financial professionals to help clients create a plan for retirement.

According to the Spectrum Group, 61 percent of investors nearing retirement indicate that the financial crisis has seriously impacted their long-term plans. Many of these near-retirees will turn to financial professionals for guidance and strategies to help maintain retirement income despite the unpredictable timing of market returns.

The opportunity is yours for the taking. The coming months can be a turning point for you and your business. Reach out and help clients confront the hard facts about under saving and retiring too soon.

Three stages of recovery
Investors are gun-shy about re-entering the market, and it will take time to convince clients that they can rebuild retirement savings. As such, we offer the following three stages of recovery to help clients through the process.

Stage 1: Moving investors from an emotional mindset to a rational one

When your clients saw the balance of their portfolios drop sharply, they may have panicked--leading them to make rash decisions based on emotion. At this stage, they need help moving to a more rational mindset.

One way to achieve this is by providing a rational look at their current situation. Their losses may not be as bad as they seem. Review their long-term goals and work through "what if" scenarios. The objective is to show investors that they can still achieve their goals by making decisions based on sound investment principles--not fear.

Stage 2: Shifting investors from passive to active

The task of rebuilding can at first seem overwhelming, leading many investors to feel paralyzed by indecision. Help motivate those investors by showing them how they can retake control through adjustments in their savings and consumption levels, lifestyle choices and allocation to investment options.

Remind your clients that they're in control of their asset allocation. Help them complete a risk assessment, as their tolerance for risk may have changed. Use simulations to illustrate to clients how small adjustments may help them achieve their long-term goals.

Stage 3: Refocusing investors' attention from short term to long term

Economic ups and downs are inevitable parts of investing. During a downturn, however, it can be tough for investors to see the rebound in the future. This is the time to discuss the need for patience and the development of a long-term plan.

Investors want education and guidance (not products)
Our focus group research has revealed that investors do not want to start retirement income planning by talking about products. They want education and guidance.

You can help gradually move your clients into the solution phase through this four-step process:

  1. Create awareness of a need to plan.
  2. Help educate clients on their specific needs.
  3. Provide guidance through the planning process.
  4. Recommend solutions for your clients' individual needs.

Just as there isn't a single product solution that fits each of your clients' needs, neither is there an identical income plan for all of your clients. The key is to work with your clients--and the sooner the better--to build a plan that reflects their current situation and their expectations for retirement and then to periodically review that plan.

Employers want help, too
Eighty-three percent of employers who sponsor retirement plans say they are concerned their employees won't be prepared to enter retirement. Yet only 40 percent of employers offer help with the transition. This is a tremendous opportunity for the advisor who can bring retirement income expertise to the workplace.

The time is now
There is a huge opportunity for financial professionals right now. You play a key role in helping your clients rethink and rebuild their retirement future. The steps you take today will make a difference in the retirement security of future generations--and in the future of your business.

Daniel J. Houston is president and CEO of the Principal Financial Group.

Reasons for hope
There is reason for hope--and you can educate your clients about the randomness of the market and the potential benefits of dollar cost averaging during any kind of market conditions.

In March, 2000, the S&P 500 was at 1527. The S&P hit its low on March 11, 2003 at 810 (a drop of 52 percent), with the post recovery peaking in October of 2007. That's seven years and eight months from peak to peak.

Since the low of the most recent market downturn in March 2009, however, the market has already recovered nearly 63 percent as of Nov. 30, 2009. That's a much faster recovery than the 2000 downturn.

Assuming growth of 2 percent per quarter going forward, we could potentially return to the previous market peak by 2014. Of course, this assumes there are no additional periods of volatility, market unrest or other negative factors that may influence growth.

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