From the January 2011 issue of Research Magazine • Subscribe!

January 1, 2011

Redefining Retirement

Make sure your retirement advice doesn’t get old.

The influential Merrill Lynch Affluent Insights Quarterly survey was the talk of the trade when it was released two months ago because of this number: 61.
Sixty-one percent of people surveyed said they expect to retire later than planned, up from 29 percent in January. Talk about a headline grabber.
But here’s the back story: New thinking from industry leaders suggests that millions of Americans are delaying retirement not because they have to — but because they want to. It’s a fundamental shift that could well reshape the advisor-client engagement.    

“It’s important for us to adapt what products we offer, what conversations we have. You’re having very different conversations with people who look at retirement as a second act,” observes David Tyrie, a personal retirement solutions executive for Bank of America Merrill Lynch. “Now and going forward, it’s a matter of having more tangible and pointed conversations — and the advisor has got to be prepared for those.”

Tyrie attributes the big jump in workers pushing back their retirement dates to both the economic downturn and to baby boomers who are redefining exactly what retirement represents to them. As one client told his Merrill Lynch advisor recently: “I do not want to live in a world of ‘I was’; I want to live in a world of ‘I am’ or ‘I’m going to be.’”

For many Americans today, that means working longer in a job they’re passionate about, starting up a new business or downshifting into something part-time. And then there’s the reality check. “Our whole point of view has changed around employment the last few years. If you are fortunate enough to have a job that pays well, people have become more forgiving of the imperfections,” notes Leslie Strebel, managing partner of Strebel Planning Group in Ithaca, N.Y. “I know I have in my own work. There’s this sense of ‘Buck up. Stop complaining.’ It’s an attitude that has really resonated.”

Continuing Ambitions

The notion that baby boomers would redefine retirement isn’t new. But, for the first time, there are hard numbers on what this so-called “late-career” life-stage segment looks like. As Laura Varas, principal of the Massachusetts research firm Hearts & Wallets, puts it: “All 55-year-olds are not alike.”

In a groundbreaking new study, Hearts & Wallets identifies 12.8 million households it labels as late-career, defined as investors between the ages of 53 to 64 where the primary breadwinner is not considering retirement within the next five years. Varas and co-researcher Chris Brown say late careerists wish to work until they’re unemployable. “The idea is I want to work as long as I can,” she adds. “Until that happens, I’m good. I feel rewarded. I’m at the top of my game. Why would I quit?” (Notably, the last Merrill Lynch Affluent Insights Quarterly survey did not ask employees why they were delaying retirement in such large numbers but the upcoming one will.)

The Hearts & Wallets survey of more than 4,000 households — and comprising 280,000 data points — also calls into question an industry assumption: that pre-retirees, who are roughly the same age as late-careerists, are the leading edge boomers. In fact, the research shows, the pre-retiree segment — those who identify themselves as within five years of the primary breadwinner stopping full-time work — is significantly smaller than its late-career counterpart: 5.9 million households.

The new thinking around retirement represents a wake-up call for advisors, according to Varas. For starters, she says, financial services providers should talk to late career investors dramatically differently than they do to pre-retirees. And lifestage, rather than age, will play an increasingly important role in financial discussions.

As an example, Varas says advisors should consider more flexible positions on recommended replacement rates for late-career clients.

“What they need and want to know is the bare minimum they need to protect themselves in case they become unemployable. The whole kind of imagery around walking on the beach, flying around the world or buying the vineyard is incredibly damaging. It’s not realistic for what they need,” she adds. “We need a more realistic definition of what that base case to protect yourself is. We need to use legitimate versus aspirational targets, which may not be necessary, achievable or even aligned with investor expectations.”

Clearly, forward-thinking advisors — many of them late-careerists themselves — see the writing on the wall. A recent FA Vision study from Kasina and Horsesmouth shows 73.1 percent of advisors may soon offer client assistance with the “softer” aspects of retirement, up from 44.1 percent today. Among those deliverables: help with second career advice and nursing home placement.

Eric Daugherty, a Kasina principal, says advisors today routinely field questions from clients that have never been asked of them before. “You’re stumped unless you are willing to move into these areas,” he says.

Meanwhile, he adds, product manufacturers are struggling to figure out the guaranteed income and annuity question.

“How do you help people convert a lump of assets into an income stream? It’s huge,” says Daugherty. “People have been conditioned for 30 years to just amass wealth. In reality, they’re figuring out ‘Okay, I did that. Now tell me how to use that to pay my electric bill, my kids’ college tuition and my parents’ nursing home payment.’ It’s almost a new field. It’s also a permanent state of affairs in terms of this broader way of thinking. So get ready for it. There’s no turning back.”

Examining Assumptions

With Social Security, Medicare and corporate pensions under threat, many Americans feel they have lost their safety net. For a lot of people, the assumption that their house would be paid off in retirement is also off the table. Then there’s the drama surrounding health care.

“That’s the conversation that always takes the air out of the room. People are afraid. They don’t know what to do. Health care is the 800-pound gorilla,” notes Ed Lynch, managing director and chief retirement officer of Dietz and Lynch Capital, a Massachusetts-based investment management firm.
Advisors, meanwhile, are rethinking risk.

“You see advisors breaking down retirement portfolios into buckets and different levels of risk — trying to create a low-risk plan, high-risk plan, short-term need, long-term need. Seventy percent of your lifestyle used to be a back of the envelope retirement calculation,” notes Philip Palaveev, president of Fusion Advisor Network. “It’s become much more complicated than that and it’s creating uncertainty not just among advisors but investors as well. Do we really know what we need to know in order to get to where we need to be?”

Against that bleak backdrop, Olivia S. Mitchell, a professor of insurance and risk management at the University of Pennsylvania’s Wharton School and executive director of its Pension Research Council, worries that there is “precious little discussion and thinking around: What if I am still here on this earth at 95 or 105?”
She is among a small core of academics who are encouraging advisors to reframe the retirement conversation to help clients focus more clearly on future income needs.

Instead of talking about the 70 percent income replacement rule, she recommends, discuss with clients how they are going to achieve spending cuts of 30 percent. A fan of annuitization, Mitchell suggests explaining the true value of insurance: For automobiles, it is 60 or 70 cents back on the dollar. For health care, it’s about 50 cents. For a simple annuity, she says, it’s 95 cents or more.
“You have to cast it in terms of the value for the money and protection you are getting. If cast as an investment, people just don’t understand,” says Mitchell, author of the upcoming book Revisiting Retirement Payouts. “It’s all in the framing. If you talk to people and say the insurance company is getting $100,000 of your money and you can never get it back, it skews against. If you say: ‘By purchasing this annuity, you have income for life. Even if you become demented someone will pay your bills,’ that’s very persuasive.”

While behavioral finance is the darling of academics, it’s getting a huge real-time workout in advisors’ offices today.

Lynn Ballou, managing partner of Ballou Plum Wealth Advisors in Lafayette, Calif., operates a practice that puts a human face on all the survey data. Many of her late-career clients have reinvented themselves: a nurse who opened an eldercare business, a pilot who became a photographer, and a human resources manager who is now a rafting tour guide. One woman, who works for a major pharmaceutical firm, is at her peak — and still loving what she does every day. Other clients, meanwhile, have been advised to press the pause button instead of retiring as planned.

“This generation thinks it can do it all, have it all, and live a really long time. That’s great. However, they’re asking their portfolios to support them for 35 to 40 years and the math isn’t making sense,” says Ballou. “People are realizing the government isn’t going to lower your taxes, your portfolio isn’t a guarantee and you’re kind of on your own. What that means for us as advisors is a lot of heavy-duty psychological sorts of conversations on: What does that feel like for you? We’ve been starting with the numbers, and often that tells the story. I don’t think it’s been a shocking revelation to anyone, but it’s been a difficult revelation for some who had plans.”

It’s not lost on advisors like Ballou, Strebel and Lynch either that their practices have become a reflection of themselves. Like a lot of their clients, they are in their 50s and pondering many of the same issues as they approach their own second acts.

“It’s kind of like people and their dogs. We start to look like our dogs after a while,” says Ballou. “The joy of my life, why I’m in the sweet spot of my profession, is that for 30 years I’ve grown up with these people, put their kids through college, cared for their parents and then helped them segue into something they are passionate about. It’s part of the evolution we are all going through personally. It’s really interesting and exciting to be part of this moment in history.” 

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