While its true that the number of people entering their retirement years is high, only about 25% of that number will have a net worth in excess of $300,000.
“Its always surprising how little money people have in retirement,” said Robert Clark, a faculty member of the College of Management, North Carolina State University, Raleigh, N.C. “You have to go pretty high up the ladder to find people with cash to manage.”
Clark discussed the characteristics of the retiree market and the circumstances that increase their need for cash management at a recent seminar held by Ernst & Young, New York.
Only 10% of households with people ages 50-59 have a net worth in excess of $725,000, and about the same percentage of households with people ages 60-69 have over $1 million, he said.
If the question is where will the cash flow for retirees be, its useful to know when retirement is, Clark said.
Twenty years ago, men chased early retirement, but that trend has leveled off in the past 17 years, he said. There is debate on whether the trend away from early retirement has paused temporarily or ended.
Men might continue working after 65 for a number of reasons, Clark said.
“It would drive corporate leaders crazy when their executives left, took a hefty pension package, then went to work for their competitors, so they tried to entice their older workers to stay,” he said.
If the age of retirement remains constant, and life expectancy continues to increase, then people will be retired for longer periods of time. So, theyd have to save more to have the same annual income in retirement, and consequently, the value of cash management during retirement increases, Clark said.
The changing nature of retirement caused by longer life spans will likely cause people to flip in and out of retirement with “bridge” jobs, Clark said.
“A lot of people are leaving career jobs and going to a different job,” he said. “This type of phased retirement means people will have earnings as part of their income in retirement; this could put a different spin on products.”
Also key to understanding the way cash is used in retirement is individual choice, Clark said. Some retirees want to live an expensive retirement, while others prefer to spend little in their later years, he said.
So, retirees need to decide on an annual consumption rate based on their current level of wealth, the number of years they expect to be in retirement, the benefits they will receive from retirement plans and the types of assets they have, Clark said. They also need to be willing to re-balance their portfolio when they retire.