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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.

They also need to update their life expectancy along with continued medical improvements, he said.

“Life expectancy is a central issue in trying to decide how much resources you need each year,” Clark said. “What are the risks of living very long or very short?”

Whether or not ones level of risk aversion changes with age is also an unknown variable, Clark said.

“If people are more risk-averse with age, that will change their choices,” he said. For instance, they might prefer bonds to equities, whereas in their youth they might have gone the other way.

A clear answer on how reaction to levels of risk change with age is not yet available, he said.

Clarks narrative changed when the topic turned to womens retirement. On average, women live longer than men so they need to plan for a longer retirement than men, and husbands have to calculate this likelihood into their retirement plans, he said, “especially since women tend to marry older men.”

Living longer and marrying older men often mean women will be caretakers to ill spouses and widowed by the time they need care, he said.

“Medicare benefits will get lower and cover fewer things,” he said. “This is a market for long-term care insurance that will continue to grow in the future.”

Clark also discussed how retirees might want to receive their money. “If you offer lump-sum options, people will take them even though it might be less than an annuity,” he said.

Receiving a lump sum increases the need for cash management in retirement, he added.

Other choices might include single life annuities and joint and survivor annuities, he said.

The potential for large health care expenses will have an impact on portfolio management in retirement, particularly because fewer people will be covered by employer-provided retiree health insurance.

Its clear that retirees will have a need for a cash management plan, Clark said, but whether or not they choose to use a financial services company with which to create one is dependent mainly on two things: financial knowledge and education.

“I dont think you can be successful in your business if people dont understand your products,” he said.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 25, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.