Creating Retirement Security In The Pre-Retirement Years

It is a well-recognized and accepted fact that retirement security is one of the most important financial goals of the American public. Concern regarding the ability to secure a comfortable retirement has become more increasingly acute in recent years, as market volatility has eroded the value of 401(k) accounts and other retirement savings.

The high-net-worth market, despite the levels of current wealth, is by no means immune to this concern. For example, among pre-retirees in this group, 83% of those surveyed in the 2003 Phoenix/Harris Interactive Wealth Survey say that “assuring a comfortable standard of living during retirement” is an important financial goal for them at this time.

Moreover, when asked to select their single most important financial goal, 61% stated this was their top concern. What is more incredible, however, is the fact that this percentage is more than six times greater than their second most important goal, which was only 9% (“financing my childrens college expenses”).

The high net worth also displayed concern about retirement security through their responses to these statements: “I am very concerned about outliving my money in retirement” (44%) and “I feel I need to make up for lost time in my saving for retirement” (41%).

Perhaps retirement concerns are best illuminated through high-net-worth consumers current attitudes toward early retirement. Over the years, many surveys and focus groups have documented that the ability to take early retirement has been a desire of the high-net-worth market. While the high net worth are quick to say they would like to stay active in consulting or some other part-time work, the underlying message is they want to have control over the timing and the manner in which they retire.

It seems that for many in this group, early retirement dreams may not be a reality. In this years survey, we saw an increase in the percentage of high-net-worth consumers who stated that their estimated retirement date is later than what they thought it would be five years ago. Some 33% of high-net-worth pre-retirees said this was the case. Their reasons why can be found in Table 1.

These numbers total more than 100% because there are multiple reasons causing retirement security angst among the high net worth; wed probably all agree that these are all very valid reasons to be concerned.

Finally, when asked what they thought their most important financial goal would be during retirement, nearly three quarters (73%) of the pre-retirees in the survey said it would be to “create a steady income stream for day-to-day expenses that will last long enough.” Moreover, this response was nearly five times greater than the next most common response, which was to “be able to provide for children, grandchildren or favorite charities while living” (15%).

When analyzing these findings, its easy to paint a gloomy picture regarding the prospects for high-net-worth consumers ability to lock in secure retirement income. The good news, however, is our survey also determined that almost one quarter (23%) of pre-retirees have already achieved the financial goal of assuring a comfortable standard of living during retirement. Further examination of these “achievers” offers some ideas of how they reached this success.

These wealthy pre-retirees are characterized by their higher average net worth and the fact that they are older than their pre-retiree peers still working on the goal of assuring a comfortable standard of living during retirement. Upon closer inspection, we see that the key to “achiever” success goes deeper than simply having amassed more assets and being closer to retirement.

Specifically, when we look at the types of financial instruments owned by both groups, we see very similar ownership patterns as they relate to stocks, bonds, IRAs, mutual funds, life insurance, and separately managed accounts.

Our group of “achiever” pre-retirees, however, is significantly more likely to own individual long term care insurance and deferred and immediate annuities.

Additionally, they are more likely to have a formal, written financial plan in place43% vs. 35% for those still working on retirement security goals.

As a result, our “achievers” are significantly more likely to report their estimated retirement date is on track, at about the same they estimated five years ago. In addition, this group is significantly less likely to say creation of an income stream is their most important goal during retirement (59% for the “achievers” vs. 78% for those still working on their retirement security goal).

With their retirement security accomplished, they are also more likely than their non-achieving peers to say their most important goals during retirement are to provide for children, grandchildren, and charities while living, and to leave an estate to heirs and/or charities upon death.

This research allows us to draw some clear conclusions about pre-retiree high-net-worth consumers.

First, attaining a sense of retirement security in the pre-retirement years is a function of creating a steady income stream for day-to-day expenses that will last long enough. Second, this need for an income stream must be addressed with specific insurance products and services that go beyond accumulating assets and provide income distribution solutions. Once this income distribution need is met, the high-net-worth consumers mind then switches to a higher level of planning relating to estate transfer and philanthropy.

In conclusion, it is interesting to note that a healthy percentage of our “achiever” pre-retirees still said they expected to put off retirement to a later date, and the biggest reason was because they enjoy working. The point is that answering income distribution needs before retirement allows one to live the golden years on his or her own terms.

Walter H. Zultowski is senior vice president, business and market development for The Phoenix Companies Inc., Hartford, Conn. He can be reached at walter.zultowski@phoenixwm.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 24, 2003. Copyright 2003 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.