Dive Into The Retirement Pool Now

If you are like many in the financial services industry, you think the retirement boom is still five or 10 years away. If it is, then you have time to prepare for it and can even put off preparing for it for some time, right?

It is easy to fall prey to this type of logic. The looming baby boom generation can lead one to think that there really is no meaningful market until the boomers retire.

Since the boomer generation spans 19 years (including all those who turned 39 this year), the number of retirees will grow somewhat gradually. While there is no reliable way to predict with certainty when boomers will retire, we can use the median retirement age of 60 from LIMRA research as a proxy for retirement age.

If we assume that all people retire at this age, then there will be more than 2.5 million new retirees this year and all years for the foreseeable future. The numbers jump to about 3.5 million when boomers begin to retire and exceed 4 million 14 years from now.

Combined, there are more than 47 million people between ages 55 and 75 today. Sounds like a large market to me.

This market has the potential to be extremely lucrative for those that make a concerted effort to tap it.

There are two major threats to this potential. First, if you wait too long, others will pick up market share you could have had. Second, other industries also are looking at this generation for their products and services.

There also is a growing body of evidence from LIMRA research suggesting that both current and future retirees could use your help.

For example, one in four people who retired between 1998 and 2001 with the option of receiving a lump sum distribution from a defined contribution (DC) and/or defined benefit (DB) plan at work felt they could have benefited from more retirement planning guidance.

In a recent survey of people aged 50 to 75 with at least $50,000 in investable financial assets, 78% of those not retired said they could do more to plan their retirements and an additional 16% werent sure, leaving just 6% who say theyve done enough. Two in five retirees feel they could do more planning, with an additional one in three saying “not sure.”

That same survey found that two in five retirees and three in five pre-retirees do not believe guaranteed lifetime income sources, such as social security and employer pensions, will be enough to cover their basic living expenses in retirement.

Of these, over one-third of the retirees and over half of the pre-retirees said they are interested in converting some of their assets to create guaranteed lifetime income to fill the gap. Not only do they recognize the need for planning guidance, but also they are willing to consider the key risk management strategies that the insurance industry offers.

Other than encouraging savings and providing products to do so, the financial services industry has done relatively little to help the millions retiring each year to maximize their chances of success.

New approaches, new tools and new products are called for.

New approaches. Since virtually all boomers still are not retired, helping them accumulate assets in preparation for retirement makes sense, especially since less than half of private-sector employees are covered by any type of pension plan (DB or DC). This accumulation mindset is beneficial when trying to help working-age Americans save for retirement.

However, the industry needs to think of new ways to approach the retirement phasethe time when people will need to rely on their accumulated savings.

Peddling more accumulation products with new bells and whistles to these people will not necessarily meet their needs. These needs include managing a growing list of risks they will face in retirement (e.g., health care related risks, longevity risk, inflation risk, investment risk, etc.). These are risks about which many people often are uninformed and for which they are inadequately prepared.

Assuming a person has the ability to set aside funds for retirement, solving accumulation needs is no more difficult than finding the appropriate savings vehicle, given the time horizon, risk tolerance and other characteristics. A product sales approach often adequately meets this need.

Many years later, when that same person is nearing retirement, the needs become more complex.

No longer will finding the right investment vehicle(s) meet the needs. This person now needs to make sure there is income for as long as self and spouse are alive. The income should maintain its purchasing power.

This individual will require health care coverage, too, and may also have to consider long term care coverage. If some of the assets are invested in equities, then this person will need to minimize the chance of market risk wreaking havoc on the retirement plan.

And, maybe this person would like to leave a certain amount (or whatever is left over) to heirs.

What this individual probably needs is someone to provide education on the issues, prioritize goals and concerns, and give guidance through a process that will effectively help meet those goals.

There is probably a product sale or two in there, but you wont know until you have gone through the process with this person.

New tools. An abundance of retirement planning tools already exists.

These range from the standard retirement savings calculators to full-blown retirement planning programs that perform complex analyses such as Monte Carlo simulations.

A study of the latter type (Retirement Planning Software, LIMRA, Society of Actuaries, InFRE, 2002) suggested that prevailing programs do not treat retirement risks adequately. However, providers of many of those programs as well as other providers now are developing enhanced tools.

These newer tools are beginning to focus on the retirement phase as a distinctive life stage rather than as an extension of ones working years.

Such tools may not be useful for everyone. Their value increases with the complexity of the clients situation, and affluent individuals usually will benefit the most from their analyses. For many in the middle market, a scaled-down planning model likely will be called for. Education and the placement of suitable product solutions likely will suffice for many in the middle.

New products. Many in the industry believe the answer lies in innovative product features. I agree that new products and product features will be needed and that continued innovation will be productive.

It will, unfortunately, take years before the industry really knows what works and what resonates best with the coming retirement generation.

Successful innovations likely will be those that capitalize on the changing reality of retirement, such as the increase in working during retirement, the expansion of risk management responsibilities among individual retirees, and the diversity of preferences for education, service, and advice among current and future retirees.

The time to embrace the future senior market is not in 10 years; it is now. And if you are content to wait, realize that others wont be.

Eric T. Sondergeld, ASA, CFA, MAAA, is corporate vice president and director of the Retirement Research Center at LIMRA International, Windsor, Conn. His e-mail is esondergeld@limra.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 14, 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.