Boomers Behind The Next Megatrend: Retirement Income Planning

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Washington, D.C.

“Retirement income management will be a megatrend,” said John David Davenport at a seminar here.

The numbers alone are huge, indicated the chairman of Davenport Financial Group, Oklahoma City.

For instance, in 2001, all sources of assets for the retirement market equaled $10.69 trillion, he said, citing data from the Employee Benefit Research Institute, Washington, D.C.

Most of those assets ($8.3 trillion) were in employer plans, but the variable annuity industry has a role in this market, too, he said. Specifically, he said the VA industrys contributions will be strong in the areas of new product innovation and advisory services.

Davenport spoke at a panel here at the annual meeting of National Association for Variable Annuities, Reston, Va. The discussion zeroed in on workers need for retirement income planning education and advice.

Current employees, especially boomers approaching retirement, want to learn about income planning so they can manage their assets better, said Ralph Marsh, chair of the Deferred Compensation Board of the City of Houston.

“We have 18,000 employees approaching retirement, and their assets are approaching $400 million. We want to be sure it [the money] is properly managed, so they dont run out of money in their retirement years.”

The employees want that, too, he added. “They desire knowledge, so they can manage their assets.”

There is a “huge retirement wave” coming, he said. For example, in 2005, “about half our workers could retire at any time.”

Also, employees have said they need help with things like risk management, taxes, investing and allocation, employee benefits, and estate planning, Marsh explained.

In view of that, “we wanted to hire retirement counselors to provide employees the information and advice they need, free of charge,” he said.

His office did that, hiring Certified Financial Planners and Certified Retirement Counselors as salaried employees of the plans in-house retirement planning and financial counseling service.

In the next 5 years, those who package advice or education with innovative solutions to retirement income will have high success, predicted Davenport of Oklahoma City.

The reason? “People will have to make decisions about their money, sooner or later,” he said.

In the past, adverse publicity did dampen interest in annuity solutions, allowed Davenport. But a July 2003 report on private pensions from the United States General Accounting Office should help change that, he said.

“The GAO report concludes that Americans need help and information about retirement planning,” he said. “This will help give credibility and legitimacy to annuitization and the retirement income management services” provided by the VA industry, Davenport predicted.

When employees step from the world of work to the world of retirement, they look at their assets and ask, “How much will these assets produce and for how long?” said Richard Austin, a financial services industry consultant based in Tampa Bay, Fla.

When people start taking steps to convert retirement assets to retirement income, they are looking to establish a comfortable lifestyle, he said, and they also want to be able to make some kind of bequest.

But many realize their money is subject to market risk and longevity risk, Austin continued. Though no one knows the exact nature of those risks, he said he believes most retirees should plan to live to age 100.

“Long-term planning should be embedded in their minds,” he said.

Worst-case situations–when people outlive their money–do occur, he stressed.

But if people include VAs and fixed annuities in the plan, along with bonds and stocks, the chances increase of a more favorable outcome, he said.

Annuities allow retirees to customize their income floors and mitigate their longevity risk, Austin said.

But, he added, advisors need to be trained and prepared in how to work annuities into the income plan, and they need the appropriate tools, as well.

Plan sponsors and investors also need education, Austin said.

Yes, agreed Arthur N. Caple Jr., people do need information and education.

To facilitate that, providers should reduce the words used in the plan to a level that plan members can understand, said Caple, who is executive director of the State of Marylands Supplemental Retirement Agency, Baltimore, Md.

The Maryland plan has offered retirement counseling services on planning issues since the late 1970s.

The industry should “tear the products apart, fine-tune them and give full disclosure of the fees,” he added.

Agreed, said Marsh. “And also emphasize the importance of keeping the VA as the tool.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 19, 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.