The Truth About Retirement

Is More Gut Feel Than Definition

By

New York

One of the more interesting definitions of retirement that David Zander retrieved from a Google search that netted 12.4 million results pointedly contrasted the difference between a more traditional concept of retirement and its current perception.

The definition presents retirement as “the disposal of a fixed asset at the end of its useful life,” said Zander, a certified financial planner who is a principal with Achaean Financial, Fort Wayne, Ind. Zander spoke during the annual meeting of the National Association of Variable Annuities in October.

But speakers at the conference emphasized that both in perception and in fact, this definition is far from the case.

There is a “virtual nation” of retirees and pre-retirees that is 76 million strong, a number that is nearly as large as Germany, according to Cynthia Egan, executive vice president of FMR Corp. and director of the retirement services business unit of Fidelity Personal Investments, the personal investment unit of Fidelity Investments, Boston. For couples who are age 65, she told NAVA attendees, the chance that one will live to age 92 is 50% and the chance that one will live to age 97 is 25%.

For those who do live into their 80s and 90s, she says, retirement can be risky. The issues they face include longevity, inflation, asset allocation and health care expenses.

And, one of the biggest risks, Egan continued, is that “many pre-retirees are drifting into retirement without a plan.”

It is this lack of planning that Rick Carey, founder of the Variable Annuity Research & Data Services and a managing director of research with Finetre Corp., Atlanta, referred to when he said during the annual meeting that “the journey has begun” for issuers, distributors and advisors who will face this issue going forward.

Carey kicked off a session in which two top national financial advisors discussed some of the practical considerations that the need for income planning is creating.

An income plan should, among other things, use real-money projected returns and not overall return as a basis for planning, and should use realistic market returns predicted going forward, according to Harold Evensky, a fee-only planner with Evensky, Brown & Katz, Coral Gables, Fla.

A 12% return that investors have become accustomed to may be more in the range of 6% going forward, he indicated. And, when inflation is factored in, that return may be whittled away to as low as 2.4%, Evensky added.

Income planners also will need to dispel the myth that retirees need 80% of their pre-retirement income, he said. With retirement, comes additional time, he added.

The traditional income portfolio is poorly designed, according to Evensky. Income based on dividends and interest is counterintuitive because in lean times, drawing from the portfolio chisels away at the principal.

Perhaps the hardest job, according to Donald Haas, president of Haas Financial Products, a broker-dealer in Southfield, Mich., is to get the 65-and-over crowd to reconsider their financial position and realize that “you are no longer in a needs world. You are in a wants world.”

An immediate annuity can help with that transition because, according to Haas, “the money I see is the money that I spend.”

A question from the NAVA audience focused on what planners should do for those who are not affluent but have “undersaved” for retirement. The answer, according to these planners, could at least, in part, be found with a steady income that an immediate annuity would provide.

Another issue that was raised was what period would be used when an annuity was selected. Scott Curtis, president-Raymond James Financial/Planning Corporation of America, St. Petersburg, Fla., said he has advised that the life expectancy at the annuitization age be estimated based on the 2001 CSO Table.

Other speakers offered their assessment of income planning. The notion of a regular lifetime income appeals to people, said Mark Tully, a senior vice president, annuity distribution and sales with the Phoenix Companies, Hartford. Tully said this is particularly true as fewer people have defined benefit plans to rely on and more individuals rely on 401(k) plans in which fund values can fluctuate.

An immediate annuity can be part of the answer to a steady stream of income and should be used as “a base of income surrounded by other investment alternatives.” For those who have not saved enough, an immediate annuity can help alleviate the problem, he added.

Zander sees “income as freedom.” Most people, he conjectured, do not want a lump sum from a retirement fund, but rather the assurance that there will be a steady income on which they can rely.

John Kennedy, a vice president and national sales director of the brokerage division of PLANCO, a Hartford Life Company based in Hartford, Conn., said he has been hearing about annuitization for years and that there are currently products available such as an immediate annuity that can provide that benefit.

The product can allow an individual to better enjoy life now, he said. “Life is an hourglass. We know how much sand has passed through, but we dont know how much sand is left.”

This article first appeared in the October 2004 issue of Income Planning, an online publication of National Underwriter Life & Health.


Reproduced from National Underwriter Edition, November 11, 2004. Copyright 2004 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.