Give Boomers The Tools To Meet Investment Challenges Mutual funds and variable annuities can help

by Charles DiVencenzo

The leading edge of the baby boomer generation, the 77 million Americans born between 1946 and 1964, will turn 60 years old next year and they face retirement savings and investment challenges unlike anything faced by prior generations.

The financial professional must play an important role in bringing the whole picture together, from asset allocation assistance, to retirement investment and income planning, as the investor journeys toward retirement and beyond.

Mutual funds and variable annuities, insurance products with mutual fund subaccounts, are ways that the financial services professional can help accomplish this goal.

The coming crisis

From a savings standpoint, the majority of Americans approaching retirement clearly have not saved enough to support their desired retirement lifestyle. According to the “2004 Retirement Confidence Survey” developed by the Employee Benefit Research Institute, American Savings Education Council and Mathew Greenwald & Associates, 58% of workers say they are currently saving for retirement, yet 48% of those aged 45-54 and 44% of those aged 55+ have saved less than $100,000 toward their retirement!

Americans in general are not saving enough and even those who do save regularly are not investing their assets in a systematic way. The majority of Americans misunderstand the concept of asset allocation and its pivotal role in successfully investing for retirement and beyond.

A 2004 study, commissioned by The Hartford, showed that two-thirds of investors recognize the importance of asset allocation and, after reading a description of asset allocation prepared by Ibbotson Associates, nearly 8 in 10 claimed to be practicing it. In reality, however, very few investors are practicing actual asset allocation. In the same survey, when investors were asked to provide a definition of asset allocation, the majority of respondents cited forms of diversification.

Asset allocation is a specific allotment of monies into different asset classes, while diversification is a more general spreading of assets among various classes of assets.

Additionally, 45% of this same group had not made tactical changes to their asset allocation in the past 12 months. (See chart 1.)

Couple this with a shift to income planning from accumulation and the need for the help of a financial professional is heightened.

For decades, our focus has been on accumulating assets toward retirement. As an industry we have spent the last two decades communicating the benefits of saving for retirement over the long term. However, even for those who have invested diligently for many years and approach retirement with a decent nest egg, new challenges await.

Boomers risk a substantial decline in standard of living in retirement if they cannot design an effective retirement income and investment plan. To create such a plan, a financial advisor should consider three major retirement uncertainties: longevity; the impact of market cycles on a portfolio; and the state of public and private “guaranteed” pension plans such as defined benefit pension plans and Social Security.

Investment approaches for retirement

Solving for retirement today requires a balanced approach including consistent tactical and strategic asset allocation based on an investors life stage and risk tolerance and use of products to help manage for lifes major uncertainties.

While no investment or product strategy can substitute for years of inadequate retirement savings, we believe that asset and product allocation is one strategy which can provide growth potential for the nest egg throughout retirement.

Investing for growth potential

Depending on ones time horizon, life stage and risk tolerance, mutual funds and variable annuities are two vehicles which can help meet retirement challenges.

In recent years, many mutual fund companies have begun to offer life stage, or asset allocation funds, where assets are professionally allocated across various equity and fixed income investments within a single fund.

In addition, many variable annuities provide asset allocation assistance through programs which provide target allocations and automatically rebalance on a regular basis to adjust for market performance. (See chart 2.) Other features, such as annuity payouts and guaranteed minimum withdrawal benefits, help manage for uncertainty. The guaranteed minimum withdrawal benefit guarantees receipt of at least the original amount invested in the form of regular withdrawals.

Effective retirement planning involves the coordination of many moving parts and dealing with major certainties as well as uncertainties. Each retirement investment and income plan is unique to the clients personal situation, retirement dreams, risk tolerance and life plan. Mutual funds and variable annuities can be an important part of this plan but are just one part of the overall retirement mix.

The financial professional must play an important role in bringing the whole picture together, from asset allocation assistance, to retirement investment and income planning, as the investor journeys toward the retirement date and beyond.

Charles DiVencenzo is a vice president with The Hartford and leads advanced product marketing initiatives for the firms Investment Products Division.


Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 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.