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The Yawning Knowledge Gap On Retirement Income

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“There is a train wreck I see coming,” says Chris Blunt, executive vice president, New York Life Investment Management, New York.

He is referring to the time when boomers hit retirement with Social Security, a 401(k) or other qualified accounts, and some savings but no plan for taking income safely. They will say, “I want my pension back,” and they will be “screaming for help,” Blunt predicts.

A new National Underwriter/New York Life telephone survey of 1,002 consumers shows the depth of their uncertainty.

The survey shows 40% of consumers “do not know” the percent of retirement savings they can safely withdraw yearly in retirement without running out of money. Another 48% said they could take out 5% to more than 25% a year. Only 10% said “less than 5%,” the number most often recommended by financial professionals. (See Chart 1.)

A companion National Underwriter/New York survey of financial advisors shows many advisors hold to the recommended liquidation range but not all.

For instance, 25% of advisors said that as a rule of thumb a healthy 65-year-old retiree can liquidate “less than 5%” from the retirement nest egg each year without running undue risk of outliving savings. Another 36% answered “5%.” Most experts agree those are safe percentages. But the remaining 39% of advisors thought otherwise: 26% put the liquidation rate at “6% to 10%,” while 9% said “11% to 100%.” Only 4% said they “don’t know.” (See Chart 2.)

These results have implications for financial services professionals and clients, according to sources interviewed by National Underwriter.

Clearly, consumers need help getting from asset accumulation to taking retirement income, says Ted Mathas, executive vice president of New York Life Insurance Company, New York. “The incongruity is that there is not a great practice model on the advisor side for doing that.”

Many advisors focus on asset accumulation, with tweaks for retirement income purposes, he continues. (A tweak could be using guaranteed living benefits on variable annuities but keeping the risk management and asset management processes in place.)

Instead, advisors can and should develop a new business model, he says, one that centers on helping clients replace the stability of regular monthly paychecks. This replacement would be a guaranteed income stream via income annuities or annuitization. This would focus on clients receiving a monthly check that will likely be higher than what they could get on their own if, say, they take systematic withdrawal, he adds. It would pay them income for life, so they won’t outlive their money.

That’s “income for life, not a lottery windfall,” adds Blunt.

Going forward, the immediate annuity could be positioned as a separate asset class within the retirement plan, he suggests.

Tema Steele, a New York Life agent based in Cherry Hill, N.J., has been focusing her practice this way for over a year. “My clients love it,” she adds, and “they send me referrals.”

Many new clients come with no goals or financial plan, Steele observes.

“They have worked and have income from Social Security and maybe a pension,” she says. “But when that is not enough and they go into principal, they get scared.

“They’re afraid they’ll outlive their money,” she says, so they go to see her.

Steele does not talk with clients about liquidation rates. Instead, she works conceptually, learning about their lives, expenses, emotional/psychological issues and so on. When it’s time to develop plans and choose products, she speaks of “creating a personal pension,” and “putting in guarantees and certainties to counteract the uncertainties of the world.”

She does use immediate annuities–and is a top IA producer at New York Life–but the products are positioned alongside other solutions. For instance, she might recommend the client place 25%-50% of assets in an immediate annuity.

Clients are happy with this, she says. “Most want to be OK, with whatever money they have.”

Clients in their 60s and 70s tend to get back about 8% in principal and interest, she adds. That sounds “very good” to them, especially since the money is not subject to market fluctuations and is held at a top-rated company, she says.

Unfortunately, says Blunt, the NU/NYL survey also shows there is “a disconnect” between needs of the market for such guidance and the readiness of advisors to meet those needs.

In the advisor survey, for instance, 65% described themselves as “very knowledgeable” about helping clients create guaranteed retirement income streams. And 96% said the ability to get guaranteed income for life is either a “very” or “somewhat” important advantage of annuities. However, 97% of advisors also said they have more knowledge about astronomy than about fixed immediate annuities.

What’s more, immediate annuities are not at the top of the products about which advisors said they are “very” or “fairly” knowledgeable. The top products are mutual funds (96%), variable deferred annuities (93%) and fixed deferred annuities (90%). Immediate annuities come fourth (88%).

Actual sale of payout products indicates that immediate annuities are not on the front burner, points out Mathas. “Their sales represent just a tiny fraction of all annuity sales industrywide,” he notes.

Blunt thinks the survey demonstrates that many advisors don’t know how to work with income products, even though they see retirement income opportunities.

“They’ll need training and tools to make it happen,” he predicts.

So will consumers, he says. “If people think it’s safe to pull out 10% a year from retirement savings, they’ll never annuitize.” And if liquidation expectations don’t stay in the 4%-5% range, advisors “will never be able to tell the annuitization story.”

Even liquidation at 6% is probably “way too high,” he adds. The fact that 26% of advisors believe clients can safely withdraw 6%-10% a year is “scary,” he says.

William E. Bartholomew, an insurance agent at Glatfelter Agency, York, Pa., says he has just completed two years researching what other advisors are doing in this area. He spoke with marketers around the country, asking, “What are you doing?”

Now, he has developed his own approach. For wealthy individuals–those with $3 million or more, say, who want $50,000 a year in additional funds (over other monies)–he will recommend using, say, $1 million to pay out 5% a year. The money is spread between three annuities in a type of split-annuity arrangement, factored at 5% growth on the deferred side. A sophisticated program guides how the original funds will be “restored” over a certain number of years. (With the other $2 million, the clients do with as they please.)

“To use more than a 5% factor in any of this is foolish,” Bartholomew says, citing the uncertainties people face in retirement.

Clients to whom he has already introduced the approach “like it,” he says. “The older clients agree on the 5%, while those under age 55 tend to want 8%-10% from their money.”

The older people are much more realistic, he says.

For clients having $1 million or less, “it gets tough,” Bartholomew says. “If they want to count on 8%-9%, I won’t work with them unless they sign off on my recommendation or they can convince me they will die at age 89.”

Bartholomew concedes he “could be wrong” in his projections, but he says this is his best judgment knowing what he knows now. “I don’t think anyone knows what will happen,” he adds. “But I do sense real fear about the uncertainties.”

Charles Yanikoski, president of Still River Retirement Planning Software Inc., Harvard, Mass., believes the 40% of consumers who say they don’t know how much they can withdraw from their retirement nest eggs are “absolutely correct.

“Actually, if 100% of them said that, it would be even more encouraging, because consumers really don’t know. Advisors don’t know either.”

He views the 5% withdrawal rate as conservative, and projections of 5%-9% percent as “less conservative” and “unrealistic.”

Over the years, Yanikoski says he has learned that “many people don’t understand percentages, even if they use a calculator.” So, approaching clients with a percentage in mind may be fruitless.

In fact, he thinks using even the conservative 5% a year as a rule of thumb is unrealistic. “It assumes people withdraw the same amount a year and then die; in reality, people have changing cash flow needs over time.”

For instance, he says, a newly retired couple may pay off the mortgage after five years so they suddenly have greater cash flow. Someone else may have unexpected expenses that require a major withdrawal.

“Plans should be based on cash flow needs, not a level amount per year,” Yanikoski says.

Furthermore, even with the assistance of stochastic modeling, people don’t know what the future will bring, in the stock market, world events or anything else.

Since people don’t know, he says they and their advisors should “do what people always do when we don’t know something–take our best guess and do some contingency planning.”

Annuitization and purchasing an income annuity are probably “great concepts” for people who realize they “don’t know,” Yanikoski adds. “It helps them live a lifestyle, or somewhere, indefinitely.”

Advisors need to be realistic when talking to clients about retirement income, maintains Mathas. They may need to say, “You’re spending too much.”

That can be a difficult conversation, he allows. Also, some advisors may not yet be comfortable with presenting the income annuity as a solution, and some are not comfortable selling guarantees at all. Others don’t like the idea of shipping assets to an insurance company to manage.

“Still, if they don’t tap into immediate annuities, they can’t manage the longevity risk with income that lasts a lifetime,” Mathas says.


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