Retirement planning has been mushrooming in the financial services industry. In 1985, a search of “retirement planning” in the LEXIS/NEXIS database drew 75 hits. Halfway through 2005, that same search was on pace to exceed 10,000 hits for the year. In a 2005 Financial Research Corporation survey, Retirement Income Products and Services, 88% of financial services firms considered retirement income solutions “very important” or “of vital importance”–important enough to alter the company’s structure to deal with it. There’s a good reason for this: 43 million of America’s 100 million households will enter retirement over the next 20 years. Which presents advisors and their clients with a problem.
With the first wave of baby boomers set to retire in the next few years, the industry is waking up to the fact that historically it has been overly focused on asset accumulation and investment performance, and is woefully unprepared to handle the appropriate distribution of those assets. Whether it’s juggling the host of new variables that must now be considered, such as life expectancy, assumed withdrawal rates, changing income needs, and healthcare expenses, or dealing with more familiar challenges, such as asset allocation, diversification, and tax control, advisors and investors alike are not ready to handle the retirement planning challenge in front of them for a number of identifiable reasons. Among the most significant are:
Focus The industry is focused on products, performance, and accumulation, not distribution.
Record bull and bear markets Investors are uniquely experienced in both, skewing their view of equity markets and investing in general.
Longevity People are living longer.
A number of factors allowed the industry to ignore retirement planning and remain focused on accumulation. First, until recently, the concept of retirement as something other than an idealistic goal was not very widespread. Second, even if you were lucky enough to actually retire, the odds were against you living very long afterward. Third, the greatest bull market of the last century kept both investors and advisors following the “hot dot.” Who needed to worry about income planning when net worth was doubling every two to five years?
Then, just about the time many Americans were no longer contemplating if they were going to have a vacation home, but rather how many and where, they were slapped with the worst bear market since the Great Depression. These two market extremes created unrealistic expectations at both ends of the spectrum, and neither markets nor investors may have yet fully recovered–financially or emotionally.
Accumulating assets is only the first part of retirement planning. The next step is to help retirees determine how to convert those assets into income that can last for the rest of their lives. This process is far more complex, and involves a long list of issues, including: longevity, inflation, taxes, healthcare and long-term care costs, growth, asset allocation, liquidity, Social Security benefits, investment guarantees, and market performance possibilities.
A typical question from a boomer pre-retiree might sound something like this, “How much can I spend without running out of money?” Many financial experts conclude that a 4% initial withdrawal rate, adjusted annually for inflation, may be the highest amount that can be withdrawn and still give the investor a reasonable assurance that a properly allocated portfolio can last 30 or more years. Although a 4% withdrawal rate doesn’t provide any guarantees, it is clear that rates above that level can significantly increase the risk of running out of money.