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Catch Up

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There has never been a time when retirement planning represented such a challenge–and an opportunity–for advisors. Let’s look at the facts. While it’s true that the majority of advisors have done a great job helping their clients accumulate assets for retirement, it’s also true that the bulk of advisors are still stuck in the accumulation phase, and are woefully unprepared to help retirees–particularly baby boomers–manage the distribution of those assets. The first challenge for advisors is to admit that they lack the know-how to help retirees manage the income phase of retirement, industry officials and even many advisors themselves say. Then they must take the necessary steps to educate themselves. “Advisors need to know what they don’t know,” says Kevin Seibert, a CFP and managing director of the International Foundation for Retirement Education (InFRE) in Lubbock, Texas. “Retirement income management is complex–there are lots of moving parts.” The background advisors have as a CFP or tax or insurance advisor “is applied in a different way” when planning for the distribution phase as opposed to the accumulation phase, he continues. “It’s not business as usual. You can’t keep doing what you’re doing and expect to have the results you’re looking for in making sure clients’ money lasts as long as they do.”

Indeed, some advisors–particularly those with smaller practices–acknowledge that serving retirees is a new ballgame these days, as the four advisor profiles on the following pages show. Some advisors are even finding it necessary to specialize in retirement planning, like Mark Carruthers in Garnerville, New York (see profile) because so many clients are looking for help in figuring out how to fund their retirement. Planner Lois Carrier admits the advisory profession “doesn’t have a lot of experience with distribution” of assets, and that’s not due to a lack of intellect. It’s merely because, historically, clients have been able to rely on defined benefit plans and Social Security to help fund their retirements. (For more on the history of retirement, see the timeline.) Today, however, with DB plans going extinct and the longevity of Social Security in question, the emphasis is on 401(k) plans and IRAs and other methods to fund retirement, she says–so finding ways to produce retirement income is paramount.

Helping baby boomers meet their income needs will be particularly challenging for advisors because, as Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI) in Washington, D.C., says boomers are entering retirement with more mortgage debt and general debt; boomers have less retiree health care paid by third parties; and they have a lower probability of having annuity income from a former employer. Plus, he says, “They are entering retirement with a much higher lifestyle relative to their income than the [previous] ‘silent’ generation.”

So addressing shortcomings in managing retirees’ assets is a necessary undertaking if advisors expect to retain their current clients–and pull in new ones. The good news, according to Seibert, is that more and more advisors are getting InFRE’s Certified Retirement Consultant (CRC) designation and other specialized training because they recognize that retirement income management “is an area that deserves some specialization.” For an advisor “who’s going to be retirement specific, or who has the CFP and [whose practice] is going to be more retirement oriented, [is] a good fit for the CRC credential,” he says.

Opportunities and Dangers

Jerry Kenney, vice chairman of Merrill Lynch, laid out the opportunity for advisors to serve the retiree market in his recently released study, “Seizing the Retirement Income Opportunity,” and when he addressed attendees at the Retirement Income Industry Association’s (RIIA) recent conference in Boston. (RIIA also plans to provide a retirement specialist credential for advisors, but Seibert says it’s too early to discern whether it will be the CRC). Kenney noted that between 2000 and 2020 there will be a dramatic rise in the number of retirees. In 2011, the first wave of boomers–3.4 million people–turns 65, and by 2020, 30% of the population will be in retirement, Kenney said. Also, by 2020, 67% of U.S. financial assets held by individuals will be controlled by retirees and pre-retirees. Kenney also warned advisors that despite the fact that baby boomer retirements will peak in 15 to 20 years, advisors must act now to build relationships with pre-retirees.

Salim Ramji, a partner at McKinsey & Co., and co-head of the consulting firm’s retirement area, echoed Kenney’s sentiments at the same event, adding that consumers begin to seek advice five to seven years before retirement.

There is some good news for advisors, according to Kenney’s research, such as the fact that 80% of retirees will seek advice from a personal advisor rather than turning to the Internet or financial books for help. Ramji added that the competitive playing field for retirement dollars is still wide open, so if advisors jumpstart their efforts to serve retirees’ income needs now, they can snag a sizable portion of this market.

However, if advisors fail to shift their expertise from the accumulation phase to the distribution phase, Ramji warned, they’ll start losing clients to online brokerage firms like Fidelity and Schwab.

Research by McKinsey found that “leading up to retirement, consumers are willing to switch advisors to get the advice they are seeking,” he said. Seibert of InFRE ( knows this from personal experience. Before joining InFRE, he lost a client who’d been with him for 10 years “because while I did a great job helping him accumulate assets, when it got to the point of him retiring and he was asking good questions, because I hadn’t focused on retirement income management, I didn’t have good answers.”

Being educated about retirement income planning isn’t just a defensive strategy, Seibert notes, it also helps advisors show they’re adding value for younger clients. “Managing risks that a retiree has–which include healthcare, inflation, and market risks–can actually start before retirement, so advisors need to start focusing on, and managing, those risks before clients’ retirement,” he says.

The Biggest Lag: Paying for Medical Care

Addressing retirees’ medical expenses is arguably the biggest area where advisors are falling behind, asserts Salisbury of EBRI. “There is a gamut of things that many planners haven’t dealt with because they’ve been so focused on helping people accumulate,” he says. “People tend to plan for an income stream–meaning Social Security and something on top of it, but they don’t spend much time planning for long-term care and retiree medical.” Advisors are not adequately assessing how much retirees need for long-term care expenses, or the necessary cash, or dedicated assets to pay for other medical expenses, he says. Fidelity just released a study in March that estimates that a 65-year-old couple retiring today will need $200,000 to cover medical costs–assuming they have no employer-provided retiree health coverage, the male lives 17 years after retirement, and the female lives 20 years. A study that EBRI conducted in 2004 found that a couple who retired that same year at age 65 would need $216,000 to cover retiree medical expenses to get them to age 80, Salisbury notes. If they lived to 90, that figure would jump to $444,000. (A recent Census Bureau study on the health of retirees did have some good news, however, on the age/health equation: See sidebar above right.)

Salisbury believes very few advisors are actually aware that their high-income retiree clients face skyrocketing Medicare costs starting next year. The Medicare Modernization Act of 2003 provides that beginning in 2007 and phasing in until 2011, a retiree that has income of more than $80,000 per year will pay a higher percentage of the Medicare Part B premium, he says. For those earning $200,000 in retirement, the act requires such retirees to pay 80% of the Medicare Part B premiums themselves as opposed to the current 25%. “That would mean the retiree is paying $400 [per month] for Medicare Part B whereas most people are paying $93 per month,” Salisbury says. High-income retirees “are going to end up facing higher payments of Medicare Part B payments than anybody in history has ever had to pay.”

If you need further evidence that retiree medical costs are being ignored, Salisbury cites a joint study conducted by LIMRA International, the life insurance trade group, and the Society of Actuaries, which reviewed the top 27 financial planning software packages. The study found that none of the software packages factored in what retirees need for long-term care, he notes, or the amount needed for retiree medical costs. Also, many of the packages “had top-out ages, so they all assumed that everybody died by 85,” Salisbury notes. “The financial planner would have had [the clients] broke by 85.” Perhaps the most significant omission is that only about seven of the software packages offered any type of Monte Carlo simulation. So very few “had a risk component to it that did active modeling” of client portfolios, he says.

EISI (Naviplan) and Morningstar are planning to release retirement planning software packages this year. Other providers include AdviceAmerica (, Kettley Publishing (, and Impact Technologies Group ( (For a complete list of planning technology providers, see our annual directory.)

McKinsey’s Ramji says advisors can look forward to more products being introduced that address retirees’ health care needs as well as inflation. In fact, Charles Schwab introduced the Schwab Inflation Protection Fund in March, which the company says is designed for pre-retirees and retirees. More companies will also be coming out with products that offer income guarantees within defined contribution plans, like Genworth Financial’s product called ClearCourse (see Playing Field column for a more in-depth discussion of some recent retirement products.)

While manufacturers are busy developing products to help clients generate an income in retirement, the time for advisors to address their educational shortcomings on retirees’ income distribution needs is now. That also includes preparing clients emotionally and mentally for the transition, as Olivia Mellan conveys in her eloquent article, “Retiring Minds”. As Seibert of InFRE puts it, one of the best practices advisors should embrace is “helping retirees plan for what they are retiring to.” Ask clients: “Are they ready for a month of Saturdays?” That’s a good start.–Melanie Waddell

For a list of the top 401(k) and pension plan providers, click here.

To see a copy of “65+ in the United States: 2005″ a current population report from the U.S. Census Bureau and the National Institute on Aging, click here.

Melanie Waddell, Investment Advisor‘s Washington bureau chief, can be reached at [email protected]. Staff editor Ryan G. Murphy can be reached at [email protected].


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