Seven critical issues are creating a “perfect storm” of forces that threatens the secure retirement of most boomers, according to insurance executive and author Gregory Salsbury.
“My profound worry is that the boomers will be the first generation that will be worse off in retirement than the previous generation,” writes Salsbury in his book, “But What If I Live? The American Retirement Crisis.”
The book has just been published by Highline Media Inc., the parent company of National Underwriter Life & Health.
Salsbury says the seven key issues boomer retirement planning must address are increased life expectancy, the vanishing of traditional pensions, an uncertain future for Social Security, high taxes, rising inflation, soaring health care costs and too little savings.
Longevity, normally thought of as a blessing, becomes a serious problem to those who outlive their savings, notes Salsbury, who is executive vice president at Jackson National Life Distributors, Lansing, Mich., the U.S. subsidiary of Prudential PLC, London.
More than half of American couples age 65 and over can expect to have at least one spouse live until age 90 or more, Salsbury says. That will put a big strain on those trying to live on a fixed income.
For financial advisors, this presents a couple of major tasks.
“The first is education,” he says. “The advisor has to show boomer clients how to control their expectations and educate them to the fact they cannot spend the way they have been or may have intended to.”
For one thing, some boomers may need to extend their retirement age to age 68, given all the demands on their savings, he says.
Beyond that, advisors should encourage boomers to purchase variable annuities, he insists.
“Bond portfolios are fine for the affluent, but for a population that has saved some money but not enough, the advisor has a dual challenge: preserve what they have and grow it as well,” Salsbury says.
Due to market volatility, mutual funds are also not an appropriate answer for most boomers in planning for a secure source of income in retirement, he cautions.
“The solution is to offer a suite of living benefits available today through variable annuities,” he says. “This is a new step in retirement planning, and a large number of advisors are waking up to what living benefits provide: the guarantees or floors offered by fixed instruments plus growth of equity.”
On the problem of disappearing pensions, his book cites federal data showing the percentage of workers covered by a defined-benefit pension plan has fallen from 80% in 1985 to 33% in 2003.
For its part, the insurance industry needs to fill the gap by offering low-cost VAs with a living benefit, he says.
With more than two-thirds of retirees depending on Social Security for more than half their income, it’s increasingly obvious boomers wishing to maintain their lifestyle need to save more, Salsbury notes.
This creates an opportunity for advisors as more boomers realize they need professional assistance.
“The retirement income riddle is so much more complex today than previously,” Salsbury says. “This makes financial advisors even more important than a couple of decades ago. Taxes, longevity and inflation make it a tough puzzle, so boomers need to save more than they have been and adjust expectations to perhaps work longer than they planned.”
Advisors must recognize many historical net-income solutions for retirees are inappropriate for today’s circumstances, he adds.
“In the past, the advisor might say, ‘You have a 25% chance of living to 92, so I’ll design a portfolio that will take you to 92,’” he says. “The problem with that is, there’s still a chance he’d run out of money before 92 and a 25% chance of living past 92.”
For most American families, taxes are the single greatest monthly expense, accounting for 30% of their income, Salsbury notes.
“A surprising number think if they are maxing out their contribution to their IRA and 401(k), they’re saving enough,” he says. “But that is often incorrect. The advisor’s job is to show there are other qualified opportunities to save on taxes, such as charitable remainder trusts and annuities that allow them tax-deferred growth.”
As for inflation, someone who needs $50,000 a year in today’s dollars will need more than $101,000 in 25 years, he notes.
“There’s only one real good antidote: income growth that exceeds the inflation rate,” he argues. “Historically, the only readily available asset class to offer this was equities. Therein is one of the not-so-subtle benefits of the living benefit of VAs in that it allows investors to have the comfort of protection while still having potential of growth.”
The real “gorilla in the closet” for retirees is health care, what with the underfunding of Medicare and the rising costs of medical care and prescriptions, he warns. Most retirees who have run into financial trouble say it was health care that derailed their retirement plan, he says.
“So, financial planning needs to consider health care as part of the portfolio,” he says. “Boomers need to escalate the amount of money they’re saving by an amount that will compensate for the expected jump in medical care.”
Finally, it’s apparent Americans aren’t saving for retirement, Salsbury concludes. Advisors can help by getting boomers to see the need for saving while reducing expensive debt, such as credit cards.
“They’ll pay off the house and then incur credit card debt,” Salsbury says. “The advisor needs to help them get rid of the ‘I want it now’ syndrome.”
Kicker: 7 Key Issues
o Increased life expectancy
o The vanishing of traditional pensions
o An uncertain future for Social Security
o High taxes
o Rising inflation
o Soaring health care costs
o Too little savings