Research: We hear a lot about the future of retirement. What aren’t we hearing that we need to know?
Salsbury: I will turn the finger and point to us. Largely because of the greatest bull market mankind ever witnessed, our industry became overly preoccupied with accumulation. Even though the handwriting was on the wall in the form of massive demographic shifts, the industry remained entrenched on the accumulation side of the equation; the products we developed and the expertise we worked on were overwhelmingly accumulation-focused. This massive demographic wave is not coming — it’s here. We’re in the middle of it. We as an industry share part of the blame for not having prepared sooner.
Is it even possible to rescue the mass market’s chances for a traditional retirement?
Yes, it is, but it won’t be easy. It’ll involve education, serious changes in spending and saving behavior and, in many if not most cases, lowered expectations. There’s an old line out of the Jack Nicholson movie, A Few Good Men: “You want the truth? You can’t handle the truth.” The truth is most of the mass market doesn’t like the truth on this subject at all because 40 percent of America has saved nothing at all for retirement.
How can advisors get the word out without being too scary?
The first step is recognizing the magnitude of the problem. Half of all American households have assets under $23,000, and when you look at 55-year-olds, according to EBRI’s data, 75 percent of their retirement accounts have less than six figures in them. The Social Security Administration is underfunded by $10 trillion and the underfunding on Medicare is about six times that.
What should we all be thinking about?
To start with, one of the things investors need to understand (most advisors already do) is that this whole [distribution] phase is dramatically more complex than the accumulation side. Many, many more variables are involved. We need more than just simple math; we get into probability, and that’s a whole different world. Life expectancy, joint life expectancy, inflation rates, tax rates, withdrawal rates, accumulation rates, legacy issues, healthcare issues — all of those things. It becomes a very complex puzzle that often necessarily involves consultation with physicians, attorneys and other specialists. What is your life expectancy? It’s not a fun topic but it’s not just about you; it’s your spouse. If you’re 65, you have a 25 percent chance of living to see age 90, and a higher chance than that of one member of a married couple reaching age 90. These are dramatically longer retirements than previous generations experienced. When you retired at 65 and died at 70, a whole number of financial plans worked pretty well — just throwing it in the passbook savings account was OK. Today, a bigger pot of cash is necessary. So many Americans are not connecting longer retirements to a bigger pot of cash.
And so we need to manage expectations?
Our research in this area indicates that today’s prospective retirees have expectations that are very different from traditional retirees of the past. The hope of previous generations’ retirees was that they would be able to retain their lifestyle in retirement. Today, more people hope to escalate their lifestyle in retirement — take several luxury vacations a year and not just one, for example — and all those things cost money. Aside from escalating, today’s lifestyles are already far more luxurious than those pursued by retirees of the past. Today’s $4 coffee is a normal thing for a lot of the boomer generation.