Products are not enough to meet the growing retirement income needs in the United States, said Lisa Plotnik here at the annual marketing conference of NAVA Inc., Reston, Va.
Many insurers, asset managers and banks already have products for income generation, said Plotnik, associate director, Cerulli Associates, Boston. They are also exploring product innovations–for instance, adding flexibility to insurance products that guarantee income streams.
But the industry has not yet figured out how to “position products together in a way that will last for what will be, for many people, several decades of retirement,” she said. Advisors will need to offer holistic advice, she added.
A new paradigm is needed, agreed Mathew Greenwald, president of Mathew Greenwald & Associates Inc., Washington, D.C. For instance, “the concept of asset allocation should be expanded to include risk-reducing products.”
Based on his firm’s interviews with several advisory firms, he said that current approaches have many problems.
One such problem is the predominant use of mutual funds by reps, even though many people in retirement actually need a guaranteed stream of income, Greenwald said.
Further, many advisors continue to focus on accumulation, he said. “They do not yet have a firm foundation in managing income in retirement” around 6 key risks: when death will occur, disability, inflation, market volatility, public policy and programs like Medicare, and overspending.
In addition, advisors do not always elicit information or raise topics that lead to discussions about those risks or about plans to manage them. For example, at their first retirement planning session with a client, advisors typically focus on investment risk, Greenwald said. A lot of the time, they do not also discuss longevity risk, long-term spending, inflation or the outlook for Medicare and Social Security.
Another problem, he said, is that many retirement income proposals assume that certain factors remain constant when in fact they actually fluctuate. Examples include inflation, Medicare, Social Security and spending levels (including for health care and long term care).
Even the concept of using the standard 70% replacement rate is questionable, he maintained. This rate assumes that people have reduced expenses in retirement and so can live on 70% of former income. This does not account for inflation, and it typically focuses only on the first year of retirement, Greenwald said. Further, it does not recognize that spending can go up–say, when a person responds to a “pent-up need to travel” after retirement.