The Future of Retirement Income

The lingering economic crisis has caused many clients to rethink retirement — putting fundamentals like “How?” “What?” and “When?” into high relief.

As George Walper, president of the strategic consulting firm Spectrem Group, bluntly frames it: “The whole planning of retirement changed in the last 12 months.”

Not surprisingly, according to survey after survey, anxious investors are clamoring for retirement planning guidance. At the same time, forward-thinking financial services companies, in a huge top-down initiative, are trying to create new products and processes to help them. Strangely out of the loop in all of this: the financial advisor.

A research study this past summer by Cerulli Associates found advisors continue to exhibit “ambivalence” toward retirement income planning. “We’ve been almost surprised by the lack of change. It’s odd,” observes Bing Waldert, a Cerulli director. “What’s interesting is even in spite of the market, that same ambivalence came through.”

The topmost obstacles cited by advisors to providing retirement income support: lack of consumer awareness and the fact that it is time-consuming.

Meanwhile, a survey from Spectrem Group says many financial advisors are unprepared for retirement planning and dated in their knowledge of products and strategies — even though more than 60 percent expect retirement income planning to be a huge part of their business in years ahead.

Why the disconnect?

“It’s just not what advisors have been trained to do. Yes, most are unprepared,” notes Francois Gadenne, executive director of the Retirement Income Industry Association. “The mission is no longer to sell hope and things that could be, but to deliver a floor, then expose to the upside. Because your client is moving from an investment focus to a retirement focus, your business model has now changed. Your job is now not just to collect the AUM’s and have a nice day. Your job is to deliver a monthly check. It’s a completely different business model — and not something you adjust to lightly.”

There are indicators — big and small — that suggest the landscape may be changing. At its annual meeting in October, for example, RIIA launched a new professional designation: Retirement Management Analyst. The first cohort of candidates has just been selected. The takeaway from a recent RIIA webinar on Brightwork Partners’ retirement income research? “Retirement income is maturing as a practice focus. It’s not a contrived fad.”

And while research conclusions on the topic of retirement income planning may diverge at points, they do converge on one key issue: the significant market opportunity that the mass affluent represent.

“This is a real challenge for the industry — and a real opportunity. It’s a big chunk of the population and it’s where retirement planning will play big. If you really think about it, the financial life of regular people who have worked their entire lives is much more complex than it was in the past and it is approaching that of a very wealthy person,” according to Sean Cunniff, research director for The Tower Group. “Insurance, health care — you’re dealing with all these issues. It really is a complex problem and it becomes more so in the retirement income phase.”

And, in what could be a harbinger of things to come, Merrill Lynch Wealth Management in late October introduced to its 15,000-plus advisors a retirement income platform process. Developed in conjunction with independent consultants and the firm’s “best of best” retirement planning advisors, the process starts with the client’s risk-weighted retirement investment strategy, continues with an annual income plan that includes drawdowns, and finishes with a cash management component.

The latter, called My Retirement Income, connects a client’s Merrill Lynch brokerage account to his Bank of America checking account.

Aimee DeCamillo, head of personal retirement for the firm, said the platform will evolve over time. Notably, Merrill Lynch corporate has never before dispensed specific advice and guidance to advisors related to the drawdown of a retirement asset.

“Retirement needs have changed, frankly. The industry is evolving, client need is evolving. And you see advisors in different stages. Some have been way out in front of this for many years now and those are the ones we turn to to create a best-of-best approach to bring to our core advisor base,” she said. “But there’s always more advanced thinking we can do.”

A Changing Picture

Advisors don’t need a poll to tell them retirement expectations have changed in the last 12 to 14 months.

But consider these findings.

o SRI Consulting Business Intelligence in February returned to households it had surveyed between April and August 2008 and learned that one-half of all households’ expectations for retirement had changed since September 2008.

Thirty-seven percent said they had lower expectations for how they would live in retirement, and nearly 25 percent said retirement was no longer an option for the foreseeable future. “How do you say all this without getting really depressed? I guess the good side is that those expectations for retirement were based on antiquated ideas anyway,” notes Larry Cohen, SRI’s director of Consumer Financial Decisions. “This will accelerate the new idea of retirement as a whole life stage.”

o Sun Life Financial’s Unretirement Index reports that the most popular reason cited by American workers for why they would continue to work past age 67 shifted in December from “to stay mentally engaged” to “earn enough money to live well.”

o And Merrill Lynch Wealth Management’s “Affluent Insights Quarterly” survey, released in October, found that 50 percent of respondents felt that their current retirement plan was an area of “high” concern. Their foremost worry: the risk associated with rising health care costs.

If nothing else, the market meltdown has put the spotlight on risk — and it is emerging as a key driver as advisors consider their clients’ retirement needs, particularly as it relates to the mass affluent.