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Retirement Planning > Retirement Investing

Creativity In Retirement Plans

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Before getting into this week’s topic, I would like to offer a brief preface.

About 17 years ago, and following my retirement from NALU, I received a call from Steve Piontek, editor of NU. Steve wanted to know if I would be interested in writing an article on a regular basis for this publication. I wasn’t sure how such an assignment would fit into my retirement plans, but I did believe that I still had a few things to say about this great business for which I care deeply. So I accepted the offer.

Working with Steve the past 17 years has been a pleasant and satisfying experience. Regular readers of NU have, I am sure, noticed that Steve and I are miles apart on the political spectrum. Nevertheless, despite our differences, he has never changed the content or wording of anything I have written. Our disagreements over politics and industry perspectives have always been cordial and hopefully produced a more balanced publication.

And so as we bid farewell to Steve, I wish him a happy and healthy retirement and offer my thanks for his cooperation and tolerance of my viewpoints.

And now on to the main business–not coincidentally, creative retirement.

One primary reason agents have remained the dominant distribution force for life insurance is their creative ability in using and presenting traditional products. Examples include the use of insurance in deferred compensation plans, split dollar, etc.

Now, because of the way our products are perceived by many, a new surge in creativity is vital, particularly as the products relate to retirement planning. In this connection, we might take a lesson in marketing from the Social Security people.

Social Security may be flawed at the political level, but at the administrative level it has outsmarted us in marketing techniques. To illustrate, the needs our products meet have always been expressed in dollar amounts. As long as the dollar remained stable, this identification served us well.

Today, with the gold merchants and others trashing the dollar in their ads, “dollars for future delivery” has lost its luster.

The Social Security folks, on the other hand, have never associated themselves with absolute dollars. Rather, when they go to Congress, they advocate benefit increases based upon replacement ratios. Increases in benefits are presented as necessary to maintain the traditional ratio of covered income to be replaced by Social Security. Thus, while it’s true that the base for covered wages has increased dramatically, the replacement ratio of Social Security benefits to covered wages has remained fairly stable at about 32%.

The large Social Security benefits being projected today present a serious problem to low- and middle-income families and are increasingly encroaching upon pension and disability income markets. Historically, Social Security as a planning base has been an effective sales tool. Today, however, it can be detrimental to the sales process if we express future benefits in today’s dollars.

For example, a young person today is not likely to be terribly disturbed if a proposed financial plan concludes that his projected retirement income will exceed his current income. Of course, his or her reaction ignores the concept of replacement ratio and could lead them into serious trouble.

What the prospect must understand is that whatever the size of the future benefits–$1,000, $2,000 or even $5,000 a month–it is still going to be only 32% of covered wages at retirement. When prospects understand that, they won’t be quite so complacent about future security.

You don’t have to look very far today to find people trying–and failing–to live on Social Security. This is true despite the fact that their benefit has been excessively indexed for inflation.

Once the prospect accepts the notion that they cannot retire on 32% of their covered wage base, they will acknowledge that additional income must come from either personal or company effort.

Thus, it is reasonably certain that even a $2,000 a month projected benefit will represent less than one third of a person’s final working wage. If they, like most, would like to retire with at least 60% of final salary in retirement income, then 28% of that desired retirement income will have to come from other savings.

Translating that 28% replacement ratio into dollars indicates that pension plans or savings must supply an additional $1,750 per month. These figures are more disturbing than simply asking someone, “How much income would you like at retirement?” The answer to that question is always couched in today’s dollars, not tomorrow’s.

The retirement market is huge and the key to it is creativity.


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