New math for nest eggs
Today’s 65-plus seniors face some daunting challenges. But they can have a comfortable retirement–if they live within their means now and later.
Ask advisors like James H. Fydroski, CFP, RFG, RFC, to assess the financial standing of today’s seniors relative to other generations and they’ll be quick to tell you the generation of roughly 40 million people who were born before 1946 is, generally speaking, in better shape than the much larger baby boomer population.
For one, says Fydroski, president of Haas Financial Services in Southfield, Mich., today’s seniors “are much better savers than the boomers are.” That’s due in large part to the prevalence of defined benefit retirement plans in seniors’ portfolios. Such arrangements tend to deliver more certainty in building a retirement nest egg than do the defined contribution plans offered most workers today.
What’s more, according to recent estimates, today’s seniors won’t need as big a nest egg as subsequent generations. For example, a significant segment of investment advisors polled by
Scottrade estimates that $500,000 to $1.5 million will be sufficient for the average senior through retirement, but that later generations will need nest eggs in the $2 million to $3 million range.
It’s no wonder then, that in the 2010 MetLife Retirement Readiness Index, 81 percent of 65- to 70-year-olds indicated they feel prepared for retirement, compared to 64 percent of those aged 60 to 64.
But a closer look at how the 65-plus set is faring in tackling key retirement issues–such as transitioning one’s mindset and portfolio from accumulation to distribution mode, finding the right investment path to ensure a later lifetime’s worth of comfortable income, and protecting retirement assets–reveals some significant obstacles on the road to a comfortable non-working life.
“The good news is that they do have Social Security and they do have Medicare. Those are safety nets the younger generations may not have,” observes Lynn Ballou, CFP, managing partner at Ballou Plum Wealth Advisors, LLC, in Lafayette, Calif. “But seniors who continue to hold these visions of a grander lifestyle through their entire retirement and choose to live that way–they will wake up someday with nothing left. People who understand what they have and how to live within their means will find themselves in the best position during retirement.”
An uneasy transition
However ready for retirement they claim to be, today’s seniors still must confront formidable challenge–strategic, logistical and psychological–in transitioning into distribution mode after spending most of their working lives accumulating assets.
Long-held notions about retirement age and career paths are changing fast, says Mark DiGiovanni, CFP, president of Marathon Financial Services near Atlanta. That’s due to not only financial necessity but from a desire by many seniors to keep working well into their 60s and 70s. “What I’m seeing more and more is that [65-plus] clients do much better when they don’t stop working altogether,” he says, “but find something else they really like to do, where the money is secondary, but the income means they’re not pulling as much from retirement accounts. That means the money in there can continue to grow.”
For some seniors, there’s simply no point in retiring at 65, DiGiovanni says. “I tell people, if they feel like retiring is going to hurt them financially or psychologically, don’t do it yet.”
The economic and market upheaval of 2008-09 “caused people to rethink their career paths and the length of their career paths,” Ballou explains. “I’m seeing more people [65 and older] switch to what they would prefer to do [for work], like open a bed-and-breakfast or string guitars.”
While the 65-plus generation may be better than succeeding generations at saving, the recent economic downturn still exposed inadequacies in their retirement nest eggs, DiGiovanni says. “With longer life expectancies, people are going to need 30 times their annual income requirements in their retirement nest egg,” he says. “Most have on the order of 20 times [their income needs]. That means they have to [invest] some [of their money] in equities to generate the income they need. One of the new realities is, if you’re going to enjoy 25 or 30 years of retirement, you have to accept a certain amount of risk in your investments to get the returns you need to fund retirement. A too-conservative investment portfolio will not allow them to ratchet up their income to keep up with inflation.”
The upshot is that many seniors’ portfolios no longer automatically switch to pure distribution mode at age 65; most must remain in accumulation mode, at least to some extent.
Change is the only constant
David A. Littell, co-director of the New York Life Center for Retirement Income and the Joseph E. Boettner Chair in Research at the American College in Bryn Mawr, Pa., says that when it comes to helping seniors plan for their retirement, advisors must anticipate that those plans will inevitably need to be amended. It’s not just that recent economic upheavals have rerouted many seniors’ retirement paths; many have been confronted with other changes as well, such as helping a grown child who has lost a job or taking care of a grandchild.
“In some ways working with seniors can be the most complex because the plan needs to change and there needs to be very regular contact between advisors and seniors just because of that issue,” Littell says. “The products and solutions have to be flexible enough to address people’s changing situations.”
For example, for some seniors, a fixed immediate annuity may not be the best solution because most don’t offer a liquidity option “You have to be careful if you use that product, which I like,” Littell says. “You have to have other funds that are available to address the potential liquidity needs.”
Getting past gun-shyness
The challenge for advisors is getting senior investors who are still smarting from the 2008 market nosedive to accept some measure of risk and to help them find a comfortable balance between growth potential and protection.
“A lot of people [65 and over] are scared now,” Fydroski observes. “They’re reluctant to get back in the market to any extent.”
To keep 65-plus investors from “going into a shell” and keep them in the market if their nest egg demands it–and it frequently does–Fydroski often recommends, particularly for older seniors, a managed growth portfolio built with enough upside potential to provide solid, steady growth, but with a conservative downside risk-management strategy.
While some advisors might turn to a tool like a single-premium immediate annuity to deliver growth and income in retirement, Bob Oberstein, CPA, RFG, RIA, of Oberstein Wealth Management in Sherman Oaks, Calif., says he prefers not to tie up clients’ money in an annuity contract with high surrender penalties. Rather, he suggests putting the money “in some kind of conservative portfolio that’s going to deliver the cash flow they need,” while preserving unfettered access to the money for health emergencies and the like.
Also part of the post-recession retirement reality for some seniors is the need to take relatively drastic steps to shore up their nest eggs. “I think we’re going to see a lot more press about reverse mortgages,” Ballou says. “The over-65 set is going to be using them a lot more than they thought they would.”