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The Great Retirement Rethink

By Ellen Uzelac

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Retirement was once such a tidy thing. You worked, you saved, you retired. Not anymore. As an affluent investor in a new study by Hearts & Wallets puts it: “I don’t think retirement is the buzzword it once was. ‘Okay, yeah right, retirement. Okay, yeah right, I’ll win the lottery.’ It just doesn’t have the meaning behind it that it used to have.”

The same study of middle-aged accumulators by the retirement and savings research group concludes that “retirement” doesn’t resonate because it seems “unknowable,” “unachievable” and “possibly not smart.” And, in a big heads-up for the financial services community, these folks also say that traditional industry advice doesn’t reflect their vision for life as a senior. “The financial services industry needs to start executing on the reality that many investors don’t plan to retire. What they are saving for is ‘freedom money’ and many plan to work as long as health permits,” notes Laura Varas, Hearts & Wallets principal. “Yet industry advice is still all about: ‘When you retire. When you retire.’ It’s a little bit like if I wasn’t planning to move to Mars, yet all the ads are about when you move to Mars. There’s a disconnect.”

The economic recession and continuing market turbulence have caused Americans to rethink retirement as never before. Not only when to retire — but how. And, experts say, people are clamoring for peace of mind. A key finding from the 2011 SunAmerica Retirement Re-Set Study reveals that financial peace of mind is now six times more important than accumulating wealth. “Clients are more scared of running out of money than dying,” observes Mike Reese, a certified financial planner who heads Centennial Wealth Advisory in Traverse City, Mich.

Just three years ago, 90 percent of Reese’s new clients regarded their retirement accounts as “excess funds” they would leave to their kids because pensions and Social Security covered all of their needs. “The majority of my time was spent trying to figure out how you [stop] excess accounts from turning into tax monsters,” said Reese, who has more than $100 million in assets under management. Today, he says, with pensions disappearing and recession-worn portfolios, the equation has flipped. “Ninety percent of my new clients’ primary concern is: How do we take our accounts and use them to generate secure, sustainable lifetime income regardless of what the markets do?” A new approach to post-recession retirement, according to industry pundits, requires fresh thinking from financial services firms — on everything from fees, to products, to straight talk not only about financial and investment planning but what your client needs to do to sleep at night.

“This is a wake-up call,” says gerontologist Ken Dychtwald, founder of Age Wave, who collaborated with SunAmerica on its initial landmark retirement study in 2001 and again this year. “One of the people in our focus groups said: ‘Before this recession my retirement dream was to play all the great golf courses in Europe.’ Today he’s saying all the public courses in New Jersey would be fine. He’s from New Jersey. It’s not surprising to see that people are still worried. They’ve lost a lot of their sense of security. However, hopefulness has remained powerful in the last decade. This is a hopeful, resilient population in the process of making a thoughtful course correction. I think people want to go to sleep and know they are okay and their family is all right. They’ve got a new vision of what’s important in life.”

A Course Correction

That new vision involves what Dychtwald calls a “radical” change in how Americans 55 and older want their savings (and their advisors) to work for them. “Don’t tell me ‘rosy’ or ‘ideal,’ tell me ‘what if?’ What if I can’t work any longer? This is one of the big changes in the last decade. Then, it was all about let’s talk about your money and you can worry about your life. Now, it’s let’s talk about your life and how your money can finance it,” he said. “There’s been a shifting of the forest and the trees.”

Probably the biggest shout-out from new retirement surveys is that Retirement 2.0 no longer means the end of work. The SunAmerica Retirement Re-set Study, for example, says almost two-thirds of those interviewed would include some work in retirement to stay active and involved. Fifty-four percent view retirement as a new chapter in life, rather than a winding down — a significant increase over the 38 percent that held a similar view a decade ago. And pre-retirees say they now intend to delay retirement by five years, from 64 to 69, due to increasing longevity as well as the recession and financial need.

Brent Brodeski, CEO of Savant Capital in Rockford, Ill., has pushed the retirement reset button when he talks to clients.

“What we’ve been doing a lot of when we talk to clients is say ‘Hey, maybe it’s not an on-off or an all-or-nothing, maybe the goal shouldn’t be retirement at all but financial incentives so that you can position yourself to be in a place where you can run your life on your own terms, on your own schedule,’” said Brodeski, whose firm has over $2 billion in assets under management. “It’s all about being open to a less rigid definition of retirement. If you can identify something that’s productive and stimulating and maybe you can make some money doing it, why would you ever retire?”

A more flexible retirement model can also create a lot of value, he added. Instead of working 70-hour weeks and pulling down six figures, for example, a person could work part-time and make $20,000 a year. “That amount for an extra five years means you don’t need as much cash flow,” Brodeski said. “It makes a huge difference for your potential financial success.”

One of the biggest problems facing those approaching or in retirement these days: inertia. An investigation of retirement planning attitudes and behavior from the Financial Security Project at Boston College showed that many people, especially those with no financial advisor, feel completely overwhelmed.

“This was the big takeaway. A lot of people feel angry, helpless and worried. That feeds into this notion that there’s nothing I can do. They’re angry at government, at their employer, at the financial services industry,” said Steve Sass, associate director of the college’s Center for Retirement Research. “It’s debilitating and the reaction to that is often paralysis.”

One of the game-changers going forward will be to make retirement more attainable, Sass said, by reducing expenses, working longer and saving more. Clients need to make adjustments — and so do financial advisors. Here is some of the new thinking that is rising from the shifting landscape:

Plan for the unexpected. As an advisor, remove “in an ideal world” from your vocabulary and your materials when you query clients about their plans for retirement. “You want to emphasize the curve balls that pop up over and over again,” notes Sass. Potential challenges include losing a job, getting sick, or taking care of a parent or child. Consider: In a twist on child care, 70 percent of people surveyed in the SunAmerica study expect to provide financial assistance to adult children.

“This is a much more serious problem than academics or planners might think,” Sass added. “You have to have a certain framework but you need to have add-ons for the curve balls. You’ve got to build robustness into a plan knowing that life happens.” The outcome: a strategy that minimizes feelings of hopelessness around “starting over” or it being “too late” to correct one’s path. It also conveys an understanding of your client’s needs, increasing the relevance of the advisor-client engagement.

Empower your clients. Accept that some people do procrastinate, are paralyzed and that “baby steps” are the only solution to paralysis. Sass recommends empowering your clients with little steps they can take to secure their financial future. “People need to know there are things they can do,” he said. For example, if a key goal is travel, explain how a client might take one trip a year on a fixed income. “This is all about keeping it real — and doable.”

Demystify Social Security. Just about everyone plans to tap Social Security but research has turned up very low levels of Social Security literacy coupled with a pervasive skepticism about its future. How much more does a person get by claiming the benefit at age 70 rather than 62? At least 76 percent more, according to the Financial Security Project. The Social Security Administration itself reports that 74 percent of current retirees are receiving a reduced benefit. “We’ve definitely seen in our day to day practice a lot of interest in this subject,” said Luke Vandermillen, vice president of retirement and investor services at Principal Financial Group. “But this stuff is complex. It’s difficult for advisors to do on their own.” Earlier this year, Principal Funds rolled out a three-step program to help the advisor explain the benefit, untangle the options and create a plan to maximize the Social Security payment.  

Rethink ‘buy and hold.’ A self-described contrarian, Don Schreiber Jr. says the recession should have convinced people about what he has been saying for years: Investment models based on passive asset allocation have not worked. As he puts it: “This idea that investors should focus on returns only in good markets — that markets will bail you out and allow you to recover your capital over time and then get a return high enough to fund your retirement goals — is not supported by history.”

Yet, he says, the investment management community has continued to support the methodology, leaving people poorer than wealthier because they didn’t focus on what Schreiber deems important: risk to capital. Schreiber, president and CEO of WBI Investments and co-portfolio manager of WBI Funds, oversees $900 million in assets from offices in Little Silver, N.J. The framework he follows involves buying low and selling when the security appreciates to its fully valued price, determined by Schreiber’s dynamic trailing stop-loss process. “This is the opportunity to buy low and sell high by design,” he says. Also built into his construct: a monthly income stream from bond interest and dividends.

Explore new pricing mechanisms. One of the most striking data points to come out of the Hearts & Wallets research is that many accumulators reject the traditional model of asset-based fees. Less than 10 percent gave it an “A” or “B,” 70 percent gave it a “C,” and 20 percent gave it a “D” or “F.” “The current model isn’t working for a lot of people,” notes Hearts & Wallace principal Chris Brown. “They not only want to know what they are paying for, but what the incentives are and they want some choice.” One pricing concept that involved a choice of services and fees was especially popular with accumulators. Eighty percent gave it an “A” or “B.”

Give annuities their due. The much-maligned annuity is getting new life in an era where income guarantees are so sought after. “People have switched to a safe area and for good reason. The market looked flat for the last 10 years and it doesn’t look good for the next 10,” says Mike Davis, founder of Davis Financial Services in Jacksonsville, Fla. With $15 million in assets under management, Davis has a small practice that caters to people over 60.

“Some people have high expectations, and I do too, that we’re going to get out of this at some point. That’s okay when you’re in your thirties, but when you’re in your sixties, it’s not so peachy.” An annuity is part of every plan Davis works up.

Dig deeper than ever with clients. One of the things that struck Dychtwald most about the 900 pages of data in the SunAmerica study was that people’s lives have become more complicated over the last decade. Some have lost jobs, divorced, gone bankrupt and turned to their families for support. If you’re supporting a grandchild, the advisor should know that. If you want to work until age 90, the advisor should know that too. “You need to know more than just the numbers,” he said.

Despite the challenges that lie ahead, Dychtwald is wholly optimistic. “We’re living longer and longer lives. It’s quite wonderful we have that challenge,” he adds. “This is more stimulating, more fertile, more productive and more valuable than any version of retirement we’ve ever seen. We are in metamorphosis.”