While attending the 2012 Life Insurance Conference in Orlando Florida from April 23-25, NUL Associate Editor Michael Stanley sat down with LIMRA, LOMA and LL Global President and CEO, Robert Kerzner to discuss industry trends.
NUL: What is the biggest risk facing retirees and pre-retirees?
R. K.: Actually, there are two: not enough savings and longevity.
Our research shows that 70 percent of all U.S. households have less than $100,000 in investable assets. If you look at pre-retirees (those ages 55-70 within five years of retirement), the numbers are much more stark. LIMRA research reveals that less than half of pre-retirees have adequately saved for retirement and less than a third feel confident about their retirement preparedness.
So there is not much gas in the tank to start. It gets worse—people are living longer and facing many more risks in retirement than generations before. While statistics show that most retirees can expect to live more than 22 years into retirement, LIMRA’s surveys show that 65 percent of pre-retiree five to 10 years away from retirement estimate their longevity window as 20 years or less. Retirees have a more realistic view of longevity, with a majority estimating they will live 20 years or more. But a significant number, 34 percent of those retired three to five years, also hold to the 20 years or less estimate.
This is a critical issue in developing a financial plan that will ensure lifetime income. If they get it wrong, they are at risk of setting themselves up for retirement’s worst-case scenario – still alive but with no more checks arriving in the mailbox.
Here’s the troubling thing – most pre-retirees say that they’ll just work longer but in actuality, the majority of people don’t retire when they plan – many involuntarily. So their back-up plan is fundamentally flawed.
As an industry, we have got to get the message about systematic savings to consumers much earlier and then, when they are approaching retirement, we have to help them develop a retirement plan that includes the lifetime income stream they need.
NUL: Can you explain why longevity is a much bigger concern now (more people retiring with the benefit of pensions, etc).
R.K.: First of all, people are living longer and will have many more years in retirement. For example in 1970 people spent an average of 18 years in retirement by 2005, it was 23 years.
As I mentioned earlier, our research suggests that people simply haven’t saved enough money for retirement and underestimate the length of time they will need to make the savings they do have last.
We estimate that current retirees will have to get 40 percent of their retirement income through their savings and we expect that number to increase as future generations approach retirement.
NUL: How do advisors effectively communicate the longevity risk to younger generations?
R.K.: Our studies indicate advisors understand the severity of the issue far better than consumers. Advisors need to show consumers the facts and really help them understand the real possibility of living in what I like to call ‘retirement hell’ – living longer than your money lasts and not being able to have the retirement of your dreams.
We know from research conducted in 2009 that retirees were using their advisors primarily to help them manage assets. Only 34 percent were going to their advisors for help with retirement planning. But that is changing.
In a just released LIMRA survey, three-quarters of advisors said they were spending more time on retirement planning than they did two years ago. And 9 in 10 are making changes to their business in anticipation that the demand for retirement planning will continue to grow.
Currently, only a quarter of all pre-retirees have a written retirement plan – even for those consumers who work with an advisor, only a third have a written retirement plan. Yet, 6 in 10 advisors say these formal written plans are well received by their clients and 8 in 10 say it helps them better understand their clients’ goals and come up with product solutions.
It’s clear that consumers – now more than ever – need help not just managing their assets but creating a comprehensive retirement plan, which addresses the risks retirees face that could severely undermine their financial security.
NUL: How does life insurance play a role in mitigating longevity?
R.K.: The old myth that you don’t need life insurance when you retire is no longer true.
Because people are entering retirement with less than a full tank (i.e. not enough saved) and people are living longer into retirement, there will be a need for infusion of cash at the first death to make sure the spouse can make it through retirement.
In addition, we know that many more retirees are entering retirement with debt – nearly a quarter of retirees owe more than $50,000.
We have always talked about buying life insurance is an act of love – providing financial security to the ones you love. Doesn’t it make sense to provide the same security to your spouse in retirement?
NUL: The IMF just released a report warning countries about the risk of underestimated the longevity of their populations. What are the implications of this report?
R.K.: It supports what our industry has said all along — governments need to pass legislation that provides incentives to their citizens to systematically save throughout their lifetimes because it is clear that governments cannot afford to fund the retirements of their citizens.
Instituting defined contribution plans alone cannot do the job. While these programs have encouraged millions of Americans to save, our research shows that people are inherently inert. They need help and motivation to save systematically.
Without prompting, consumers are less likely to enroll in their retirement savings programs and many will not raise their contribution levels. Our research has demonstrated that auto-enrollment and auto-escalation are not only effective but welcome by many workers to help them save for retirement.
Our research shows that the existence of an employer matching contribution is the single most significant factor in determining whether employees contribute to a 401K plan or not. In fact, the presence of an employer match nearly triples the odds of employees contributing to their DC plan, according to our research.
As a society, we need to look at what else the government could do to help encourage people to save systematically through annuities or other long-term savings plans.