Since the global financial crisis of 2007/2008 there has been much academic debate about how Americans will retire and the repercussions that certain modifications in retirement planning will have on the industry and the country as a whole.
It seems the financial crisis and the havoc it wreaked on peoples’ retirement savings across the country was the type of seminal event that prompts introspection and retrospection by individuals and professionals alike; placing retirement — and the industry that facilitates the process — under a microscope, scouring for competencies and inefficiencies.
And while much attention has surrounded the droves of baby boomers who will be retiring soon, very little has been given to those seniors currently in retirement and those pre-retirees right on the cusp. One would imagine there is a trove of relevant information that can be gleaned from those who were retired before and throughout the darkest days of the financial crisis and subsequent recession as well as those who entered into retirement in its immediate aftermath. Examining how they are living in retirement could illuminate a topic that breeds worry for millions of Americans.
So, are those currently enjoying their golden years — and those less than a year away — going to be able to realize the type of retirement they have spent their working lives imagining? Up to the start of the crisis, retirement conjured up idyllic images of couples carelessly strolling down beaches, travelling and eating out with friends and family. This, it was assumed, was all taking place while the individuals had enough money to cut some checks to assist their children with college tuition and spoil their grandkids a bit.
Finally being able to purchase that luxury car or European vacation seemed perfectly attainable for Americans from various socioeconomic backgrounds, as long as they worked hard and saved adequately during their working years. This image has suddenly been replaced by people slipping into penury, working well into old age, couples having to move in with their children, exploding health care costs and the extended lives that cause people to outlive their savings. Are seniors in retirement living the lives they wanted or is retirement — as it was once known — a thing of the past?
Different stages, different attitudes
Ninety percent of retirees said that their current lifestyle is very or somewhat close to their ideal vision of retirement, according to the ING Retirement Research Institute’s 2013 Retirement Experience study.
Patrick Kennedy, head of marketing and advice for ING U.S. Retirement Solutions, highlighted the starkly different attitudes held by retirees and pre-retirees: “People living in retirement report being quite satisfied with their quality of life (despite the low interest environment) while those preparing for retirement are very concerned about it,” he said.
There are myriad reasons — some salient, some opaque — why retired individuals may be more satisfied with their level of preparedness than their pre retiree counterparts. The ING study found pre retirees report far more stress about retirement than their retired counterparts (60 percent vs. 18 percent). One rather obvious reason is that the transition into retirement has actually been made. Naturally, before any major life stage, there is a sense of apprehension that permeates the psyche: The high school senior undoubtedly displays more worry than the freshman already acclimated to life in the dorm. Preconceived notions and unfounded ideas are dispelled once the leap has been made.
Pre-retirees are also subjected to a relentless drumbeat — one that has grown increasingly rapid since the financial crisis — about the pitfalls of being un/underprepared for retirement. This can breed anxiety even for those individuals that are adequately prepared.
Kennedy feels the concerns of pre retirees can be viewed as both practical and overly pessimistic. “I think they have been scared by the financial press as well as the crisis … 2008 was a shock and many people entering into retirement then had to adjust their expectations but I do think that to a degree, the financial press and the financial industry overlays the cautions.”
One upside of some of the alarmist calls about lack of retirement preparedness, according to Kennedy, is that younger generations are saving more diligently. There are, however, more tangible reasons why retirees are satisfied with their lives in retirement while pre retirees are concerned.
According to the ING study, current retirees are much more likely than pre retirees to have a defined benefit (DB) plan (60 percent vs. 41 percent). As a testament to the rapidly evaporating relevance of DB plans in the retirement planning environment in America, the further away a pre retiree is from retirement, the less likely they are to have a DB plan.
The study found that nearly all pre retirees (94 percent) have workplace defined contribution (DC) plans vs. 53 percent of current retirees. The difference in retirement savings vehicles between the two groups is striking and a helpful hint that brings the concerns of pre retirees into focus.
Overarching fear of outliving assets
The biggest concern among pre retirees and retirees alike is the longevity crisis (the potential for people to outlive their assets).
The longevity crisis has been garnering just as much attention from the industry and the individuals serviced by it as the shift from DB plans to DC plans, and the two are intimately entwined. DB plans offer retirees an income stream for life, while employer-sponsored DC plans have a finite amount of money in them. Whether one has enough is reliant upon how much one has saved, how much one’s employer has matched and the behavior of the market.
This set of circumstances, coupled with the uncertainty surrounding how long one will live, renders an environment ripe for fear (pre retiree or retiree) without a DB plan. The ING study found that one-third of pre retirees reported they were “very concerned” about saving enough to last throughout the rest of their lives, while only 16 percent reported being “completely prepared.” The fear of outliving one’s assets is exacerbated by the growing cost of health care and the amount of capital it consumes when individuals are living extended lives.
Mark Fitzgerald, national sales manager for Saybrus partners, a distribution subsidiary for The Phoenix Companies, feels that the primary concern is certainly longevity and the health care costs associated with it, although he cautions that many Americans are woefully underprepared for a retirement even if they do not realize an extended lifespan.
“If you think about the diminishment of pensions and the onus being placed on individuals, it is driving a need for products with guarantees. These products give retirees and pre retirees a lot of predictability and certainty as far as knowing what they can expect from their money in retirement,” Fitzgerald said.
A recent survey sponsored by The Phoenix Companies found that two thirds of advisors surveyed reported that “the need for guaranteed income in retirement” was a “must have” feature for their clients. “This survey shows that the need for guaranteed income in retirement continues to be a top priority for consumers and the annuity professionals who advise them,” Fitzgerald said.
The misunderstood solution
Many industry professionals, including Ross Goldstein, managing director with the investment group of New York Life Insurance, feel that various types of annuity products are the best way for pre retirees and retirees to ensure that they do not outlive their assets.