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The 5 top questions facing middle-wealth boomer retirees

By Ben Yahr, Carl Ghiselli

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For years, investment advisors and financial planning professionals have been aware of the looming wave of baby boomer retirees. The interest of advisors has been focused squarely on high-wealth boomers, as reflected in the significant expansion of wealth management offerings from both large institutions and independent service providers.

To date, however, a large and potentially profitable market segment has been overlooked. That segment is sometimes called the average, or middle-wealth boomer. Thanks to limited assets and a perceived inability to pay for traditional advisory services, these individuals have been underserved by the financial services industry. Today, it’s become clear that the size of this market opportunity is too substantial for institutions and advisors to ignore.

To convert this potential into strong and profitable relationships, the industry must come to terms with a number of critical issues and questions middle-wealth boomers face as they near retirement. Like their higher-wealth counterparts, the average boomer must confront the complexities and risks associated with longevity, inflation, market turbulence and the prospect of catastrophically high health care costs. However, unlike higher-wealth individuals and families, most boomers face a significant gap in their replacement incomes — one that advisors can help them bridge by finding the best answers to critical questions highlighted below. For advisors, there is a clear opportunity to help the average boomer navigate these decisions and develop strategies and action plans that can significantly improve outcomes.

The biggest risk faced by middle-market retirees is a significant gap in retirement income, which for most will be well below the recommended replacement ratio of 70–80 percent. There are ways to narrow the gap, however.

To serve this market effectively (and cost-effectively), advisors and institutions must shift their thinking about the middle market and develop new operational approaches. Those approaches are likely to combine robust online advisory services, automated data analysis and traditional advisor-based delivery. More fundamentally, advisors must gain clearer insights and broader understanding of the needs of middle-wealth boomers.

The top five retirement questions for middle-wealth boomers

Based on EY’s analysis, effectively addressing these questions for many middle-market clients will positively affect their after-tax outcomes by between 70 percent and 155 percent, and will mean that their retirement plans will remain stable during periods of economic turmoil such as the recent global financial crisis.

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1. When to retire?

First and foremost, boomers must decide when to retire, which is a decision with multiple impacts. For instance, by continuing to work until age 70 (either on a full-time or part-time basis), boomers can boost their retirement savings and acquire more liquid assets. A few extra years of working also reduces the number of years during which boomers will be spending down their assets. There are also implications relative to the timing of the receipt of Social Security benefits (see below). Many retirees lack the skills and knowledge to “run the numbers” or figure out the impact of a few years of extra income in their unique circumstances, which represents a clear opportunity for advisors to provide guidance.

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2. When to begin Social Security benefits?

Retiring boomers must also decide when to start receiving these benefits. For a soon-to-retire boomer, delaying that moment may be beneficial from the perspective of long-term cash flow. The longer the delay, the higher the payout. The impact of a delay may be even larger, potentially, for couples and those receiving a spousal benefit.

To be clear, providing guidance can be time-intensive. Plus, advisors are not directly compensated for advising on Social Security. Some strategies may even reduce the assets they are being paid to manage. However, the trust-building and relationship-strengthening opportunity cannot be overlooked. Thus, advisors may think about these decision points in the context of broader relationships. In fact, many large banks and institutions see that they need to help advisors in this area and are investing in networks and tools to enable advisors to provide effective (and cost-effective) advice in this specific area.

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3. Whether or not to purchase long-term care insurance?

Soaring health care costs — including those associated with assisted living and custodial care — are among the biggest risks faced by all types of retirees, but those of average means may feel the pinch more than high-wealth individuals and couples. Certainly, considerable planning is required. Most middle wealth boomers will not be able to self-insure these risks, so they will have to carefully consider the costs and benefits of long-term care (LTC) policies. Advisors can help retirees understand their options in this critical area.

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4. How to allocate investable assets?

Risk tolerance is an important variable in the income generation equation. Conventional wisdom says that people should adopt more conservative investment and asset management strategies in their retirement years. This investment strategy may be effective for high-wealth boomers with ample assets to achieve their income goals while protecting their assets and livelihood against market turbulence. However, the average boomer may need to take on more investment risk, especially if they have limited investable assets relative to the value of their Social Security benefits. Though this sounds counterintuitive, it may be necessary to invest in assets that have more investment risk in order to generate the income they need. Advisors can provide great value in helping their middle wealth boomer clients strike the right balance between risk and income generation.

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5. Whether to tap home equity?

For most middle-wealth boomers, their house is their largest, if not only, non-pension asset. Therefore, it is more a question of when, not if, they will need to tap their home equity. The emotional issues that often accompany selling a home can be difficult on their own, but retirees must also address challenging practical issues. Primary among them is the question of selling a home outright or taking a reverse mortgage.

Reverse mortgages are designed to generate cash flow over a period of time, but they are complicated and typically involve considerable fees and expenses. As a result, only a small percent of retirees have decided to use them. Outright home sales generally yield more net cash, but then retirees must figure out where to live and determine the optimal investment strategies to generate necessary income. It is a very difficult task for anyone to compare the model cash flows from a reverse mortgage versus investing the net proceeds from an outright sale. For the average retiree lacking professional advice, it’s truly a daunting task.

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Other considerations

These five questions are not the only factors in retirement planning. Purchasing an annuity, working part-time beyond retirement and increasing savings are other options that can impact the retirement income gap. A small but significant percentage of middle wealth boomers will retire with a vested defined benefit pension plan. They have additional strategic thinking to do. Advisors may examine these options, recognizing that giving clients too much information can lead to inaction.

Looking ahead

Wealthy boomers take for granted their access to professional assistance in making retirement lifestyle and cash-flow decisions. The average boomer requires just as much — perhaps even more — financial education and real-time guidance. But currently, they are mostly left to fend for themselves. Access to practical, actionable advice is truly an imperative for this large segment of the population, largely because they face a serious retirement income gap.

We expect a combination of online analytical tools and traditional advisory services to fill the current gap. New business models will integrate these services with a certain degree of tailoring to meet the unique needs of the market and protect the bottom lines of financial services institutions and their advisors. The key components of this new model are likely to include:

  • Rich multimedia education content and self-service capabilities
  • Interactive online information collection, including customer financial data, specific demographic factors and retirement lifestyle/attitude expectations
  • A robust, automated analysis platform that provides for scenario generation and usable comparisons
  • Access to a range of  products, especially those that have been simplified (e.g., streamlined rollover processes for 401(k) balances)
  • Budgeting assistance
  • Some form of real-time interaction with a financial advisor on an as-needed basis to ask questions, discuss scenarios and conduct transactions

The bottom line is that understanding customer needs and servicing those needs in an appropriate and timely manner can be the difference between growing a relationship and losing a customer.

Sensing a solid growth opportunity, some forward-looking organizations in the financial services industry are moving aggressively to develop these capabilities. In addition, new online self-service providers have emerged to target this segment. They have designed operating models from the ground up to be able to service this market in a cost-effective manner.

While conventional wisdom has held that the middle-wealth boomer market was not worth the time and effort of professional advisors, a gradual shift in thinking has occurred as the scope of the opportunity comes fully into view. It is true that most advisors are not directly compensated for providing guidance on the complex questions faced by non-wealthy individuals and couples. However, over the longer term, it is likely that the average boomer will not be particularly demanding clients. Nor will they be likely to switch providers once the assets are in place. Therefore, there is a good chance that the initial advice and engagement will be paid back over time. Consequently, we believe that it is not a question of if, but when, the industry leaders in this large and important market will emerge.

The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or the global EY organization.

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