Data & Research December 16, 2015

Jumbo Size Nest Eggs Are Needed

Historically low interest rates had a sharply adverse impact on retirement income.
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S&P Capital IQ and SNL Financial released “Retirees Can No Longer Afford to Live on Investment-Grade Fixed Income Returns,” a new research note that analyzes the annual cash flow generated by the 10-year U.S. Treasury note per calendar year, dating back to 1976.

Retiree nest eggs now need to be much larger than what was required 40 years ago to generate the same level of investment income. The report tracked total inflation- and risk-adjusted retirement income generated from a $100,000 principal investment.

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More principal was required to generate same returns. The average annual income generated on an inflation-adjusted $100,000 principal investment in U.S. Treasuries has been 13.3% of median household income between 1976 and 2015. Based on that 40-year average figure, principal invested in 2015 would need to increase by more than 600% to generate that same level of return.

Seven-figure investment required for modest income. In order for the 10-year U.S. Treasury note to generate annual retirement income approximating 50% of median household income, retirees would need a seven-figure investment principal account, or roughly 24 times 2015 median household income levels.

Shrinking nest eggs. Not only do current-day retirees need an attractive fixed-income interest rate, they also need stronger personal income growth that enable adequate lifetime savings, likely driven through self-directed 401(k) investments as opposed to defined benefit employer-funded pensions.

“The last seven years of short-term interest rates at or near zero percent has created some serious problems for retiree and near-retiree investors,” says Michael Thompson, chairman of S&P Investment Advisory Services. “The net result has been low-risk profile investors moving further and further out on the risk curve, investing in corporate bonds and equities to generate the same level of income they historically earned in the fixed-income markets. Long term, that is not a sustainable solution.”

S&P Capital IQ and SNL Financial, a business unit of McGraw Hill Financial, provide financial and industry data, research, news and analytics to investment professionals, government agencies, corporations and universities worldwide.

The full research note can be accessed through the S&P Capital IQ and SNL website.

Data & Research December 16, 2015

Participants Under 35 Relying Less on Advisers

A third of participants age 35 to 49 say they are planning to depend less on financial advisers in the years ahead.
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Forty-one percent of retirement plan participants under the age of 35 are relying less on an adviser, according to a new report from Spectrem, “Advisor Usage Among DC Plan Participants.” 

Among those 35 to 49 years old, 33% are depending less on advisers. The trend continues among older investors, although it declines to 28% for those 50 to 64 and to 19% for those 65 and older.

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Overall, 54% of all participants use an adviser, but among this group, only 45% rely on and trust their adviser for the vast majority of their financial needs. When it comes to specialty investing, such as real estate or alternatives, 42% of participants under the age of 35 use an adviser. The numbers are equally strong for the other age groups: 35 to 49 (43%), 50 to 64 (34%) and 65 and over (55%).

Asked whether they have a portion of their investments with an adviser to compare results with their own investing, 18% of those under age 35 indicated this is a strategy they are testing. This is also true for 21% of those 35 to 49, 21% of those 50 to 64 and 27% of those 65 and older. The percentage of participants who had done most of their own investing but who are now transitioning more of their assets to advisers is 19% for those under age 35, 15% for those 35 to 49, 15% for those 50 to 64 and 24% for those 65 and over.

NEXT: Other findings

The percentage of participants who said they are likely to drop or replace their adviser in the coming year fell from 11% in 2014 to 9%. Adviser communications continue to leave investors unimpressed. Excellent ratings were low for newsletters (15%), blogs (2%) and social media (2%). Forty-six percent of participants rated advisers’ blogs and 50% rated advisers’ social media activity as poor.

Of the top five reasons investors said they would fire an adviser, four were about communication and only one relates to performance. Fifty-seven percent said if their adviser did not return phone calls in a timely manner, they would consider firing them. That was followed by not returning e-mails in a timely manner (53%), not providing them with good ideas and advice (49%), not being proactive in contacting them (42%) and underperforming the overall stock market (39%).

“Providers have a significant opportunity to retain and grow their business by strengthening their engagement with plan participants,” says Spectrem President George Walper Jr. “As the U.S. population ages, these opportunities for engagement will only increase, since more than 30% of plan participants say they will be seeking advice on planning for long-term care, implementing tax-advantaged strategies and establishing an estate plan.”

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