Data & Research April 9, 2018

Baby Boomers Not Doing Enough to Prepare for Retirement

Many Baby Boomers have not saved enough, a survey found, and many are also not thinking of important elements of a plan for retirement.

Reported by

Baby Boomers are in large measure unprepared for retirement, having failed both to plan adequately and save enough, according to a study released by the Insured Retirement Institute (IRI), in conjunction with National Retirement Planning Week.

According to the study, 42% of Baby Boomers have no retirement savings. Among Boomers who do have retirement savings, 38% have less than $100,000 saved for retirement. Further, only 38% have calculated the amount they will need to retire. However, 79% of boomers who work with financial professionals have at least $100,000 saved for retirement.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

During a media call, Tim Seifert, vice president and head of Annuity Sales at Lincoln Financial Group, said clients come in with two questions: “Do I have enough saved, and will it last for my lifetime?” This is a universal problem, he says, whether the client is a factory worker or factory owner, and the challenge Americans will continue to face is how to know if they are prepared to be financially secure in retirement.

The number one rule is to understand longevity—what Seifert calls the 73/47 rule. For a husband and wife age 65 today, there is a 73% chance that one will be alive at age 90 and a 47% chance one will be alive at age 95. “Savings needs to last 30 to 35 years, and only 18% can depend on pensions,” Seifert said. “A good retirement plan will always include a strong income strategy.”

The IRI study found 46% of Baby Boomers expect they will need $45,000 (in current dollars) or more in annual retirement income. Assuming the current average Social Security benefit of $16,848, an individual would need to generate at least $28,152 in additional annual income from a combination of pension benefits and retirement savings. At current rates, a life annuity paying $28,152 in annual guaranteed lifetime income would cost approximately $430,000, far more than most Boomers have saved.

Seven in 10 Boomers say it is very important for retirement income to be guaranteed for life, yet only 14% plan to purchase an annuity with a portion of their 401(k) or IRA, and only 3% have done so. However, 84% of Boomers with financial advisers have had income from an annuity included in their financial plan by their adviser (43%), or their adviser has discussed using annuities for retirement income with them (41%).

Only 25% of boomers believe that they will have enough money in retirement, and only 28% believe they are doing (or did) a good job financially preparing for retirement. While a growing number (25%, up from 20% in 2017) plan to retire earlier than age 65, 29% expect to work past age 70.

Baby Boomers began reaching age 65 in 2011—26 million have so far and another 50 million will turn 65 over the next 10 years, Cathy Weatherford, president and CEO of the IRI, pointed out in the media call. “There is still some time, and with effort, we can help millions become better prepared for retirement.”

Changes to Social Security that may reduce their income (76%) and health care expenses (69%) are the top two concerns of Boomers regarding their later retirement years, according to the IRI study.

Bill Nash, VP, MoneyGuard Distribution, Lincoln Financial Group, said during the media call that it is impossible to have a retirement planning discussion without having a discussion about the effect of long-term care needs in retirement. Only 29% of survey respondents believe they will have enough for health care expenses in retirement, and only 19% believe they will have enough for long-term care expenses. Nash pointed out that the average cost of nursing home care is more than $100,000 a year, and for a home health care nurse, the average is $47,000 a year.

“Family and friends have the best intention to be caregivers, but many do not have financial or emotional resources,” Nash said. “Only 14% of clients are having a conversation with family, mostly due to a lack of education and awareness. People severely underestimate the cost and many feel they won’t need long-term care, and there is a lack of awareness about what Medicare or Medicaid will pay.”

Nash said the conversation can be started by asking, “What is your plan for long-term care,” “How will long-term care affect your family,” “How will the expense affect your family,” “What kind of care do you want,” and “If you were to need care and are unable to make decisions, other than your spouse, who would you want to make those decisions?”

Brandon Buckingham, vice president and national director of Advanced Planning at Prudential Financial, pointed out that more Americans today have to rely on personal savings for retirement income than in the past. “A retirement income plan is more than just taking out money from defined contribution plans as needed; it will likely require a combination of investments, strategies and products. It will involve making informed decisions such as when to take Social Security, understanding health care costs and what Medicare costs and covers, and knowing how to structure decumulation to address inflation risk, longevity risk and market risk.”

Weatherford noted that the theme of this year’s National Retirement Planning Week is “Rethink Retirement.” She said it is important for Americans to have a plan, save as much as they can and seek the help of retirement professionals to make sure they are using all possible resources to prepare for a comfortable retirement.

IRI’s survey report is here.
Products April 9, 2018

Bond Manager Reflects on Industry Change, Increased Role of LDI

The president and CIO of Ryan Labs describes in detail the mechanics behind the firm’s new defensive bond portfolio strategy—and the way his work continues to be shaped by the Pension Protection Act and MAP-21.

Reported by

Richard Familetti was last year appointed president and chief investment officer of Ryan Labs, a Sun Life Investment Management Company specializing in bond portfolios, following his initial 2009 hire as senior portfolio manager and a 2012 promotion to head of asset management.

Sitting down for a high-level strategy discussion with PLANADVISER, Familetti suggested his firm is set apart by the long tenure of its investment management team.  

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

“When I first joined Ryan Labs, I was very impressed to see the portfolio management team has been made up of the same core group of professionals, plus some additions, for the entire history of the firm, going back to our real entry into the asset management space in 2004,” he noted. “Prior to that time, we were more of an advice and data provider. We have had the opportunity to really evolve and flourish post Pension Protection Act.”

The asset management group stated by offering a single core fixed-income strategy, Familetti noted, but over time the liability-driven investing (LDI) capabilities have really ramped up. This has been fueled by the cumulative impact of the PPA, as well as the Moving Ahead for Progress in the 21st Century Act (MAP-21) and its successors, the Highway and Transportation Funding Act of 2014 (HATFA) and the Bipartisan Budget Act of 2015. Familetti also pointed to the recent tax cuts and rapidly growing Pension Benefit Guaranty Corporation (PBGC) premiums as key motivators of pension plan sponsor de-risking behavior.

“With all of this going on in the background, the fixed-income side of the pension plan portfolio is really thought of differently today than in the past, and this has had a pretty big impact on our firm over time,” Familetti explained. “Today we have a full suite of investment grade fixed-income offerings, including short-duration enhanced strategies, core fixed-income offerings, and long duration portfolios—either offered as a custom product or against a Barclay’s benchmark.”

At this stage, Familetti estimated about half his firm’s total invested assets are directed particularly at LDI programming and pension liability management—whether tied to a Barclay’s benchmark or to a custom benchmark. The other half is made up of core and/or short-duration holdings for clients, he explained.

Role of the consultant remains strong

Another change that has occurred over time is the increasingly prominent role of investment consultants in helping to shape LDI strategies and other pension plan behaviors.

“We always are asked by investment consultants about our retention strategies for our management team. Funny enough, they always ask first about the money,” Familetti observed. “They want to know, what is the structure of the deferred compensation and the equity earned by our team? But we’ve demonstrated time and again that manager success is about more than just compensation. It is important for folks in this field to like to work together and to really enjoy what they do. It sounds cheesy, I know, but it is true.”

Familetti further observed that there “have simply been many more consultants and clients who have become focused on long-duration and LDI hedging strategies.” Increasingly they are using “benchmarks where they change allocations dynamically, in both directions, according to interest rates and the level of equities—as opposed to just moving in response to a didactic idea that you want to buy all the bonds you can to eliminate equity risk.”

“That has been the story behind most of the business we have seen recently,” Familetti explained. “Consultants will have different views in terms of how we, as the manager, fit into this effort. When it comes to small and medium-sized pension funds, oftentimes we are working very closely with a consultant to come up with a bond portfolio and a mix of equities that makes sense for that client. It has become very collaborative, in that respect.”

While pension plans are, broadly speaking, on the decline, Familetti expects the role of the consultant in serving this marketplace will remain strong for some time.

“We know that pension plan sponsors have a lot of responsibilities, and unless they are a finance professional in their own right, it may be difficult for them to dig into the weeds on the fixed-income side of the portfolio—or even the equity side of things,” he said. “So there is a lasting reliance on the consultant and their expertise. We meet with so many consultants, and the depth of their due diligence today is amazing. We find ourselves working with all different types of consultants these days.”

Tied to the broad LDI trend and the push towards de-risking, another trend Familetti has observed on the part of investment consultants is “a real push towards more dynamic strategies that are proactive about rebalancing the equity/fixed income mix as interest rates move slowly back towards normal.”

It was with this trend in mind that the firm conceived and launched its latest strategy, dubbed the “Defensive Risk Premia (DRP) strategy.” The portfolio solution is designed for corporate and public pension plans, as well as other institutional investors, Familetti explained.

“This strategy is designed to enhance the defensive role the fixed income allocation plays within the total asset allocation of an institutional investor’s portfolio and to further offset losses from equity market downturns,” he said. “Using a proprietary quantitative model that monitors financial and economic risk on a daily basis, the DRP strategy is designed to turn on when elevated equity risk is indicated and there is a flight to quality into safe haven assets. Using treasury futures contracts, the strategy aims to dynamically offset negative equity performance of market volatility.” 

Offering some additional context, Familetti pointed out that the strategy focuses on three key volatility variables, “not just the VIX.”

“Importantly, it is off all the time, until it is switched on. And then it is only on for a short period, by design, in the context of sharp market drawdowns, which are usually by their nature short-lived and aggressive,” he said. “Once our three risk sign posts turn on, we in effect start to buy long-term treasury futures as a short-term hedge against equity drawdowns. Interestingly, the strategy has only been turned on once in the last year or so—the recent volatility spike hasn’t actually triggered it. And this makes sense, because equity markets have stabilized quite quickly, so we saw just one of the risk signals turn on, but not the others.”

«