June 1, 2008

Reality Check

Five things advisers can do to help participants 50 and older to prepare for a leaner, and likely meaner, retirement

Reported by Judy Ward

“The hardest thing for an adviser is to hit these people over the head with a reality check,” says Scott Ciullo, a retirement plan adviser at Raymond James Financial Services, Inc., in Marquette, Michigan, of talking these days with participants age 50 and older who fall far short of their retirement-savings targets. “These are hard conversations to have—to tell someone who is 55 years old and wants to retire at age 62, ‘You are going to have to live on $20,000 a year, so you need to lower your expenses and plan on selling your house.’ It is especially hard with guys and ladies who have done the right thing and put money in.”

Amid the economic meltdown, Ciullo says, the force driving 401(k) participant investment decisions has changed from logic to emotion—especially for those nearing retirement. “We are dealing with a lot of emotion right now,” he says. “As an adviser, you need to help them put a strategy together to get the emotion out, and start them thinking logically again.”

Overall, just 13% of Americans surveyed in the Employee Benefit Research Institute’s (EBRI) 19th Annual Retirement Confidence Survey say they feel very confident that they have enough money to live comfortably in retirement—a record low. That represents a one-half decline in worker confidence since 2007, EBRI says in the survey that was released in April.

“People 50 and older were in deep trouble prior to this economic downturn, and this has made things significantly worse,” says Mathew Greenwald, President and CEO of Washington-based Mathew Greenwald & Associates, Inc., a market-research firm that conducted the survey in conjunction with EBRI. Forty-nine percent of people 55 and older surveyed by EBRI have less than $50,000 in savings and investments, and just 26% have $250,000 or more. (Those totals do not include defined benefit plans or the value of their primary residence.)

In reality, the majority of Boomers “never had enough for a traditional retirement” because of overconsumption and undersaving, says Francois Gadenne, Chairman and Executive Director of the Boston-based Retirement Income Industry Association. He points to findings in a study released in February by the Center for Economic and Policy Research (CEPR). The median household headed by a person between the ages of 55 and 64 saw its wealth fall by almost 50% between 2004 and 2009 from $315,400 to $159,800, according to the CEPR study. That drop is based on recent declines in housing and stock values. Many Baby Boomers “now have little or no equity in their home,” according to the report, “The Wealth of the Baby Boom Cohorts after the Collapse of the Housing Bubble.”

Many Boomers have counted on their house as a large part of their retirement nest egg, says David Rosnick, a CEPR economist who co-authored its report. “Overall, they did not have a whole lot saved before the crash,” he says. “[Many] expected to cash out and move into something smaller, like their parents did,” says Deena Katz, co-author of the book Retirement Income Redesigned: Master Plans for Distribution: An Adviser’s Guide for Funding Boomers’ Best Years and Chairman of Coral Gables, Florida-based Evensky & Katz Wealth Management. “The things that Boomers depended on are not there anymore.”

They may not fully realize it yet. Just 52% of people 55 and older have tried to calculate how much money they need to save for retirement, EBRI found. “There is no question that most folks are in a rougher situation [than they were before the market downturn], and a lot of people have inadequate savings,” says Paul Hirschboeck, Second Vice President and actuary at Securian Retirement Services. “If there is a silver lining [to the downturn], it is that this has highlighted an existing problem.”

So, more participants 50 and older may be ready for a reality check. “The distribution phase is pretty complicated,” Katz says. “People do not know all the [choices] they have, which is why they are going to run to advisers”—and much can be done by advisers in the workplace.