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
A lot of this involves framing the complex concept effectively. Retirement-income products help solve a big problem. As Della Vedova says, “It does not matter if someone has saved $10 million or $2 for retirement: They worry about running out of money.”
Lacking pension plan payouts in most cases, Boomer retirees will need dependable income streams and, as unpopular as traditional annuities have been—largely because of concerns about their cost and the dangers of putting an entire nest egg in them—they effectively pool longevity risks, Hirschboeck says. “I am not suggesting that people annuitize their entire nest egg, but a lot of studies say the optimal allocation in retirement is one that brings in some form of annuity,” he says. “When people finally realize this is how much income they get with an annuity and without an annuity, that is when it [buying an annuity] is going to get traction. An annuity produces meaningfully higher income than a systematic withdrawal strategy for any given level of assets. The annuity is not a panacea, and cannot create sufficient income from insufficient assets, but the annuity ‘stretches’ the assets to provide a consistent stream of income during retirement.”
However, participants in this age group also will need retirement-income products tailored to their needs. “Retirees are going to need a significant income stream to help them secure a successful retirement. The good news for retirees is that they are going to live longer. The bad news is that they are going to live longer and need to figure out how to pay for it,” Katz says. “Past generations have used the sale of their primary home, income from defined benefit plans, and Social Security to create these income streams. The housing market has been decimated, there are no defined benefit plans anymore, 401(k)s have become 201(k)s, and the hurdle to receive Social Security benefits is rising with each passing year.”
Katz envisions the popularity of hybrid investments that blend a retirement-income product with an investment fund that incorporates risk-based and target-date factors. She does not know of any product like that currently on the market, but expects to see it before too long. “We are trying to figure that out in the investment world: how to structure these to the best benefit of this age cohort, as opposed to the previous age cohort,” she says. People do not need “income” at retirement, she says: They need cash flow. “We cannot put all available assets into just income-producing vehicles—annuities and bonds—because it cannot keep up with inflation,” she says of the danger inherent in longevity issues.
The rise of target-date funds has done a lot of good to improve allocations and diversification for the average participant, Hirschboeck says. “However, as people move into retirement, the facts and circumstances can differ so much for each individual—health issues, bequest issues, desire to work—that these individuals are going to be well-served by what an adviser can bring. Certainly, the process needs to start before retirement. However, retirees’ needs will continue to change also, and there is a great opportunity for advisers to continue to serve participants into retirement. No single, cookie-cutter solution is going to work that well.” Something like an annuity in conjunction with a managed account could be a winner, he adds, possibly within a plan itself.
That works better for advisers, too. Many of the current products do not mesh well with the adviser service model, if the adviser wants to continue providing guidance in retirement, Hirschboeck says. “A lot of [products] are one-shot deals, and the adviser gets a commission,” he says. He expects to see more new retirement-income products that pair with ongoing adviser counseling during the distribution phase. “I view the workplace and the 401(k) plan as the ‘point of entry,’ but imagine that ongoing consultation will be—in many cases—part of the package of services,” he says.
Even if a buying decision is in the future, sources recommend, do not hold off on familiarizing 50-plus participants with the basic benefits of retirement-income products. Says Katz, “Waiting until two years before they retire to educate them about this is stupid.”