Retirement will change in the coming years, and people need more help than ever to make sure they're prepared. At the LIMRA Annual Meeting, held Oct. 30-Nov. 1, 2005, in Orlando, Fla., Eric T. Sondergeld, ASA, CFA, MAAA, from LIMRA International explained what these predictions mean to baby boomers and other near-retirees.
"The number of retirees had been fairly flat," Sondergeld said, "but that will rise with boomers." He pointed out three challenges facing this group of near-retirees:
1. People aren't saving enough -- or they aren't saving at all;
2. When they do save, people don't invest that money well; and
3. People don't keep money through retirement.
Mr. Sondergeld explained that the 78.1 million baby boomers (the number has grown because of immigration) had a net worth of $17.5 trillion in 2001; those between 55 and 74 had a net worth of $18.0 trillion in 2001. In terms of retirement assets, boomers had $2.8 trillion in 2001, and those between 55 and 74 had $2.4 trillion in 2004. And he said that there is more than $300 billion a year in potential rollovers.
Sondergeld also emphasized that the age group behind the boomers should not be overlooked, either. There are two 19-year groups behind the boomers that are around 75 million strong, so there are three consecutive 19-year groups headed toward retirement that are sized similarly. Producers should help near-retirees, he said, but they also should be looking for prospects with years to go to prepare.
Retirement Plans Are a Cause for Concern
"Private pensions are underfunded by about $450 billion," Sondergeld said. "Companies file for bankruptcy to get rid of this 'guaranteed' benefit." He pointed out that defined contribution originally was intended as a supplement -- not a substitute -- for defined benefit plans. Now defined contribution plans greatly exceed defined benefit plans. This will have an effect on retirement for years to come.
Retirees Will Need Health Care
Sondergeld warned that employer-sponsored retiree health benefits are disappearing. Only 13% of employers offer some kind of health care to retired employees, and that percentage is likely to decrease. Retiree health benefits are another area producers should cover when planning with boomers.
Payout Options Are Not Explained Fully to Retirees
Annuities can be the best option for retirement plan payouts, for they enable retirees to spread their retirement funds over many years rather than receiving a lump sum and being responsible for saving or investing that money wisely. But Sondergeld pointed out that only half of plan sponsors even offer an annuity option.
"The normal form is the payout an employee would get if he or she didn't make any other choice," he said. This is the default option. Seventy-eight percent of Section 401(k) plans have a lump sum as the normal form of distribution. "People essentially are told: 'Figure out what to do with it.'"
This is where you can help. Make your clients aware of the benefits of annuitizing their payouts.
"Retirees mainly are recommended a lump sum or IRA," Sondergeld continued. He said only a small percentage are directed to annuities.
He listed factors related to availability of annuity payout options. These include companies that offer retiree health care; companies with 500 employees or more; companies that use a full-service provider in plan design; and companies that offer a defined benefit plan.
"If you ask employees about adding annuity options," Sondergeld said, "only 7% are interested." This number is so low because employees say it would not be used, it is too complicated, there are fiduciary concerns, or simply that it never came up during plan design. What would encourage plan sponsors to offer this option? Participant demand is a big factor.
"Most employees aren't aware these options are even available," he said. More information on annuity benefits and recommendations from you, the producer who helps with the plan design, also are important.
10 Consumer Mistakes
As a group, consumers are not planning for retirement as efficiently as they could. When planning with your clients, it can be helpful to address these 10 points and work with your clients to find appropriate solutions.
1. Consumers save too little.
2. Consumers do not know when retirement will occur.
3. In most cases, consumers do not plan on living as long as they actually do.
4. Consumers are not facing facts about long-term care.
5. Consumers are trying to self-insure against a long life.
6. Consumers do not understand investments.
7. Consumers are relying on poor advice.
8. Consumers do not know what their sources of retirement income will be.
9. Consumers are failing to deal with inflation.
10. Consumers are not providing for a surviving spouse.
If you are looking for ways to target soon-to-be-retired prospects, consider approaching them with new products. "Long-term care and funding health care are some of the biggest concerns of new retirees," Sondergeld said.
Consumers Are Not Saving Enough
Including Section 401(k) plans and IRAs, only 11% of all workers and 19% of those 55 and older have saved $250,000 or more; more alarmingly, 52% of all workers and 39% of those 55 and older have saved $25,000 or less. This is a huge discrepancy that can lead to many unresolved problems down the line. You should urge your clients to plan ahead and make sure they don't enter retirement unprepared.
Those who enter retirement earlier than planned have less time to save for retirement and will spend more time retired and using their savings. "The leading reason for early retirement is health issues," Sondergeld said. This creates a double whammy: It leads to an earlier-than-planned retirement, and illness causes an unexpected drain on retirement resources. In 2004, 37% of retirees retired earlier than planned; only 6% retired later than planned.
Sondergeld said producers have a huge opportunity in this market. "Out of those not yet retired," he said, "78% say they could do more to plan their retirement. People are admitting that they need help."
Are You Ready?
Do you have the skills needed to be successful? Do you know how to ask the right questions? "Consumers are not looking for a transaction," Sondergeld explained. "They're looking for someone to educate them."
Can you advise clients, or are you limited to transacting? "How do producers interact with clients?" Sondergeld asked. Do you approach clients to sell a product, or are your interviews more of a consultation? "This isn't necessarily a product opportunity -- product innovation isn't necessarily what's needed. People want help deciding what their lifestyles will be. They want advice, not products per se."
Clients need help with both financial and non-financial needs. By being more of a planner than a seller, you will be well-positioned to help baby boomers secure their retirements.
