Since the global financial crisis of 2007/2008 there has been much academic debate about how Americans will retire and the repercussions that certain modifications in retirement planning will have on the industry and the country as a whole.
It seems the financial crisis and the havoc it wreaked on peoples’ retirement savings across the country was the type of seminal event that prompts introspection and retrospection by individuals and professionals alike; placing retirement — and the industry that facilitates the process — under a microscope, scouring for competencies and inefficiencies.
And while much attention has surrounded the droves of baby boomers who will be retiring soon, very little has been given to those seniors currently in retirement and those pre-retirees right on the cusp. One would imagine there is a trove of relevant information that can be gleaned from those who were retired before and throughout the darkest days of the financial crisis and subsequent recession as well as those who entered into retirement in its immediate aftermath. Examining how they are living in retirement could illuminate a topic that breeds worry for millions of Americans.
So, are those currently enjoying their golden years — and those less than a year away — going to be able to realize the type of retirement they have spent their working lives imagining? Up to the start of the crisis, retirement conjured up idyllic images of couples carelessly strolling down beaches, travelling and eating out with friends and family. This, it was assumed, was all taking place while the individuals had enough money to cut some checks to assist their children with college tuition and spoil their grandkids a bit.
Finally being able to purchase that luxury car or European vacation seemed perfectly attainable for Americans from various socioeconomic backgrounds, as long as they worked hard and saved adequately during their working years. This image has suddenly been replaced by people slipping into penury, working well into old age, couples having to move in with their children, exploding health care costs and the extended lives that cause people to outlive their savings. Are seniors in retirement living the lives they wanted or is retirement — as it was once known — a thing of the past?
Different stages, different attitudes
Ninety percent of retirees said that their current lifestyle is very or somewhat close to their ideal vision of retirement, according to the ING Retirement Research Institute’s 2013 Retirement Experience study.
Patrick Kennedy, head of marketing and advice for ING U.S. Retirement Solutions, highlighted the starkly different attitudes held by retirees and pre-retirees: “People living in retirement report being quite satisfied with their quality of life (despite the low interest environment) while those preparing for retirement are very concerned about it,” he said.
There are myriad reasons — some salient, some opaque — why retired individuals may be more satisfied with their level of preparedness than their pre retiree counterparts. The ING study found pre retirees report far more stress about retirement than their retired counterparts (60 percent vs. 18 percent). One rather obvious reason is that the transition into retirement has actually been made. Naturally, before any major life stage, there is a sense of apprehension that permeates the psyche: The high school senior undoubtedly displays more worry than the freshman already acclimated to life in the dorm. Preconceived notions and unfounded ideas are dispelled once the leap has been made.
Pre-retirees are also subjected to a relentless drumbeat — one that has grown increasingly rapid since the financial crisis — about the pitfalls of being un/underprepared for retirement. This can breed anxiety even for those individuals that are adequately prepared.
Kennedy feels the concerns of pre retirees can be viewed as both practical and overly pessimistic. “I think they have been scared by the financial press as well as the crisis … 2008 was a shock and many people entering into retirement then had to adjust their expectations but I do think that to a degree, the financial press and the financial industry overlays the cautions.”
One upside of some of the alarmist calls about lack of retirement preparedness, according to Kennedy, is that younger generations are saving more diligently. There are, however, more tangible reasons why retirees are satisfied with their lives in retirement while pre retirees are concerned.
According to the ING study, current retirees are much more likely than pre retirees to have a defined benefit (DB) plan (60 percent vs. 41 percent). As a testament to the rapidly evaporating relevance of DB plans in the retirement planning environment in America, the further away a pre retiree is from retirement, the less likely they are to have a DB plan.
The study found that nearly all pre retirees (94 percent) have workplace defined contribution (DC) plans vs. 53 percent of current retirees. The difference in retirement savings vehicles between the two groups is striking and a helpful hint that brings the concerns of pre retirees into focus.
Overarching fear of outliving assets
The biggest concern among pre retirees and retirees alike is the longevity crisis (the potential for people to outlive their assets).
The longevity crisis has been garnering just as much attention from the industry and the individuals serviced by it as the shift from DB plans to DC plans, and the two are intimately entwined. DB plans offer retirees an income stream for life, while employer-sponsored DC plans have a finite amount of money in them. Whether one has enough is reliant upon how much one has saved, how much one’s employer has matched and the behavior of the market.
This set of circumstances, coupled with the uncertainty surrounding how long one will live, renders an environment ripe for fear (pre retiree or retiree) without a DB plan. The ING study found that one-third of pre retirees reported they were “very concerned” about saving enough to last throughout the rest of their lives, while only 16 percent reported being “completely prepared.” The fear of outliving one’s assets is exacerbated by the growing cost of health care and the amount of capital it consumes when individuals are living extended lives.
Mark Fitzgerald, national sales manager for Saybrus partners, a distribution subsidiary for The Phoenix Companies, feels that the primary concern is certainly longevity and the health care costs associated with it, although he cautions that many Americans are woefully underprepared for a retirement even if they do not realize an extended lifespan.
“If you think about the diminishment of pensions and the onus being placed on individuals, it is driving a need for products with guarantees. These products give retirees and pre retirees a lot of predictability and certainty as far as knowing what they can expect from their money in retirement,” Fitzgerald said.
A recent survey sponsored by The Phoenix Companies found that two thirds of advisors surveyed reported that “the need for guaranteed income in retirement” was a “must have” feature for their clients. “This survey shows that the need for guaranteed income in retirement continues to be a top priority for consumers and the annuity professionals who advise them,” Fitzgerald said.
The misunderstood solution
Many industry professionals, including Ross Goldstein, managing director with the investment group of New York Life Insurance, feel that various types of annuity products are the best way for pre retirees and retirees to ensure that they do not outlive their assets.
“At New York Life, we handle this with an income annuity either on an immediate basis or on a deferred basis,” Goldstein said. “Any academic will tell you that annuitization is the way to go to guarantee the type of retirement that you want but there is certainly a reluctance on the part of consumers to give up the liquidity needed to properly annuitize.” That hesitancy to annuitize has been deemed “the annuity puzzle” by academics and industry professionals, and there are varying reasons for the phenomena that go beyond a fear of giving up liquidity.
Annuities are misunderstood by potential clients with many viewing them in a negative way. Some of this can be attributed to an overall lack of financial literacy but it can also be attributed to some confusion surrounding variable annuity products sold before the crisis and the subsequent changes made to those products by carriers.
Across the board, industry professionals agreed that for pre retirees and retirees, income annuities are really the best tool to help mitigate concerns about running out of income in retirement.
Christopher Hale, director of retirement at Schechter Wealth Strategies, an advisory firm specializing in wealth management services, found that working with simpler annuity products is an easy way to overcome skepticism about annuities.
“I learned a long time ago that if I do not understand a product because there are too many bells and whistles, there is no way I can expect to be able to explain it adequately to a client,” Hale said. “I can count on one hand the number of either variable annuities or equity-indexed annuities we have on the books. There are just too many moving parts, too many internal costs, and with very few exceptions and very unique client situations, we utilize those solutions.”
Experts and analysts across the board agree that for the most part, seniors who are currently in retirement are living the lifestyles that they imagined for themselves. And pre-retirees, despite the concern and uneasiness surrounding their transition into retirement, will be able to fulfill their expectations. Some industry experts even maintain that pre retirees will have a disposition — brought on by fear — that will cause them to be overly frugal in retirement.
The certainty of a comfortable retirement changes when we look to younger generations. Middle of the pack boomers, Gen X and Gen Y will have fully realized the shift from DB to DC plans and will have complete control of their retirement destiny. Social Security, their one back-stop, may not be fully functioning, either (although the severity of this anticipated insolvency is hotly debated). These demographics will struggle with increased longevity and will need to harness the power of annuities to prevent bleeding the cash dry.
But for those currently in retirement and those less than a year away, the landscape looks similar to what they had envisioned, and if they utilize the proper tools to work against longevity risk, they will be taking that long walk, hand-in-hand down the beach.