Distribution planning will move to the forefront as boomers retire.
Part 1 of 2
It's a well-known if not mundane fact by now. Some 77 million Baby Boomers are advancing toward retirement. To be sure, it's a slow moving storm system. At the forward edge are those born in 1946, who are still eight years away from the traditional age of retirement. But advisors, academicians and product manufacturers are starting to see the tsunami moving toward shore.
And all parties involved are beginning to sense the problems and opportunities that await them at landfall: Advisors will be pressed to create lifetime income for clients while maintaining a profitable revenue stream for themselves; financial services firms that have long focused on helping people accumulate assets for retirement will be forced to create retirement income distribution products that ensure asset retention and thus revenue; and, lastly, consumers-who many believe are woefully unprepared for the huge responsibility of managing retirement savings-will be faced with making hard decisions about bequests and the little-known subject of mortality, or longevity risk.
"A number of marketers believe this post-savings market will ultimately offer more business potential than the accumulation market," wrote Editor Jim Sholder in a recent issue of DSG Dimensions, published quarterly for clients and friends of The Diversified Services Group Inc. (DSG) in Wayne, Pa. "The overriding belief is that the holding period for managed assets is longer, more easily defined, more stable, and people definitely need help. There is also the view that the need for help will increase with increasing age. All of these factors translate into a substantial business opportunity to develop long-term and profitable customer relationships."
To be sure, some of the wave is already breaking on land. An estimated 6,000 Americans now retire each day, and that number is expected to rise to about 10,000 by the time the peak of the boomer wave turns 65. But what's troubling at the moment is that there is only a limited body of knowledge, and very few authorities, on the increasingly important topic of whether and how Americans will create an income stream during retirement that will last a lifetime. A search for subject matter experts on the CFP Board of Standards Web site finds none. Retirement planning, yes. Retirement income distribution planning, no. A Google search also turns up very little in the way of reliable information on the subject.
To be fair, there is some literature (promotional, academic and consumer-oriented) on the subject, and some experts do exist. Margaret "Peggy" Malaspina has authored two books on the subject. DSG has published research on the subject for several years. Lightbulb Press has published a book, in association with the National Association of Variable Annuities, on creating retirement income. And J. & W. Seligman & Co. Inc. has created a Web-based illustrator and the Seligman Harvestor fund to help advisors help investors manage the process of creating lifetime income. Unfortunately, for many advisors and financial service firms, it's still a subject in development. "If you look at the whole universe of investors, the general emphasis tends to be on accumulation," says Gary Terpening, vice president of Seligman Advisors in New York.
The reasons why the subject is still in an incubation phase vary. For most advisors, there is very little demand on the part of clients. "I don't have many clients asking me about it," says Michael S. Finer, CPA, PFS, CFP, CLU, ARM, MST, chairman of Salem, Mass.-based Major League Investments Inc. Indeed, DSG's Sholder notes that most consumers are still focused on saving enough money for retirement. "Before retirement, consumers give little attention or even recognition to the need to provide for income during retirement," he says in the DSG Dimensions article.
Frank Gencarelli, an executive vice president with GE Financial Services' Retirement Services Group in Richmond, Va., believes there is a retirement savings crisis going on that sometimes overshadows the near-retirement and at-retirement challenges. "The key problem that is looming is that there is a lack of a robust, disciplined savings program by most working Americans, '' he says. ''It's a bigger problem than retirement income distribution. ''
Bigger, perhaps, but some advisors have had to become experts out of necessity. Bill P. Bengen, CFP, a sole practitioner in El Cajon, Calif., specializing in investment management, is among those who qualify as a bona fide expert. About a decade ago, Bengen says he was faced with the prospect of helping some of his clients, who were offered early retirement packages, to create retirement income for life.
Since then, he has published several articles in the Journal of Financial Planning detailing post-retirement investment portfolios, withdrawal rates and conservation strategies. Bengen's research suggests that retirees create a portfolio of at least 50% to 75% equities and the remainder in fixed-income securities, and withdraw 4% per annum on an inflation-adjusted basis. That withdrawal rate should enable clients to create a retirement paycheck for life. "With retirement assets, a lot of folks think they can pull out 6%, sometimes 7% per year," says David W. Polstra, CPA, CFP, CIMA, PFS, chairman of Norcross, Ga.-based Polstra & Dardaman LLC. "And that can be a recipe for disaster." Polstra says that higher withdrawal rates improve the odds of clients achieving their income objectives, which some advisors put at 75% of pre-retirement income, but it also increases the odds of clients running out of money.