The Retirement Income Conundrum

A day doesn’t seem to pass without a new, alarming headline about retirement in America.  I was reminded of this today when our head of research sent me this link about the decline in the “Retirement Optimism” index (perhaps an oxymoron these days)  And consistent with other research, retirees maintain a consistently higher level of optimism than non-retirees.

Despite this morose pre-retiree outlook about retirement, the study reports that about 3 in 4 have no formal plan for retirement.  Why are households unable to address such an important personal challenge and prepare for the days of retirement?  Well, there are many reasons for this, including:

1) The definition of retirement.  What’s retirement?  Has the norm ever been 15-20 years of golf, world travel, and endless vacations on a private yacht in the Aegean?  Maybe “retirement” is a more transitional period of life, when earned income declines, new expenses emerge (e.g. health), and guaranteed sources of income from accumulated financial assets are required to match consumption  liabilities.  So maybe “planning for retirement” is not exactly the caracature we all imagine.

2) Savings.  As we near completion of the transition from a defined benefit to a defined contribution work place, have households accepted responsibility for postponing consumption and saving for a time when they’ll need new sources of income?  This will require a cultural change in how households budget.

3) Investing.  How many consumers know how to build a retirement portfolio?  How many understand the benefits of an annuity and how to select the most appropriate product?  How many understand how to use capital market products to create a stream of guaranteed income?  The accumulation model alone based on risk and return just doesn’t solve the retirement problem yet the airwaves are filled with messaging that encourages this.

4) Advice.  Despite the dramatic increase in advisor clients requiring retirement income portfolios, there is still no acknowledged consensus on the best approach.  Moreover, compensation models based on AUM often conflict with what’s best for the client.  Systematic Withdrawal Plans, Annuities, Time Segmented Allocation Models, laddering with strips….or plain old risk and return…where’s the consensus and why isn’t there one?

5) Insurance.  To some degree, most consumers need income “insurance” in retirement.  Typically, insurance products are sold, not purchased.  Given this paradigm, the financial advisor is key – he/she needs to recommend the right product for the right purpose.    This brings us back to the point 4 – advice.  The financial intermediary is going to be key in helping households efficiently use their savings to create income for retirement.  Manufacturers of retirement income products are going have to educate financial advisors on the benefits of their product from an outcome point of view and when the advisor should incorporate them into their client portfolios and financial plans.