Month: July 2023

Minding the Trimesters of Retirement

Don’t be fooled by the early stages - longevity has implications.

I’m often challenged by advisors and industry executives, “We don’t hear a lot of complaints from retirees. So why do you say most retirements will be a trainwreck??”

It would be in very poor taste to observe there were very few complaints from the passengers of the Titanic – during the first four days of their voyage.

“Retirement” is a terribly misleading concept. To many people, it is a destination – a long awaited moment to cast off a job they don’t love, a boss they despise or customers that are too demanding. Now it’s their time – time to travel, time to relax, time for hobbies, family or just do nothing. The most popular phrase I hear is “freedom”. And well deserved at that.

But the cruise ship of retirement faces icebergs. And those icebergs are typically life events created by longevity. The longer you live, the more you cruise the SS Retirement, the more chances you have to hit an iceberg.

Never Say “Unsinkable”

The Titanic’s Captain Edward Smith infamously ignored warnings by other ship captains on his course and was on record for years before the tragedy extolling the virtues of modern shipbuilding to the point where he “could not imagine any condition which would cause a ship to founder”. Sounds like a devotee of Monte Carlo simulations who doesn’t acknowledge the statistical reality that 70% likelihood is not a guarantee of success.

But what if the Titanic’s passengers had been told there was only a 35% chance of success – albeit with a short sidetrip in a lifeboat. Would John Jacob Astor IV, a billionaire in today’s dollars, have bought that ticket for himself – and his pregnant wife? She survived – the child was born – he drowned at 47 along with 65% of the passengers and crew.

Mind the Trimesters – Go-Go, Slow-Go, No-Go

Way back when I was an advisor to families, I met a couple who had already quit their jobs. At 61 and 60, Dick and Ginny were active, true go-go retirees. They had his pension and were financially secure. From me, their first ever advisor, they were looking more for validation of their choices. Most of my perspective about retirement was learned watching my older relatives – four grandparents and three great-grandparents ( see more: https://nextchapterinnovation.com/my-family-made-me-do-it/ ).

“Tell me about your plans”, I asked. They enthusiastically described winters of skiing and summers of sailing their boat along the coast of Nova Scotia. “Wow – that sounds great”, I agreed, “So what’s next – when one of you may not be up for that effort?”. I went on to share how it’s very common to have great plans but that Mother Nature has her own and longevity can be a spoiler. There are strategies and location choices that can help ease the transitions.

The look on their faces said it all – I’d overstepped their expectation for the meeting. And just that quickly, they thanked me. And left my office. And that was my first encounter with the downside of being candid about retirement planning.

A few weeks later they called and asked for another meeting. “We’ve made some decisions”, they shared. “First, we really appreciate what you said – we weren’t ready to hear it”. They went on to say they listened and had taken steps. They scrapped the Nova Scotia plan in favor of Lake Champlain in Vermont where they could store their boat year round and also buy a condo in the same town as their “most responsible” child, who welcomed the idea. They also wanted to supplement the pension with a more protected form of income and liked the idea of an annuity in lieu of some of their mutual funds. Like a paycheck, they reasoned.

Reality Check, Paycheck and Checking Out

All good – but there was more. The “slow go” phase of retirement was daunting to them, but they really disliked the “no go” vision. “We have a plan for that” Dick shared with some mystery…

Rolling the story forward, Dick and Ginny campaigned successfully for what became only the second assisted suicide bill in the nation. The governor of Vermont signed the bill on his father’s birthday with Dick standing over his shoulder. Death with Dignity Vermont was born of their dedication to doing things their way in retirement and reflected the determination and energy that defined them both. I was so proud to see them on the front page of the New York Times.

Reconnecting with Ginny upon Dick’s death nearly thirty years after our first meeting, she recalled that day. Even how much they appreciated the “reality check and the paycheck” – and she volunteered, “I still have that annuity – it’s been great”.

Real Retirement Planning Takes Courage

The facts are stubborn – most of our clients are not prepared. Nearly half of people with more than $100k in a retirement plan have no advisor, no financial plan and – we know – not enough money to retire and maintain their lifestyle.

You can say, “Not my clients”, but are they ready to finance 30-40 years of additional longevity? How do you know? How do they know? Most people still underestimate their longevity so what plans do you have for them to hedge that risk?

What about those trimesters of retirement? Have you had the conversation with every client close to retirement age or already in retirement about the second and third trimesters? What does “slow go” imply for their plan – including where they will live? And what about “no go” when one partner or spouse is gone. My mom’s in that phase now with very different circumstances from the other two trimesters.

You Can’t Fake Retirement Planning

The advisors who sell a sunny retirement funded by a balanced investment portfolio fit only with multimillionaire clients who can keep their spending in check. And that is a tiny percentage of the population. For all of the other clients and advisors, there is real work to be done with trade-offs and pivots as the inevitable challenges of longevity pop up. Professional imposters won’t last and naïve clients will fail. The real advisors will protect their clients – and earn both unprecedented growth and the feeling of achievement. Do good and feel good.

by Steve Gresham

The Retirement Opportunity is Staring Us in the Face - Can You See It?

Most retirement plans will fail. So who will tell the clients?

In 1965, a Harvard-trained lawyer working for the Department of Labor published a book warning Americans that their cars could kill them. Unsafe At Any Speed by Ralph Nader rocked the Detroit auto industry, and its damning revelations prompted the federal government to act with uncharacteristic energy to implement the National Traffic and Motor Vehicle Safety Act the next year. Nader’s message was that car manufacturers know of their vehicles’ defects and in fact designed them, choosing profits over safety. The subtitle of his book is “The Designed-in Dangers of the American Automobile.” His moral observation: You can’t trust the maker of the car you drive.

Now let’s take another industry that’s likely to face trust issues. Tens of millions of Americans believe they are going to be OK in retirement. But those of us in the financial advice industry know better. Most of these retirees will fail. Many will run out of money. They’ll have significant health issues. Many will be unable to manage the care they need.

But have we warned consumers about this? If we cannot ensure that they thrive in their longevity, aren’t we responsible for telling them?

If it is our responsibility, we cannot hide from it. The truth is starting to come out. People know there’s a problem.

What We Know

Consider that “retirement savings crisis” is noted 69 million times when you search Google. We also know who will be affected. The vast majority of our clients are baby boomers, the generation first born in 1946. That group is still 70 million strong, and together with their children and aging parents represent more than a third of the U.S. population. They own half the nation’s wealth and do 70% of its consumer spending.

According to an Alliance for Lifetime Income report, 43% of consumers believe the 2022 market setback represents a longer-term change that negatively alters their retirement outlook. And they are facing a different economy: 53% of consumers say one of the three reasons why they retired were circumstances of health, job loss, mandatory age requirements and the impacts of COVID-19.

We also know baby boomers are living longer. During boomers’ lifetimes, their life expectancy at birth has increased 17% to a blended 78.8 years, and their life span at 65 has increased 44%. That longevity will demand more resources from them after they retire. Yet at the same time, the workforce supporting Social Security recipients has declined. The number of workers per beneficiary was more than 50 in 1946. Now that ratio has fallen to 2.8 workers. Meanwhile, by 2040, the number of Americans 65 and older will have doubled since 2000, and the population of 85 and older will have doubled since 2020.

We also know that people are vulnerable. The National Council on Aging says 80% of households with an older adult are financially struggling today, or they’re at risk of economic insecurity as older adults age.

Those of us in financial services also know what most clients don’t know: Most Americans say they want to live independently in place as they age, but 60% can’t afford more than two years of in-home care, while 45% of people 60 and older don’t have enough income to cover basic living costs (these were also findings of the National Council on Aging).

A Warning To Advisors

The warning here is not just about doing the right thing, it’s about good business.

You are probably thinking my clients aren’t ordinary, spendthrift boomers. They are frugal savers. They have dealt with the health issues of parents and in-laws. More recently, they’ve seen contemporaries in their fifties who thought they were financially set for life and quit their jobs during the Great Resignation only to realize it was a mistake.

Even if your clients remain financially secure and independent, they are likely to be surrounded by a lot more friends and family who aren’t. That’s a bad look for both the advisory profession and the financial services industry at large.

Detroit’s problem wasn’t just the safety of its cars. It was also a pervasive and persistent indifference to consumer preferences. At their peak, the Big Three of Chrysler, Ford and GM controlled more than 90% of the U.S. auto market. Their share is now only 44%, and 23 different companies around the world now sell cars in the United States. The consumers always win in the end, and if you don’t listen to them, they won’t argue with you. They’ll just go elsewhere.

The lesson here is that current success is often the biggest obstacle to future success. Another lesson is that there are perils in complacency and the unwillingness to innovate.

My mother and father got their first car in 1965. It was a VW Beetle with a stick and no air conditioning. Their parents, both sets, each had a version of the big four-door sedan that was the No. 1 selling car design in America from 1946 to 1976. But my parents could not afford one, so their choice was simple. Volkswagen was the No. 1 selling import car brand in the U.S.

Fast-forward 60 years and VW is now No. 1 in the world while the Big Three have tanked. My parents bought American only when they needed room for four kids and a dog. When the kids were gone, the station wagon was gone and they were lured back to the superior value of the imports because of their sticker price, reliability and better gas mileage. The Big Three still weren’t getting it.

Now consider the retirement planning industry. Do consumers have choices and new innovations to choose from? Yes, they do. Will they turn on trusted advisors if those advisors aren’t meeting their needs? Yes, they will. The technology exists to replace most of the financial advice industry. The only question now is when. Really big scale investors are eyeing the retirement industry for disruption. They see the failing consumers, the rising anxiety, and the incumbent players’ complacency. Just like VW and Honda and Toyota and BMW and (more recently) Tesla stole trillions from Detroit, financial disruptors are waiting in the wings to provide what traditional advice givers aren’t giving them.

So what are those consumers saying they want? Consider what they’ve told the Alliance for Lifetime Income, which recently released a study of consumers and their advisors. It reveals consumers’ retirement planning anxiety, and the ways many advisors are innovating to quell those concerns.

According to the alliance, 51% of consumers age 45 to 75 feel they don’t have enough in retirement savings to last their lifetime. Nearly a third are not confident they will have enough to cover basic monthly expenses. In response, eight of 10 advisors have changed their retirement planning approach in the past year. Forty percent of advisors who did put more client assets into annuities. Ninety-seven percent of consumers say having guaranteed lifetime income in addition to Social Security in retirement is valuable. Fifty-four percent of advisors believe their clients could spend more money if they added the protection of an annuity to the retirement income plan. Ninety-three percent of consumers who protected their portfolio with an annuity in 2022 are satisfied with their investment choices for 2022 and 44% are extremely satisfied.

But there’s also, apparently, a communication gap between advisors and clients. Consider these issues:

• Seventy-three percent of advisors say they raise the topic of retirement protection with clients, but only 33% of investors agree.
• Nearly half of investors say they are extremely interested in owning an annuity, but only 19% of advisors believe their clients have this level of interest.
• Fifty-one percent of consumers are uncertain that the 60/40 stock/bond model remains viable, while 28% say it is outdated and other asset classes should be added. About half of advisors, meanwhile, say the model is valid.

If we ignore these gaps, we ignore the power of the consumer to change our business if we don’t change it ourselves.

The baby boomers don’t just dominate the financial industry. If we continue to ignore their very clear preferences for financing retirement—they will be the facilitators of whatever and whomever replaces us. They have the power.

by Steve Gresham