The Future Of Retirement

The Future of Retirement

Houston ForumJanuary 27, 2009

by Steve Vernon, FSAPresident, Rest-of-Life Communications

The Future of Retirement…

is Work!

• Review current state of retirement adequacy

• What individuals should do

• What employers and plan sponsors should do

Today’s Agenda

• Large numbers of baby boom workforce won’t have the traditional retirement, due to:

– Inadequate financial resources– Poor financial management skills– Lack of affordable medical insurance– Possible broken promises

• But that needn’t be a source of despair, particularly if we act now

Overview

Present value of Social Security deficit (OASDI only):

$6,500,000,000,000Over $20,000 per citizen

Benefit cutbacks and tax increases are inevitable

Current State Social Security and Medicare Funding in Jeopardy

Retirement plan participation among workers age 55-64

• 49% of all workers

• 47% of private sector age and salary workers

• 77% of public sector wage and salary workers

Source: EBRI Issue Brief #311, November 2007

Current State Only Half of Working Americans

Covered by Retirement Plan at Work

Wealth Holdings of Typical Household Prior to Retirement

• $42,914 financial assets• $45,244 defined contribution• $88,158 total liquid assets

• $125,208 primary house• $96,705 value of DB plan• $221,913 total nonliquid assets

• $36,772 business and nonfinancial assets

• $346,833 grand total

Source: 2004 Survey of Consumer Finances, U.S. Board of Governors of Federal Reserve System. Values are mean of middle 10 percent of households headed by people aged 55-64.

Current State Existing Assets May Be Inadequate

Current State Existing 401(k) Balances May Be Inadequate

Age Group 2 - 5 5 - 10 10 - 20 20 - 30 30+

50s $32,532 $54,491 $99,794 $174,272 $167,806

60s $31,914 $51,268 $93,636 $157,069 $190,593

Source: Average 401(k) balances for 20 million 401(k) participants, 12/312006. EBRI Issue Brief #308

Tenure in Years

Current State Defined Benefit Plan Participation

Has Fallen Dramatically in Private Sector

0

10

20

30

40

50

60

70

80

90

1980 1992 2004

DBDC

% of workforce participation by plan type

Source: Center for Retirement Research at Boston College

Retiree Medical Coverage Drops

in Private Sector

0

10

20

30

40

50

60

70

1988 1993 1998 2000 2002 2004 2006

Source: The Kaiser Family Foundation, 2006 Employer Health Benefits

% Employers offering coverage

Many Americans Lack NecessaryFinancial Management Skills

Some Scary Statistics

• 47% completed retirement needs calculation

• 33% of workers who have not saved for retirement nonetheless feel confident their retirement will be secure

• 63% confident about having enough money in retirement

Source: EBRI 2008 Retirement Confidence Survey

More Scary Statistics

• Reported retirement savings age 55+ – 28% less than $10,000– 23% $10,000 - $99,000– 18% $100,000 - $249,999– 23% $250,000 +

Source: EBRI 2008 Retirement Confidence Survey

• Annual retirement income generated by 5% withdrawal percentage– $10,000 => $500– $100,000 => $5,000– $250,000 => $12,500

Amount Respondents Say Needed for Comfortable Retirement

source: EBRI 2008 Retirement Confidence Survey

Don’t know 12%

Under $250,000 25%

$250,000 - $499,999 16%

$500,000 - $999,999 23%

$1 million or more 18%

Methods for Determining Savings Needed for Retirement

source: EBRI 2008 Retirement Confidence Survey

Guess 43%

Ask advisor 19%

Do own estimate 19%

Read or hear amount 9%

Online calculator 7%

Worksheet or form 4%

Desired lifestyle 2%

Other 4%

More Scary Statistics

People overestimate safe withdrawal percentage to make savings last a lifetime

• 31% say 4% is safe– Odds of outliving assets about 1 out of 13 for age 65 retirement

• 26% say 7% is safe– Odds of outliving assets about 1 out of 2 or worse

• 29% say 10% is safe– Odds of outliving assets 4 out of 5 or higher

• 14% say 15% is safe– Odds of outliving assets near certainty

source: 2008 MetLife Retirement Income IQ Test

Inevitable Conclusions

More older people working longer than planned

Is this a bad thing?

Life Expectancy at Age 65

02468

101214161820

1940 1983 2007

MenWomen

Source: Society of Actuaries

Workforce Participation Men Age 65+

05

101520253035404550

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

Source: Bureau of Labor Statistics

Workers have lower death rates than retirees!

Death rates for males

What Should Individuals Do?

Top 10 Retirement Mistakes

1. Not creating a realistic plan.– Half of older workers have not calculated what they need for

retirement or budgeted for retirement expenses.

2. Retiring too early with insufficient financial resources.– A natural consequence of not preparing a needs analysis.– Increasing reliance on 401(k)/account-based plans presents a

significant challenge.

3. Starting pension benefits too early.– Most workers retire before maximizing their retirement income

(usually the Normal Retirement Date).


4. Starting Social Security benefits too early.

– Half of Americans start at age 62, the earliest possible age with the lowest amount of monthly income.

5. Drawing down 401(k)/retirement savings too rapidly.

– 4% to 5% per year considered safe withdrawal percentage.

– Many withdraw at much higher rates.

6. Uninformed/poor selection of financial advisors and/or products.


7. Tapping home equity too early through home equity loans or reverse mortgages.

8. Continuing unhealthy lifestyle which increases chances of expensive, debilitating conditions.

9. Not having a strategies in place for medical and long-term care expenses.

10. Living expenditures that are unnecessary, unrealistic or unaffordable, given all the above mistakes.

Top 10 Retirement MistakesPlus One!

Not having a good idea of what you want to do

in your retirement years

Top 10 Retirement Risks1. Living too long and running out of money2. Recession/deflation reducing value of retirement savings3. Inflation eroding value of fixed pensions and fixed investments4. Dropping Interest rates resulting in reduced income5. Poor health6. Potentially ruinous bills for long-term care expenses7. Drop in needed wage income during retirement years 8. Bad advice, fraud or theft9. Death of a spouse10. Loneliness, boredom, lack of purpose

Addressing these risks helps prevent the most common mistakes shown previously.

10 Steps to Recession-Proof Your Retirement Years

1. Take care of your health2. Protect against the risk of catastrophic conditions3. Consider working as long as you can4. Maximize Social Security income by delaying benefits as long as

possible5. Maximize pension income by delaying benefits as long as possible6. Be prudent when withdrawing retirement savings7. Use simple, effective investment strategies 8. Adjust living expenses to match your retirement income9. Develop a robust social portfolio10. Become a student of retirement and build a professional team

These steps address the retirement risks and help prevent the most common mistakes shown previously.

Simple solutions forclosing the gap

How much savings you need to generate a target retirement income• last for life• increase with inflation

Safest - 33 times your desired income• assumes you live on investment income• leaves money for children and charities

Conservative - 25 times your desired income• modest spend-down of principal• use if retire in late 50’s or early 60’s

More aggressive - 20 times your desired income• more rapid spend-down of principal• use if retire in mid 60’s or later

Simple solutions forclosing the gap

How much savings you need to generate a target retirement income

• 33 times your desired income (safest)• 25 times your desired income (conservative)• 20 times your desired income (more aggressive)

Example: if you need $20,000 in annual retirement income, here are suggested assets to generate this income

• safest: $20,000 x 33 = $660,000• conservative: $20,000 x 25 = $500,000• aggressive: $20,000 x 20 = $400,000

One example: can I retire at 62?married couple, same age, spouse doesn’t work

current earnings $75,000/yearno pension

expenses = $60,000 per year (80% replacement)

social security = $25,080/year(at age 62)

gap = $34,920/year

safest: $1,152,360 (33 times gap)conservative: $873,000 (25 times gap) more aggressive: $698,400 (20 times gap)

note: may need more savings for inflation and emergencies





gap = $27,600/year

safest: $910,800 (33 times gap)conservative: $690,000 (25 times gap) more aggressive: $552,000 (20 times gap)






gap = $13,440/year



Another example: can I retire at 62?married couple, same age, spouse doesn’t work

current earnings $75,000/year15 years pension service



pension = $9,000/yearnote: not reduced for joint & survivor annuity

gap = $25,920/year








gap = $14,100/year








surplus = $3,810/year

If financial resources are inadequate for traditional retirement, inevitable solution some combination of:

• Working in retirement years

• Postponing retirement

• Reducing living expenses before retirement to enable higher saving

• Reducing living expenses during retirement

Tough Choices for Individuals

If traditional retirement isn’t feasible, how about:

Long life, Health, and Prosperity…

…which may include some work and fine tuning living expenses

New Life Goals?

What Can Employers and Plan Sponsors Do?

Be prepared for more older workers working longer

• Flexible work hours and policies• Part-time workers• Keep skills up-to-date

• Maintain health of older workers

• Provide respect and safety• Best use life experience of older workers


• Extend retirement and medical plans to part-time workers

• Provide “bridge” medical coverage until Medicare eligibility at age 65

• Optimize retirement benefits

• Strategic tradeoff of pay vs. benefits?


Strong education program

• Enlist support of senior leadership

• Use simple, effective messages

• Use a marketing approach, appealing to emotions, but based on solid research and analysis

• Use multiple media, coordinated approach– traditional print– email newsletters– posters– videos– online

Employees and Participants Need Help (But Not Advice) with These Questions

• How much money do I need to retire?• How do I draw down retirement savings?• What are effective choices for DB benefits?• When should I draw Social Security?• How long might I live?• How do I protect against the threat of large bills for medical and

long-term care expenses?• What are strategies for balancing income and expenses in my

retirement years?• What is the role of part-time or full-time work in retirement?• How can I work with financial advisors?• What are considerations for selecting financial products and

services?

Will these be your employees and plan

participants in 10 years?

• What is the desirable level of involvement in the health of our employees and participants?

• How much should we help employees and participants with retirement planning decisions?

• What role should we play in setting expectations for employees and participants?

– Should we still enable or encourage expectations for a traditional retirement, relying exclusively on financial resources and promises, for periods of 20, 30 or 40 years?

Tough Questions Facing Employers and Plan Sponsors

Learn more!

www.restoflife.com

[email protected]

The Future of Retirement

Q&A

The Future Of Retirement

Business

Transcript of The Future Of Retirement