Weak Planning Can Doom Golden Years, Study Finds

Millions of Americans expect to live longer but aren’t really prepared to finance their own longevity, according to a new report.

The solutions they look to — relying on Social Security and working past the age of 70 as a Plan B — are at best dubious.

The misalignment between increasing life spans and stagnant or underfunded retirement accounts is a big opportunity for advisors, however. More on that later.

Two-thirds of Americans believe there is some chance that they will outlive their savings, with one in three saying the likelihood is 51 percent or better, according to the Northwestern Mutual 2016 Planning & Progress Study of 2,646 American adults age 18 or older.

Nearly half – 49 percent – of current retirees expect Social Security will be their sole or primary source of income in retirement, the study found.

That’s a massive percentage of people relying on Social Security, even if a lower percentage of future retirees expect to rely on the program as their primary source of retirement income.

A heavy reliance on Social Security, which was never built as the primary retirement leg on which to stand, simply isn’t the solution, said Rebekah Barsch, vice president of planning for Northwestern Mutual in Milwaukee.

The average Social Security payout was about $16,000 last year and retirees relying heavily on Social Security will in all likelihood find themselves dissatisfied, Barsch said.

Whether or not Social Security endures, however, presents the perfect segue for advisors to steer clients into a discussion about relying too heavily on the government annuity program as their primary source of income in retirement.

“When talking about Social Security and to what depth it will be there, that presents a great opportunity for advisors,” Barsch said.

Is This Your Plan B?

If so many people expect there’s even a chance they will outlive their retirement savings, you’d think they’d be working on a Plan B.

But Plan B for many people means working past age 70, which is less doable than it sounds. A strategy of working to some unidentified retirement age sans a solid, vetted retirement plan “always makes me nervous,” Barsch said.

Finding a payroll job with benefit at that age is often a fallacy, even if retirees live on median household income of $32,000 a year, according to “The Current State of Retirement: A Compendium of Findings About American Retirees,” published by the Transamerica Center for Retirement Studies.

Employers aren’t interested in hiring expensive, older workers who are likely to cost companies more in salary and benefits than young college graduates.

American workers in their 50s and 60s report more difficulty finding jobs even if they are skilled. Injuries take their toll on 60-year-old bodies, from which workers take longer to recover, according to disability data and employment research.

The upshot is that advisors need to reset Plan B among clients who when they were 50 thought they would be able to find a job at 65.

An Advisor Solution

Here’s some counterintuitive summer advice for financial advisors desperately seeking ways to steer clients away from reliance on Social Security or working past age 70: Talk to them about income, not savings.

Savings is a means to generate that income, but an effective way to get people to save is to show them how much – or how little – income their retirement savings will generate in 20 or 30 years, Barsch said.

“There’s something about actually showing income that is more effective than showing what’s in the nest egg,” Barsch said.

Show a client that a $50,000 individual retirement account earning 5 percent will generate $2,500 a year in retirement and advisors are likely to generate that “Aha moment,” she said.

Ask a 35-year-old client to contribute another percentage of salary into a 401(k) and he or she may think about it. The median 401(k) account balance in a company defined contribution plan was only $31,396 at the end of 2013, according to Vanguard.

Income illustration is on the legislative radar as well.

In the Senate, the Lifetime Income Disclosure Act would amend the Employment Retirement Income Security Act (ERISA), and inform workers of how much their existing retirement assets would mean for future income.

Income Illustration Ranges

Income illustration software packages from Northwestern Mutual and other commercially available sources make is easier than ever for financial advisors to generate individual retirement income plan scenarios.

By plugging in income projections for Social Security, retirement savings, asset sales and inheritance, and adjusting investment return variables, it’s helpful to paint different income scenarios staring clients a decade or two down the line.

But even with different income illustrations, “they are usually done in a healthy environment where the market will go up by 6 percent every year, but we know that won't happen,” so it’s critical that advisors stress test portfolios, said Barsch.

Certainly, the more saved in a retirement plan today, the more the investor will be rewarded tomorrow.

But from an illustration standpoint, saving 3 percent or 8 percent or 16 percent annually in a 401(k) plan doesn’t shed any light on what a retirement investor is likely to receive at 62 when investors are eligible for Social Security.

The point is that income illustration ranges are particularly effective because they paint a picture of the choices clients will one day need to live within and illustrations shed light on how advisors can structure retirement income plans that hold together, Barsch said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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