The Future of Retirement - Presentation Transcript

1. The Future of Retirement Houston Forum January 27, 2009 by Steve Vernon, FSA President, Rest-of-Life Communications

2. The Future of Retirement… is Work!

3.  Agenda • Review current state of retirement adequacy • What individuals should do • What employers and plan sponsors should do

4. Overview • 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

5. Current State Social Security and Medicare Funding in Jeopardy Present value of Social Security deficit (OASDI only): $6,500,000,000,000 Over $20,000 per citizen Benefit cutbacks and tax increases are inevitable

6. Current State Only Half of Working Americans Covered by Retirement Plan at Work 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

7. Current State Existing Assets May Be Inadequate 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.

8. Current State Existing 401(k) Balances May Be Inadequate Tenure in Years Age Group 2-5 5 - 10 10 - 20 20 - 30 30+ $54,491 $99,794 $174,272 $167,806 $32,532 50s $31,914 $51,268 $93,636 $157,069 $190,593 60s Source: Average 401(k) balances for 20 million 401(k) participants, 12/312006. EBRI Issue Brief #308

9. Current State Defined Benefit Plan Participation Has Fallen Dramatically in Private Sector % of workforce participation by plan type 90 80 70 60 50 DB 40 DC 30 20 10 0 1980 1992 2004 Source: Center for Retirement Research at Boston College

10 . Retiree Medical Coverage Drops in Private Sector % Employers offering coverage 70 60 50 40 30 20 10 0 1988 1993 1998 2000 2002 2004 2006 Source: The Kaiser Family Foundation, 2006 Employer Health Benefits

11. Many Americans Lack Necessary Financial 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

12. 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

13. Amount Respondents Say Needed for Comfortable Retirement Don’t know 12% Under $250,000 25% $250,000 - $499,999 16% $500,000 - $999,999 23% $1 million or more 18% source: EBRI 2008 Retirement Confidence Survey

14. Methods for Determining Savings Needed for Retirement 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% source: EBRI 2008 Retirement Confidence Survey

15. 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

16. Inevitable Conclusions More older people working longer than planned Is this a bad thing?

17. Life Expectancy at Age 65 20 18 16 14 12 Men 10 Women 8 6 4 2 0 1940 1983 2007 Source: Society of Actuaries

18. Workforce Participation Men Age 65+ 50 45 40 35 30 25 20 15 10 5 0 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 Source: Bureau of Labor Statistics

19. Workers have lower death rates than retirees! Death rates for males

20. What Should Individuals Do?

21. Top 10 Retirement Mistakes • Not creating a realistic plan. – Half of older workers have not calculated what they need for retirement or budgeted for retirement expenses. • 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. • Starting pension benefits too early. – Most workers retire before maximizing their retirement income (usually the Normal Retirement Date).

22. Top 10 Retirement Mistakes • Starting Social Security benefits too early. – Half of Americans start at age 62, the earliest possible age with the lowest amount of monthly income. • Drawing down 401(k)/retirement savings too rapidly. – 4% to 5% per year considered safe withdrawal percentage. – Many withdraw at much higher rates. • Uninformed/poor selection of financial advisors and/or products.

23. Top 10 Retirement Mistakes • Tapping home equity too early through home equity loans or reverse mortgages. • Continuing unhealthy lifestyle which increases chances of expensive, debilitating conditions. • Not having a strategies in place for medical and long-term care expenses. • Living expenditures that are unnecessary, unrealistic or unaffordable, given all the above mistakes.

24. Top 10 Retirement Mistakes Plus One! Not having a good idea of what you want to do in your retirement years

25. Top 10 Retirement Risks • Living too long and running out of money • Recession/deflation reducing value of retirement savings • Inflation eroding value of fixed pensions and fixed investments • Dropping Interest rates resulting in reduced income • Poor health • Potentially ruinous bills for long-term care expenses • Drop in needed wage income during retirement years • Bad advice, fraud or theft • Death of a spouse • Loneliness, boredom, lack of purpose Addressing these risks helps prevent the most common mistakes shown previously.

26. 10 Steps to Recession-Proof Your Retirement Years • Take care of your health • Protect against the risk of catastrophic conditions • Consider working as long as you can • Maximize Social Security income by delaying benefits as long as possible • Maximize pension income by delaying benefits as long as possible • Be prudent when withdrawing retirement savings • Use simple, effective investment strategies • Adjust living expenses to match your retirement income • Develop a robust social portfolio • 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.

27. Simple solutions for closing 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

28. Simple solutions for closing 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

29. One example: can I retire at 62? married couple, same age, spouse doesn’t work current earnings $75,000/year no 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

30. One example: can I retire at 65? married couple, same age, spouse doesn’t work current earnings $75,000/year no pension expenses = $60,000 per year (80% replacement) social security = $32,400/year (at age 65) gap = $27,600/year safest: $910,800 (33 times gap) conservative: $690,000 (25 times gap) more aggressive: $552,000 (20 times gap) note: may need more savings for inflation and emergencies

31. One example: can I retire at 70? married couple, same age, spouse doesn’t work current earnings $75,000/year no pension expenses = $60,000 per year (80% replacement) social security = $46,560/year (at age 70) gap = $13,440/year safest: $443,520 (33 times gap) conservative: $336,000 (25 times gap) more aggressive: $268,800 (20 times gap) note: may need more savings for inflation and emergencies

32. Another example: can I retire at 62? married couple, same age, spouse doesn’t work current earnings $75,000/year 15 years pension service expenses = $60,000 per year (80% replacement) social security = $25,080/year (at age 62) pension = $9,000/year note: not reduced for joint & survivor annuity gap = $25,920/year safest: $855,360 (33 times gap) conservative: $648,000 (25 times gap) more aggressive: $518,400 (20 times gap) note: may need more savings for inflation and emergencies

33. Another example: can I retire at 65? married couple, same age, spouse doesn’t work current earnings $75,000/year 18 years pension service expenses = $60,000 per year (80% replacement) social security = $32,400/year (at age 65) pension = $13,500/year note: not reduced for joint & survivor annuity gap = $14,100/year safest: $465,300 (33 times gap) conservative: $352,500 (25 times gap) more aggressive: $282,000 (20 times gap) note: may need more savings for inflation and emergencies

34. Another example: can I retire at 70? married couple, same age, spouse doesn’t work current earnings $75,000/year 23 years pension service expenses = $60,000 per year (80% replacement) social security = $46,560/year (at age 70) pension = $17,250/year note: not reduced for joint & survivor annuity surplus = $3,810/year

35. Tough Choices for Individuals 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

36. New Life Goals? If traditional retirement isn’t feasible, how about: Long life, Health, and Prosperity… …which may include some work and fine tuning living expenses

37. 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

38. What Can Employers and Plan Sponsors Do? • 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?

39. What Can Employers and Plan Sponsors Do? 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

40. 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?

41. Will these be your employees and plan participants in 10 years?

42. Tough Questions Facing Employers and Plan Sponsors • 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?

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