As more and more Baby Boomers head for the retirement ranks, it might be useful for benefits brokers and plan sponsors to think about what kind of financial security these new retirees are feeling. HR directors tend to measure success by numbers—plan balances, rates of participation, trends in contributions. Maybe if they sent surveys to former employees six months after they retire, it would provide insights that would help improve the communication process with current employees.

To try to understand how effectively retirement plans in general are equipping employees for their lives beyond work, we attended the 10th annual meeting of the Retirement Income Industry Association (RIIA) in September. The meeting agenda is directed primarily at financial planners whose clients have retired and turned over management of their 401(k)s and other assets to the planners.

Once people retire, “They just want to know they’ll be all right,” said one conference speaker, which sounds pretty obvious until you ponder that it expresses a kind of earnestness that is missing from the communication that takes place between
employees and their plan retirement representatives before retirement.

Pre-retirement, the communication the employee receives from plan representatives (often via email or a website), is likely to be highly clinical, strong on financial detail, but silent on addressing the big life questions the employee will face post-retirement. Maybe that’s okay with most employees, who probably have enough anxiety about retirement anyway without trying to confront too many “rest of life” questions while they are still working.

But once they cross the threshold of retirement, they become acutely aware of their need for a more realistic consideration of their future. At that time many of them seek out financial planners and engage in some soul searching discussions involving their personal hopes, dreams and fears—about money, health, recreation, legacies and self-worth. For many married couples, it may be the first time they’ve had a discussion with a professional manager about coordination of assets that each of them accumulated in retirement plans. The experience can be emotional, educational or therapeutic; but above all, it is focused.

Could more of this type of personal retirement planning be integrated into benefits counseling in the workplace—perhaps as part of an employee assistance program?

The RIIA devoted a large part of its meeting to addressing the life-events planning that retirees must consider as a foundation for their financial planning. Some topics are not lighthearted. Sandra Timmermann, adjunct professor of gerontology at The American College of Financial Services and the former executive director of MetLife’s Mature Market Institute, quoted a study indicating that half of all people who reach age 85 will have some form of dementia.

“Think ahead to these years, and have a plan in place,” she urged.

Other speakers at the meeting suggested varying strategies to address those later year concerns. Chris Coudret, vice president and chief distribution officer of OneAmerica Care Solutions, whose company offers asset-based long-term care, said, “Taking the long-term care risk off the table” is a good place to start. Retirees then “can spend more freely because that risk has been anticipated.”

Coudret quoted figures from the U.S. Department of Health and Human Services indicating that 70% of individuals over age 65 will require long-term care services during their life. For married couples, 99.5% will need long-term care for at least one spouse.

Tamara Ann Burden, principal and managing director, pensions and endowments at Milliman Financial Risk Management, LLC, said another way to mitigate the risks of the later retirement years is to purchase an annuity that begins paying at age 80. “A 65-year-old with assets of $1 million could put 20% into such an annuity, and manage the remaining $800,000 for 15 years before the annuity kicks in. Having the annuity funds starting at age 80 would mitigate equity risk and longevity risk; outside the annuity, the equity portion of the funds would offer protection against inflation.”

In fact, the argument for introducing annuities into a retiree’s portfolio to reduce longevity risk was a recurring theme at the RIIA conference. Owning guaranteed income products has the further benefit of reducing the retiree’s anxiety, according to Burden. “Once you take away their fear, their money management behavior improves.”

Srinivas Reddy, senior vice president and head of full service investments for Prudential Retirement, agreed. “If you have a certainty built into your retirement plan, you do the right thing at the right time,” said Reddy. “We’ve studied data from our 5 million clients, and during the financial crisis starting in 2008 we saw that those who had a safety net behaved differently. They did the right thing, stayed the course.”

Burden cautioned against a retirement income strategy tied to simple diversification, such as a 60-40 mix of stocks and bonds. “A static allocation doesn’t create a static risk,” she said. “Diversification fails during a crisis period, such as 2008, when all asset classes decline together. And looking at data going back to 1928, there is evidence of damage to returns from market volatility during non-crisis periods as well.”

Once a retiree begins taking withdrawals and a down market occurs, the account suffers, “even if the market recovers and goes on to new highs,” she noted, because the withdrawals are never recovered. “The effect on returns is much different during the accumulation stage (working years) than the withdrawal stage.” Consequently, Milliman uses an investment strategy that mitigates market volatility.

Other speakers at the RIIA meeting focused on the personal side of working with retired clients. One challenge of doing financial planning for retirees, quipped Robert Powell, editor of The Retirement Management Journal, is that “as we age, our cognitive ability goes down but our confidence goes up.”

Whatever communication challenges may exist between retirement income advisors and their clients, there are spending issues to consider that have a direct impact on the retirement portfolio. Health care and housing are two of the biggest.

Ron Mastrogiovanni, president of HealthView Services, Inc., a Massachusetts–based provider of health care cost data, suggested that “unless you’re licensed for health insurance, you shouldn’t have to give advice on health.” Nevertheless, he said advisors should have a basic understanding of the provisions of Medicare and the various supplements.

One tip advisors can provide newly retired clients, Mastrogiovanni stated, is to look into a possible reclassification of their income for the purpose of determining their Medicare Part B premium. If the premium is being determined by the retiree’s income while working, it may be considerably higher than it is in retirement, resulting in an unnecessary surcharge to the Part B premium. “They can get rid of the surcharge by showing their true income in retirement.”

Mastrogiovanni also suggested that advisors should be prepared to provide advice to retirees on housing, such as data on living costs in various areas. “People will aggregate their assets in the place where they can get advice on practical monthly expense issues,” he stressed.

Other speakers listed further sources of help for retirees outside of the money management realm. Just as some employee benefits plans with wellness services can include referrals related to elder parent caregiving, retirement advisors can refer clients to counselors specializing in senior care. Marcia Mantell, president of Mantell Retirement Consulting, pointed out that a fee-based geriatric case manager can help clients sort through the sometimes confusing options.

Srinivas Reddy of Prudential provided one piece of parting wisdom from the RIIA meeting that applies as much to benefits plan managers as it does to post-retirement advisors. He acknowledged that the biggest problem facing the retirement system is that “people don’t save enough.” Even with lots of “non-compliant patients,” entering the retirement ranks, he said he’s optimistic because of what he called the “human resilience” of so many retirees.

“How individuals relate to retirement is changing,” he added. “Many of them are embarking on second careers. We can’t guarantee everything, but we can help them succeed.”

The author
Thomas A. McCoy, CLU, retired in 2013 as editor-in-chief of Rough Notes magazine.