Equipping the Retirement Advisor

Providing Income to Retiring Boomers

Boomers face major challenges with retirement. The pensions that sustained their parents are fast disappearing or uncertain. Health care costs are rising and will continue to rise. The challenge for advisors is: What products or services should they recommend that will enable Boomers to meet their income needs during retirement.
As one of the largest cohorts to ever grace the globe, Boomers are wildly diverse. This guarantees that no one product or service will be right for every Boomer. To facilitate understand some of the larger differences, in the 2006 RIIA report The Topology of Retirement, we divided households into four segments and looked at some key characteristics of each.

These segments are:
Retired – Age 65+ living on a fixed income, enjoying retirement pursuits (travel, hobbies, grandchildren), and managing resources.

Pre-retired – Age 50-65 retirement is a looming concern.

Builders – Age 35-50 focus on family, career, and other opportunities.

Starters – Under Age 35, just starting, retirement is not a concern.
Each of these life stages have different financial priorities that translate into different approaches to retirement. Each use different products, accept different levels of risk or loss aversion, and have different views of what is retirement.
In addition to life stages we must consider household resources, so each life stage segment is divided into four ‘markets’ based on assets. Those in the wealthiest segment are likely to retire, those in the poorest segment will not. For households in-between, we divided them into those who, with reasonable guidance and assistance, should be able to have some form of retirement from those that even with significant help, may have difficulty retiring. These four levels of wealth roughly correspond to how many financial institutions divide the retail market. They are:
Wealthy – Households in the top 5% for their life stage cohort.       Affluent – Households in the next highest 15% for their life stage cohort.       Mass Market – Households in the next 50% for their life stage cohort.       Marginal – Households in the bottom 30% for their life stage cohort.
Based on data from the 2010-11 SBI MacroMonitor, the size of these life stage and market segments is displayed in the figure below. The bulk of the Boomers are pre-retired.

The figure below shows the average total financial assets held by each life stage in each market. Clearly the Wealthy Pre-retired are the best prepared for retirement of any of the typology’s segments. The Wealthy Retired, Wealthy Builders, Affluent Retired and Affluent Pre-Retired have the next highest average amounts of financial assets. However, from a total market perspective, this is not a rosy picture.


Note that in the (green segments) pre-retired Mass Market and Marginal households are totally unprepared for retirement. When we consider the fact that Marginal and Mass Market households combined represent 80% of pre-retired households, that means that only 20% of pre-retired household have anywhere close to the amount of assets to support retirement income.
Even the Affluent and Wealthy Pre-retired households’ prospects are not entirely bright. Affluent and Wealthy pre-retired households average $600,000 and $1.9 million in asset respectively, to generate retirement income. However given the current typical rate of return, even that level of assets is insufficient to generate a level of income anywhere close to the incomes that they earn during their working years. The figure below shows household income from all sources for the segments.

Even the Affluent and Wealthy Pre-retired households’ prospects are not entirely bright. Affluent and Wealthy pre-retired households average $600,000 and $1.9 million in asset respectively, to generate retirement income. However given the current typical rate of return, even that level of assets is insufficient to generate a level of income anywhere close to the incomes that they earn during their working years. The figure below shows household income from all sources for the segments.

Note that 2010 annual household income for the Affluent and Wealthy pre-retired  averaged $140,000 and $196,000, respectively. If these households withdraw an amount equal to 4% of their assets as income in their retirement years, their retirement investment income as compared to their pre-retired income will be as follows:

Age-Wealth Segment            Pre-Retired Income            Estimated Retirement Investment Income            Estimated retirement investment income as                                                                                                                                                                                                   a % of Pre-Retired Income

Affluent Pre-Retired               $140,000                            $24,000                                                                17%

Wealthy Pre-Retired               $196,000                            $76,000                                                                39%

With Affluent and Wealthy Pre-retired households only receiving 17% and 39% their pre-retired income from their assets, even many of these households will be looking for additional sources of income.

Pre-Retired households still have a number of years to save, so those lacking assets now can save, continue to work, and alter how they plan to live in retirement (including continuing to work). The key for these households is to rely on the help of their trained, knowledgeable advisors. Consider the following seven strategies.

Strategies for Advisors:

1) Segment your customer base

Only 20% of pre-retired households have the assets to provide meaningful retirement income. Even within that fortunate 20% of households, many clients will need additional sources of income. How many of your households are within the 20% of households? How many in the 5%? Devise strategies for each and try to rebalance your practice to include more affluent and wealthy households.

2) Expand your view to the whole household

In most pre-retired households today, there is more than one person. The retirement of one income provider transforms that character of that household but may not introduce all the freedoms and obligations of retired life across the entire economic unit. For example, means tested benefits under Medicare look at the modified adjusted gross income of both spouses when calculating the monthly Medicare premium for either spouse. Advisors need to look at the entire household as one unit. Impress on the client that the issues you are discussing, the analysis that you are running, the recommendations that you are making are their spouse’s business as well. Further the spouse’s goals, needs, assets, income and obligations should be included in the analysis.

3) Be an “Income Detective”

For most households, every income source is important. If investments only provide 30% of income, 70% of their income needs to come from other sources. Social Security helps but you will need to search further. Check the resume and ask about each job. Was the client on a job long enough to vest in a pension? Six or seven years on a job may only give them a $300 per month pension per job. Doing your homework may add more monthly income.

4) Match product and services to segments

Just like no two households retire in exactly the same way, no one product or service is right for every household. Even within life-stages, households have different objectives, timings, and approaches to retirement. Each is comfortable with different amounts of risk, loss, complexity, and view retirement with a different level of priority. The key is to talk to your clients and listen to what they say. Read between the lines. Match your professional expertise and knowledge to products that your client needs- thinking about the entire household and the duration of their retirement. Over time, your clients needs will keep emerging- succession planning, medical expense management, etc.- anticipate the needs, design suitable products to meet them, and adjust your practice accordingly.

5) Identify Segments that are Profitable for You

You may discover that you have developed a niche offering that is effective and important to a group of your customers. Their willingness to pay you to perform this professional service suggests a capability you could leverage beyond your base. For example, you may work with a valuation vendor and have developed an expertise in helping business owners value and sell their businesses. If Boomer business owners are a profitable segment for you, go with it, build it and make it a part of your brand. Leverage this niche to gain more customers with the same needs and leverage these customers by filling other key needs, specifically their retirement income. The Retirement Income Industry Association (RIIA) offers a Retirement Management Analyst designation (RMA) that provides advanced training, credentials, credibility and branding in the retirement income market. Programs like this give you cutting edge expertise that helps establish a new offering in the retirement market.

6) Disengage from Unprofitable Clients or Those Who Just Dont Get It

Some clients will never be profitable, because of insufficient assets or reticence to pay for the level of service to meet their needs. Clients with tremendous needs do not always require extensive planning, whereas others with minimal needs may demand constant hand-holding.  Consider your core group of clients as those that will work with you. Your time is better spent building these relationships that fit and move your practice forward, spin off additional revenue opportunities, and enhance your brand through word-of-mouth referrals for the more profitable services that you provide.

7) Integrate Clients’ Human and Social Capital

As RIIA’s RMA teaches, the majority of households solve their retirement income riddle by integrating their human, social and financial capital. In other words, they find a way to make it work together. Advisors who recognize the multidimensionality of clients’ needs and provide solutions that go beyond the financial capital to take advantage of the client’s human and social capital will soon find clients flocking to their door. The only way many Boomers will be able to engage in a dignified retirement is by taking advantage of all three types of capital. The advisors that enable these Boomers to accomplish this will find plenty of clients, profits, and satisfaction from helping people who otherwise might not have been able to retire.

Elvin Turner, JD, MBA is the President of Turner Consulting, LLC and Director of Research for the Retirement Income Industry Association (www.riia-usa.org). He can be reached at Turnerconsult@sbcglobal.net.

Larry Cohen is the Director of Consumer Financial Decisions, and he can be contacted through lcohen@sbi-i.com.

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