A household survey by the Federal Reserve Board of Governors found that nearly one-third of working Americans have zero money saved for retirement.
These and countless other consumer surveys in the last few years paint a fairly bleak picture when it comes to the public’s general knowledge of how to maintain their lifestyle after they stop working. The bulk of soon-to-be retirees are concerned about how to maintain their standard of living and actively fear being unable to do so. Yet at the same time, they remain woefully in the dark about the retirement tools available to them.
To cite yet another worrisome statistic, Vanguard’s 2014 How America Saves report indicates that working Americans have a mean average balance in their 401(k) accounts of $101,650. That doesn’t sound like such a bad number at first. If this hypothetical American retires today, however, they would have to live quite frugally: According to the commonly-used 4 percent annual withdrawal rate during retirement, that would give them just over $4,000 per year. Even factoring in Social Security and assuming an equal amount from other sources of income, that doesn’t leave much to pay for anything beyond basic necessities.
The picture gets bleaker when looking at the median average, rather than the mean, which is inflated by high-earning outliers. The median average balance is just over $31,000. Suddenly that modest 4 percent withdrawal has become downright meager. The situation isn’t improved much by focusing on retirees 65 and older, which brings the median up to about $73,000.
As a general rule, then, many Americans aren’t going to have a lot of money to work with in retirement. With life expectancies increasing dramatically in recent years, this means that what assets they do have likely will need to last for 25 years or possibly longer. Assuming that the goal is to avoid re-entering the workforce, there is a huge need for tools that can ensure financial security in the very long term. In addition, consumers need to be educated about those tools.
This need not be confined to touting a specific product, or even category of products. When working in the financial sector, it’s easy to forget that common industry knowledge – even something as simple as the aforementioned 4 percent withdrawal rule – is common knowledge to everyone. In truth, the end consumer receives so little information on how to manage their assets and prepare for their golden years effectively that even a fundamental understanding of basic money concepts would bring most of them far above average.
A great first step is to help your clients create a written synopsis of their financial objectives. A majority of the workforce lacks any written objectives for their financial future and “wings it,” for lack of a better term. A vast number of variables can bring about a dramatic change in an individual’s financial situation. This often leads to disappointment or disaster when it comes time to retire. Assisting clients with this relatively simple step can go a long way toward both ensuring that they are being served in ways other than simply managing their assets, as well as building trust in the relationship.
Advising clients on something as basic as the proper way to handle an employer-sponsored 401(k) is another step that may seem overly simplistic to the seasoned advisor. But it can substantially raise a client’s understanding of their financial picture and improve the odds of a comfortable retirement. One of the reasons for the low 401(k) balances mentioned earlier is that many employees either fail to contribute, or do not take full advantage of their employer’s match. Outlining the tremendous impact of this missed opportunity is another cornerstone of a solid knowledge of long-term planning.
Perhaps the subject that could help today’s beleaguered retirees most would be a basic understanding of the function and purpose of annuities. An oft-misunderstood and much-maligned tool, advisors and consumers alike often recoil at their very mention. Realistically, however, annuities stand out in this situation because of the one thing they do better than anything else – guaranteeing payments that cannot be outlived.
With a small amount of assets available, the possibility of needing to scale back one’s lifestyle may be unavoidable, depending upon the individual’s circumstances. There is only so much that can be done about a failure to save over the course of a lifetime. One problem that can be mitigated today, however, is the danger that funds will run out and there won’t be a guaranteed check in the mail – something that 84 percent of Americans are concerned about, according to a study by TIAA-CREF.
The same study found that only 14 percent had purchased an annuity. This is puzzling, as annuities do exactly what those respondents said they wanted to do: guarantee that money will always be coming in.
One reason for this is likely the way that annuities are marketed. Both fixed and variable products have long been pushed on consumers on the strength of flashy features like bonuses and guaranteed rollup accounts. While these features are not necessarily a bad thing in and of themselves, they are easy to misrepresent or misinterpret. This has led to annuities in general receiving a poor reputation, frequently being dismissed as a “scam” or a product that is “sold, not bought” among the advisory community.
A basic immediate annuity, on the other hand, does nothing more than exchange a lump sum of cash for a guaranteed stream of payments for life. Making clients aware that this simple guard against spending away all of their assets is available is the first step in bringing an underused financial instrument more into the mainstream. In turn, this can help to secure a future for those concerned that they may not have one.
At the next client meeting, consider having a short but informative “boot camp” on these and other elementary concepts. You can boost your clients’ chances of meeting their goals while strengthening the relationship and contributing to an overall greater public knowledge of retirement.
