In Practice January 13, 2009

Need for Help in Retirement Income Planning Grows

New reports from the Vanguard Center for Retirement Research indicate American workers increasingly need help to generate a sustainable income stream in retirement and a variety of solutions exist.
Reported by

In its first report, “Spending the nest egg: Retirement income decisions among older investors,” Vanguard said its survey of older American investors (ages 55 to 75) revealed half of retired households tapped into their retirement accounts in the past year, typically as a large, one-time withdrawal. Only two-in-10 retirees are generating systematic payments from long-term accounts.

Vanguard found spenders use a variety of strategies to guide their withdrawal decisions from long-term accounts—from basing withdrawals on living expenses (37% of spenders), to using a regular dollar amount (21%), spending investment income (16%), or using other rules of thumb. Other spenders have no formal approach (21%) or use gut feelings (10%). Less than one in 10 appear to have a formal spending rule in place, and only 44% had a regular approach to reviewing their spending strategy, according to the report.

Vanguard’s research also revealed a level of complexity to the typical older-American investor household’s financial picture and goals for retirement income. The typical household owns six distinct accounts, and one-fifth hold 10 or more accounts. In addition to transaction accounts, one-third of older households held three different types of long-term accounts (IRAs, employer plans, and personal accounts), and 39% held two types, the report said.

Additionally, 94% of respondents own a home, 48% are receiving a traditional pension, and another 28% expect to receive one in the future. About half of fully retired households carry mortgage debt, and half carry credit card debt.

Vanguard said most survey respondents reported they seek to have both a guaranteed monthly income and protection of assets, while also maintaining investment control, keeping up with inflation, and having access to savings for unexpected expenses.

According to the report, the findings suggest that many investors would prefer a mix of retirement income solutions, not a single approach, and need help balancing competing goals.
In its second report, “The Retirement Income Landscape,” the Vanguard Center for Retirement Research points out that the challenge retirees face in developing a retirement income solution is not a lack of products or strategies, but how to develop a plan from both newer and traditional income options. Vanguard suggests such a plan would integrate nonguaranteed and guaranteed elements and be tailored to an individual’s preferences for return, risk, and cost.

According to the report, investors in the spend-down phase need to weigh competing objectives for their assets (regular income, spending flexibility, survivor needs, and bequests), while considering a range of risks, including longevity risk. Meanwhile, they must seek to minimize investment costs, the costs of guarantees, and the impact of taxes.

Vanguard points out that the conventional strategy for generating income from a portfolio is a systematic withdrawal plan (SWP) based on some spending rule, applied to the value of the portfolio over time. The main risk of an SWP is longevity risk—either spending too quickly and depleting savings, or spending too meagerly and leaving too much to one’s heirs.

The report says immediate income annuities eliminate market and longevity risks in retirement. However, they remain unpopular with investors for several reasons, including that the contracts are illiquid and irreversible. Vanguard suggests a new generation of living benefit annuities offers a guaranteed income, the potential for future growth, and access to underlying capital at fair market value. However, costs can be high.

Other guaranteed strategies, such as longevity insurance and reverse mortgages, remain underdeveloped, Vanguard contends.

Weighing the pros and cons of products and strategies is what presents the challenge for investors and advisers to craft a retirement income plan that integrates traditional offerings with the newer ones.

“Spending the nest egg: Retirement income decisions among older investors” can be downloaded here.

“The Retirement Income Landscape” can be downloaded here.

Deals & People January 13, 2009

Morgan Stanley Smith Barney is Born

Morgan Stanley agreed Tuesday to a joint venture with Citigroup, forming the largest brokerage in the world with 20,000 financial advisers and $1.7 trillion in client assets.
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Under the terms of the agreement, Citi will exchange 100% of its Smith Barney, Smith Barney Australia, and Quilter units for a 49% stake in the joint venture and an upfront cash payment of $2.7 billion. Morgan Stanley will exchange 100% of its Global Wealth Management business for a 51% stake in the joint venture. After year three, Morgan Stanley and Citi will have various purchase and sale rights for the joint venture, but Citi will continue to own a significant stake in the joint venture at least through year five, the companies said in a press release.

The combined brokerage will outdo the number of brokers joined in the recent merge of Merrill Lynch & Co. and Bank of America (see “Bank of America Buys Merrill Lynch’ and “Merrill Lynch Stockholders Approve BoA Deal’).

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Reports of talks about a possible joint venture between the two brokerages first began Friday (see “Smith Barney and Morgan Stanley May Merge Brokerage Units“).

Management Team

Morgan Stanley Smith Barney will operate as one fully integrated organization, with a management team drawn from both companies, the statement said.

  • Morgan Stanley Co-President James Gorman will serve as chairman of the new company and will continue to serve as Co-President of Morgan Stanley.
  • Charles Johnston, most recently President of Citi’s Global Wealth Management business in the U.S. and Canada, will serve as President.

Additional senior management will be drawn from the ranks of both companies and the new venture will be governed by a newly formed Board of Directors composed of representatives from both companies.

Some brokers will likely remain at Citi, but it remains unclear which brokers and how the retirement unit will be affected, Dow Jones reported. Recently, Citi and Smith Barney combined their various retirement units headed into one group. In an interview with PLANADVISER.com in December, the group’s Managing Director Anne Greenwood discussed that future changes and initiatives were to come in the retirement group. She also mentioned that every adviser at Smith Barney does have at least one retirement plan as part of his or her business (see “Smith Barney Reorganizes Retirement Group’).

In September, Sallie Krawcheck exited her post as the head of Citigroup’s wealth-management unit, and reports alluded to changes in the institutional clients group (see “Report: Krawcheck to Exit Citi’). In November, Chief Executive Vikram Pandit assured brokers that Citigroup had no intention of selling Smith Barney as the company went into financial crisis mode with stocks plunging 66% in one week, Dow Jones reported.

Citigroup Shakeup

The Smith Barney sale represents part of major shifts at struggling Citigroup in an effort to boost capital. The bank is preparing to unveil a major reorganization that will further dismantle its financial conglomerate, the Wall Street Journal reported. The bank intends to slice about a third of the assets from its balance sheet, which is currently about $2 trillion in size. An announcement is expected when Citigroup reports fourth-quarter results January 22, the report said.

Citigroup was in the news frequently during 2008: In May, Citigroup Inc. and State Street Corporation sold their joint recordkeeping venture of CitiStreet to ING (see “CitiStreet Sold to ING for $900 Million’). In October, Citigroup was in talks to acquire Wachovia, but was left at the altar when Wells Fargo swooped in (see “Wachovia Leaves Citigroup at the Altar’).

Smith Barney

Smith Barney services about $1.3 trillion in client assets, according to information on its Web sites. The firm was founded in the 19th century by the merger of Charles D. Barney & Co. and Edward B. Smith & Co. Fast forwarding to 1993, Smith Barney became a wholly owned subsidiary of Traveler’s Group, which merged with Citicorp in 1998 to become Citigroup Inc.

It’s yet to be seen what the future will bring for brokers at Smith Barney. Bank of America’s retention package after requiring Merrill Lynch pleased some brokers but was met with some criticism for its lack of rewarding lower producers by others (see “BoA, Merrill Retention Package Rewards Top Producers’). The trend to slice compensation for lower produces was evident in both Merrill and Smith Barney broker compensation plans unveiled at the beginning of this year (see “Merrill, Smith Barney Change Broker Compensation’).

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