The Markets September 20, 2012

Better Decisions Generate More Retirement Income

New research from Morningstar quantifies how much additional retirement income, or “gamma,” investors can generate by making better financial planning decisions. 
Reported by

 

Through a series of simulations, the researchers found that a hypothetical retiree may generate approximately 29% more income using a gamma-efficient retirement income strategy, which is equivalent to an annual arithmetic return increase of 1.82%, compared with the average base case strategy.   

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

The research focused on five fundamental financial planning decisions or techniques for retirees—optimal asset allocation based on total wealth; dynamic withdrawal strategy; product allocation (i.e., guaranteed income products versus traditional investment products); tax-efficient allocation and drawdown; and liability-driven investing. The researchers created a series of portfolios and drawdown strategies that employ these techniques as well as a base case scenario drawn from the practices of average U.S. investors.  

Among the five types of gamma tested, the researchers determined that using a dynamic withdrawal strategy was most important, followed by making tax-efficient allocation decisions.  

Morningstar said the results from these simulations, while hypothetical in nature and not actual investment results or guarantees of future results, provide an important look at strategies designed to help retirees reach their goals. Morningstar Associates has implemented these financial planning techniques in Morningstar Retirement Manager, the company’s defined contribution advice and managed account service.  

“Investors arguably put a lot of time and effort into selecting investment funds or managers they hope will outperform the market—the so-called alpha decision,” said David Blanchett, head of retirement research for the Morningstar Investment Management division. “Unlike traditional alpha, which can be hard to predict, any investor can achieve gamma by following an efficient financial planning strategy.”  

To read the complete research paper, visit http://global.morningstar.com/Gamma.

 

Data & Research September 20, 2012

Hartford-New Haven Most Retirement-Ready Metro

The number of U.S. consumers making financial preparations for retirement fell to 70%, the lowest in three years, according to a retirement readiness index by Ameriprise Financial.

Reported by

The New Retirement Mindscape 2012 City Pulse index examines the 30 largest U.S. metropolitan areas to determine where consumers are the most prepared for and confident about retirement, and tracks national and local retirement trends over time. Hartford-New Haven, Connecticut, (No. 1), San Diego (No. 2) and Minneapolis-St. Paul (No. 3) claimed the top three spots on the third annual index while Washington, D.C., (No. 30), Charlotte, North Carolina, (No. 29) and Indianapolis (No. 28) ranked lowest.  

Several things set apart the top-ranked metros. Residents of Hartford-New Haven, San Diego and Minneapolis-St. Paul are significantly more likely to say they are making financial preparations, including setting aside money for retirement, determining how much they need to save and consulting with a financial adviser. Perhaps as a result, they are also much more likely to feel on track and financially prepared for retirement.   

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

In top-ranked Hartford-New Haven, three-quarters (75%) of residents say they have set aside money for retirement, compared with 63% of people nationwide. Nearly half (49%) report feeling on track for retirement—the most of any metro—and a sentiment expressed by significantly fewer consumers across the U.S. (37%).   

However, despite the efforts they have made from a financial standpoint, residents of these areas are only on par with the rest of the nation with regard to planning for the activities they would like to pursue during retirement—a fact that may leave them less prepared than they actually feel. In fact, in third-ranked Minneapolis-St. Paul, where residents report the highest levels of financial preparation, only 18% say they have given a lot of thought to where they might live in retirement and how they plan to rest and relax.

While the story is not as positive for the bottom-ranked metros, it may not be as grim as it initially seems. Indianapolis and Washington, D.C., are on par with the national average in financial preparation, while Charlotte scores just slightly below. However, residents of these metros report a significant lack of confidence in their ability to reach their retirement goals.

 

(Cont...)

Issues that may affect millions of retirement plans are expected to be heavily debated during the upcoming election. The Ameriprise survey found a majority of consumers say candidates' positions on health care (60%), Social Security (55%), taxes (53%) and Medicare (52%) are very likely to influence their vote—while 41% note unemployment. Similarly, more than one-quarter cite changes to Social Security (29%) and health care costs (26%) as the issues most likely to jeopardize their retirement plans.   

Retirement status appears to influence how strongly people feel about these issues. While candidates’ positions on health care are frequently cited as a deciding factor for both retired and non-retired Americans, significantly more retirees say this topic is very likely to influence their vote (71% versus 55%).   

Americans’ focus on health care may be for a very poignant reason as health concerns appear to force many people into an early retirement. Among retirees who left the work force earlier than expected, 46% say they did so because of a health issue, followed by a job setback (31%) or because they were financially capable (11%). 

Whether because of the economy, uncertainty over the upcoming election or other reasons, peoples’ views on the traditional retirement age also appear to be changing. While the vast majority of retirees (83%) say they were under age 65 the day they left the work force, many Americans expect to work much longer. Only 20% of workers say they plan to retire before age 65 and more than one-quarter (26%) say they plan to remain in the work force as long as they're able.   

More information and the complete rankings are available at http://newsroom.ameriprise.com/research+studies/retirementmindscape2012.htm.

 

«