Data & Research June 13, 2014

Going Broke in Year One A Real Possibility, EBRI Says

New modeling from the Employee Benefit Research Institute (EBRI) confirms a straightforward truth—workers in the lowest income brackets are least likely to achieve lifetime retirement income adequacy.
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A new EBRI report, “Short Falls: Who’s Most Likely to Come up Short in Retirement, and When?,” suggests many low-income workers could face income hardships starting in the very first year of retirement. But EBRI also finds that workers in all income brackets—including the highest—may run short on income at some point during their retirement if aggressive steps are not taken to secure lifetime income streams.

EBRI researchers find just 5% or less of those in the second, third and highest income quartiles are likely to run short of money in the first year of retirement, but the figure jumps to 43% for the lowest income quartile. By the 10th year in retirement (assuming retirement at age 65), nearly three in four (72%) retirees in the lowest income quartile households are likely to face income shortfalls under current savings and investing trends.

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By comparison, fewer than one in five of those in the second income quartile are likely to run short of money in the first 10 years of retirement, EBRI says. Seven percent of those in the third income quartile and just 2% of those in the highest quartile are simulated to run short of money within a decade of the retirement date. When nursing home and home health-care expenses are factored in, the number of households in the lowest income quartile projected to run short of money within 20 years of retirement is considerably larger than those in the other three quartiles combined, EBRI says.

“As the results across multiple scenarios and assumptions show, those in the lowest income group are the most vulnerable,” explains Jack VanDerhei, EBRI research director and author of the report. “They are by far the most likely to run short of money in retirement, and to do so fairly quickly.”

Extending the results to a maximum of 35 years in retirement (with the retiree reaching age 100 following retirement at age 65), 83% of the lowest income quartile households are likely to run short of money and almost half (47%) of those in the second income quartile would face a similar situation, EBRI says. Only 28% of those in the third income quartile and 13% of those in the highest income quartile are simulated to run short of money eventually.

The EBRI analysis presents outcomes under a number of different scenarios and finds that the number of years it will take before Baby Boomers and members of Generation X run short of money varies tremendously by their preretirement income quartile. Other critical factors, EBRI says, include the percentage of average deterministic costs paid by the retired individual, and whether or not nursing home and home health care expenses are taken into account.

However, even when 100% of average deterministic costs are paid by the household and nursing home and home health care expenses are included, only the households in the lowest income quartile eventually end up with more than 50% of the households running short of money, EBRI explains. The lesson is that income levels and savings rates can be far more influential to retirement readiness than investment decisions, EBRI says.

The full income analysis is published in the June 2014 EBRI Notes and is available online at www.ebri.org.

In Practice June 13, 2014

Your Marketing Strategy Can Broadcast Value

Personal brand and thoughtful use of social media are critical for a successful practice, according to a survey by Pershing.
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Advisers with thriving practices have taken the time to clearly develop a strong personal brand and to communicate with their plan sponsor clients and participants through social media, says Kim Dellarocca, managing director at Pershing. “The marketplace is really crowded, so it has become essential for advisers, including retirement plan advisers, to be really clear about the value that they bring,” Dellarocca tells PLANADVISER.

Advisers tend to be wary of technology and to continue to rely on in-person, mail and the telephone as their primary ways to reach clients, Pershing says in its report, “Advisory Success: A New Age of Client Communications and Client Expectations.” Those advisers who are not using email and social media to communicate with their clients risk being viewed as archaic, particularly since this year, there will be more mobile devices on earth than people, Pershing says.

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“A new generation of digital communication tools, from email to social media, has become even further ingrained in our lives and our preferences,” the Pershing report says. “The bar for effective communication between advisers and clients continues to rise.”

Advisers should begin by developing a unique brand, Dellarocca says, particularly since the Pershing survey found that only 26% of the 356 advisers surveyed said they can articulate what differentiates them from competitors. A good place to start is by examining their value proposition and asking clients to describe what benefits and services they deliver, she says.

Pershing equips its employees with a 360-degree feedback tool, for instance, so that they can learn what colleagues, senior executives and junior employees think about them, Dellarocca notes. “Advisers could do the same thing. It’s not easy. Advisers might find they need to make a lot of change,” she says.

Social Awareness

Social media has become an ingrained part of life today, so advisers should have a LinkedIn account and use Twitter to communicate to the marketplace, she says. This is a big step for advisers, as the Pershing survey found that a mere 2% of advisers use social media to educate their clients.

Advisers should be sure to reach out to clients not just when the market falls, but with good news and with news and information that speaks to the industries that they serve, Dellarocca says. “They should be comfortable with regular communication, to build a rapport,” she says.

Advisers can also use social media to learn about their clients, particularly when they have reached such milestone events as purchasing a home, having a child, becoming a grandparent or going through a divorce, she says. Advisers can then reach out with appropriate financial advice, Dellarocca says. Furthermore, by examining participants’ and plan sponsors’ affiliations on social media platforms and by joining industry and special interest groups on LinkedIn, advisers can ask for recommendations and use these platforms as business development tools, she says.

In addition, after learning through the survey that 76% of advisers do not have a personal website, Pershing recommends that advisers develop one, describing such sites as “their most effective platform for building a personal brand.”

“Not surprisingly, those advisers who report having the most career success are also more likely to use technology,” the Pershing report says. Advisers who are “doing better than ever” are more likely to have entered their own names into a search engine in the past month (46% versus 31% of advisers “maintaining status quo” and “struggling”) and are also more likely to have published thought leadership articles on their individual websites (62% versus 28% “regaining momentum”), according to Pershing’s research.

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