In Practice April 4, 2007

Retirement Planning High on Advice Agenda

Married men and women participating in a recent survey agreed that the top two reasons for turning to a financial adviser are to prepare for retirement (58% of men and 63% of women) and investment planning (55% of men and 56% of women).
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According to a news release about MainStay Investments’ Across Generations research, women seem to be more concerned about income planning in retirement, which rounded out women’s top reasons for using an adviser, with 52% of women citing that as a reason to visit an adviser.

Meanwhile, men ranked estate planning as the third most important reason for using an adviser (48%) and both men and women overwhelming agreed (88% and 91% respectively) that their financial adviser would play an important role in helping their spouse manage the assets when they pass away.

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“These findings reinforce a situation we have both heard about anecdotally and have observed repeatedly for many years. Married couples often believe they are on the same page when it comes to financial goals, but when advisers begin to talk with them individually, it is apparent that they are often carrying different play books altogether.” said Mike Coffey, managing director of MainStay Investments, in the news release. “It’s the adviser’s obligation to get the husband and wife together physically in the same room and mentally on the same page.”

Coffey offered the following suggestions for advisers:

  • When it comes to financial planning, both sides of today’s couples want to be involved: after all, 73% married men and women say that they meet with their financial adviser together.
  • When selecting a financial adviser, more women (55%) than men (42%) consider communication skills an extremely important attribute, especially late boomer women (59% vs. 38% for late boomer men). While men are seemingly more direct and have a tendency to act on instinct rather than consensus, women have a tendency to be much more methodical in their decisionmaking process, often discussing their options openly with their spouse and/or peers
  • The majority of men and women agreed (82%) that consolidating assets with one adviser would make it simpler and easier to manage their money and allow his/her adviser to do an effective job of asset allocation. In addition, 86% of both men and women indicate that it would also lead to better recommendations on how to meet their needs (insurance, long-term care, etc).

Generally, MainStay discovered that while the majority of married women (81%) say they share equal responsibility for decisions about investing and long- term financial planning with their spouse, only 44% of married men make this claim. In fact, the majority of married men (56%) say that they make most of these decisions on their own.

“The important thing for advisers to remember is that they will risk losing assets under management (AUM) if they view their client as only one spouse, and not the couple. Long-term, the adviser risks losing AUM if he doesn’t see the husband and wife as a two-part client,” said Chris Parisi, national sales manager of MainStay Investments.

The Across Generations study was conducted by an online research firm in May 2006. The study polled 1,512 individuals between the ages of 27 and 83, covering four different age groups: GenXers (born 1965-1979), Late Baby Boomers (1956-1964), Early Baby Boomers (1946-1955), and Seniors (1945- 1923). Respondents had at least $250,000 in investable assets. The analysis was broken down by generational cohorts and sub-divided by gender.

Data & Research April 4, 2007

Personal Savings Increase Needed to Offset Lack of Pensions

A report from the Government Accountability Office (GAO) suggests that workers need to better prepare for the growing deficit from federal programs and the declining coverage of employer-provided pensions
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One way to deal with the deficit is continued employment to bring extra income, which is needed to compensate for low defined contribution plan participation combined with a declining defined benefit pension system, rising health costs and insufficient personal savings, according to the GAO Strategic Plan 2007 – 2012.

“With the baby boom generation poised to move into retirement beginning in 2008, the Congress will need more information on the economic, financial, and social implications of these trends to ensure that the government, employers, and workers share retirement risk in an equitable and efficient manner,” the report said.

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With the continued decline of the defined benefit plan over the past few years, there has been a rapid increase in defined contribution plans.

The GAO report showed the number of defined contribution plans rose from 340,000 in 1980 to 653,000 in 2003, covering 64.1 million workers and retirees. As of 2006, 54% of all workers in the private industry were offered a defined contribution. However, the participation rate in these increasingly-popular plans in 2006 was 80% among those whose employers offered a plan.

The shift of greater retirement responsibility to individuals has also made personal savings more important. However, the GAO points out that only 44% of families headed by someone age 55 to 64 owned an individual retirement account (IRA), and among those families, median IRA balances were $60,000.

From 2000 to 2005, personal saving as a percentage of disposable income averaged just 1.3%, which the GAO suggests is a result of Americans diverting a substantial amount to living expenses. In 2006, that savings rate dropped to a negative 1%, the lowest level in 50 years.

The GAO suggests that one way to reduce the effects of a longer retirement is by keeping older workers in the workforce. However, the agency says that while many employers “indicate a willingness to recruit or retain older workers, most employers are not currently engaged in these practices.”

The agency says that employers have so far not made changes to accommodate the needs and preferences of older workers, such as establishing alternative work schedule arrangements or allowing phased retirement

The increased life expectancy and the fact that by 2050 persons over 65 will account for 20% of the population – up from about 13% in 2000 – means that people are expected to spend more time in retirement, putting greater strain on the Social Security System, according to the report.

The report suggests that even though Social Security funds are not expected to be depleted until 2040, strains on the government will begin as early as 2017, when programs begin paying out more than they take in.

One of the issues that will have an increasing affect on Social Security is increasing health costs. For example, the GAO points out that the average Medicare Part B plus Part D premiums will rise from 12% of the average of Social Security in 2010 to about 26% in 2080. Also the amount of deductibles, co-payments and other cost-sharing amounts would increase from 17% of the average Social Security benefit in 2010 to 37% in 2080.

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