Retirement Projections Need Revisions

“It would be a real shame if, instead of physical limitations, we ended up with financial limitations in our old age,″ commented Matthew Greenwald of Mathew Greenwald & Associates.

There have been many medical advances that will allow people to remain active as they age. However, people are significantly underfunding their retirement and therefore are setting themselves up for financial problems in their retirement years, he said, speaking at the Retirement Income Industry Association’s Annual Meeting in Boston this week.

There are many advisers who complete retirement income projections that consider the combination of an age-certain death, constant inflation, and level spending – an impossible scenario that leads to uninformed spend-down approaches. This ignores much of the uncertainty in retirement, and, ultimately, the consequences of living beyond their anticipated life expectancy or surviving the consequences of a market turn.

In order to better project a client’s retirement income with certainty, advisers need to understand the difference between accumulation and retirement income management, acknowledging that retirement income requires more than just an investment allocation decision, said Greenwald.

The Retirement of Baby Boomers

Many don’t make a reasoned calculation of when to retire, but choose to do so because they think it is the right time to do so, Greenwald stated. Working longer cannot be the only solution, however, it will be part of the solution, he said. When trying to anticipate their needs in retirement, people don’t know what they need, Greenwald said. Instead, they incorrectly predict life expectancy, basing it on family history – but ignoring gains in health and longevity over time. That fallacious thinking impairs their ability to plan – focusing on the odds, not the consequences.

As Baby Boomers face retirement, they are not going to want to start to be frugal after living beyond their means for a number of years, Greenwald said; to accomplish this, they will want the most efficient retirement income vehicle possible.

Although they don’t want to face a decline in their standard of living, that might be the reality for many, Greenwald said, because Boomers face an incredibly expensive retirement due to four factors: higher lifestyle demands; higher health care costs; a longer life span; and de-annuitization. Income also needs to keep up with inflation, Greenwald reminded the audience.

Maximizing Retirement Income

Traditional retirement income approaches don’t maximize efficiency, which leads to a significant opportunity for the development of tools that properly measure and maximize income, he said. Retirement income approaches cannot just look at retirement as an end date, but rather have to focus on longevity and how much time a retiree can have left to live.

Monthly income for life is a very efficient mechanism, Greenwald said; so efficient, in fact, that two of the three legs of the traditional retirement stool are some type of annuity (Social Security and a traditional employer pension). However, both of these traditional annuities are changing; the traditional pensions are declining and the percentage of income that will be replaced with Social Security will also decrease over the next few decades, Greenwald explained, citing data from the Center for Retirement Research at Boston College.