A study on retirement funding and household finance from Hearts & Wallets LLC, the financial research company that studies consumer savings and investing behaviors, breaks a major stereotype in the financial services industry: Retirees and pre-retirees are not mostly alike in terms of assets, age and lifestyle. The study further serves as a wake-up call for providers and advisers to rethink how they market to and service these diverse investors and plan participants.
“It’s not possible to understand retirees as a homogenous group,” says Laura Varas, partner at Hearts & Wallets. Some have pensions, others simply haven’t saved enough to produce substantial income, and still others, of all wealth levels, are successfully funding their lifestyles with different types of savings or annuities.”
Instead of simply categorizing households as pre- or post-retirement, Hearts & Wallets took a deep dive into retirement and lifestyle behaviors and attitudes. Late Careers are age 55 to 64, about 10 years away from retirement. Hearts & Wallets calls people who stop work altogether at traditional retirement age Leisure Pacers. Balancers are those who want to work part-time or cycle between work and leisure, while people who say they want to work until they drop are known as Full Steam Aheads.
According to Chris Brown, partner at Hearts & Wallets, deep marketing implications can be derived from these categorizations. Plan advisers and sponsors need to know more precisely the plans and expectations of participants. “The message needs to tie to [participants’] vision of life as a senior citizen,” Brown tells PLANADVISER. “If you tell people they don’t have enough to retire but they do, you’ve lost all credibility. People may know that they don’t need $3 million to retire – they’d be happy with a 60% replacement rate.”
“Two thirds of people want to be Balancers or Full Steam Aheads, but they are shown a picture of full retirement they do not connect with,” he says. These miscued messages quickly elicit responses such as “This publication isn’t for me. Why should I read any further?”
“Retirees are an incredibly diverse group,” Brown says. One segment factors in the learning curve, which is based on the years until and following retirement. In the eight- to 10-year period before the actual event of retirement, participants’ service needs change. According to Brown, people especially need more service and advice in the two years before and the two years just following retirement.
During the Learning Curve, interest in the products and services that could apply to them soars, Brown says. The actual age of retirement must be settled in advance, and people need a lot of information. The Learning Curve members will need different products and services from those elsewhere in retirement—and they may have different communication needs as well. Later in retirement, for example, people can become more interested in their finances. A participant who barely spoke with an adviser may now call several times a day.
“People want different things at different times,” Brown says, which can have an impact on the service model. “You don’t want to offer everyone who is 55 the same thing. Some might be three years from retirement, and others much further.”
Pension status can make a critical difference, Brown points out. Pensioners and non-pensioners are two slices of what they see as a retirement spectrum. The need to generate income from personal assets is quite different, so these two situations have implications for product solutions, and non-pensioners will need more advice than those with pensions.
Then, too, those facing retirement without a pension are more likely to move into a category such as Full Steam Ahead or Balancer. The message that would resonate with this segment might not necessarily be a traditional retirement, but information on scaling back on work, managing finances in your senior years, or employment income, and work-life balance. They should reflect the real life of these people, Brown says.
Because they do not have all the household information about other potential sources of income, plan sponsors are in a tough spot, says Brown. The ideal is to provide guidance and advice that reflects a household’s situation, so the plan sponsor needs a better sense of what is in the household, which the plan adviser can determine through one-on-one sessions. Real estate is often left out of the mix, but people see that as an asset to be tapped; some participants may own income property.
The plan sponsor should work with the recordkeeper or the plan adviser on quarterly materials and statements, Brown says. “Make sure these reflect the needs and attitudes of people who are not planning to retire. Those facing retirement without a pension are more likely to move into a category such as Full Steam Ahead or Balancer. The message that would resonate with this segment might not necessarily be a traditional retirement, but information on scaling back on work, managing finances in your senior years, or employment income, and work-life balance. They should reflect the real life of these people, he says.
Planning a Social Security strategy—when to take it, how much can be depended on—are part of income choices, along with how to structure an income stream in retirement. As people get closer to retirement, they want proactive, innovative solutions and a variety of products. Their risk tolerance shrinks, and they grow more concerned about protecting accumulated assets.
“The reason we have all these segments is we think there is so much more that can be done,” Brown says. “The industry looks at just age and wealth: You’ve got this money or you’re this age, and these are the products we’re going to target you with. But only a quarter of people in that age group consider themselves pre-retirees. It’s really important to go deeper than just behavior, age or lifestyle. So much more needs to part of the picture.”
According to Hearts & Wallets’ study, in 2013, more households (58%) said they plan to use personal assets for retirement income—especially withdrawals from retirement accounts. Eighty percent of Late Careers plan to use personal assets in retirement. The median Late Career household, however, is only at a Retirement Reachability Ratio (the percentage of their desired income that they are likely to meet) of 55%. Only one in five (21%) is at 80% or more of their self-stated asset goal.
Hearts & Wallets based its data on nearly 5,000 U.S. households, including 3,500 households ages 54 and older, and approximately 2,000 households in retirement.