The “Transition” Phase Allows Work and Play Together

Cynthia Egan, president of T. Rowe Price Retirement Plan Services, and Christine Fahlund, a senior financial planner at T. Rowe, believe the industry should move away from the negative connotations surrounding a “delayed” retirement.   

Speaking to the press at a breakfast at the T. Rowe Price 2011 Investment and Economic Outlook meeting, Egan and Fahlund said they saw positive signs that retirement preparedness is steadily improving in these post-recession times.  Egan said the Pension Protection Act (PPA) of 2006 was a huge milestone for the industry and credits it with many of the improvements she sees, including auto-enrollment features being a part of 53% of plans, versus 22% of plans in 2005 (pre-PPA), and 81% of plan sponsors using an auto-increasing feature, up from 11% in 2005.   

However, total account balances are still far too low, said Egan – most plan participants have saved less than $200,000.  The national average deferral rate is 6.1%, she said; for those 65 years and older, the average is 11.1%.  Egan and Fahlund said they would like to see the national average get closer to 15% (but they also noted that wouldn’t be reasonable for every age group).  This lack of a strong nest egg will be challenging for people to overcome as retirement approaches.   

One solution that many in the industry are discussing is guaranteed retirement income.  Egan said it’s as if “an arms race for new products” has taken off.  But, she cautions, retirement income solutions need to be about more than the product itself –advisory and educational support and services are just as important. 

Participants are most concerned with simplicity and flexibility, said Egan.  Terms such as “surrender fees,” “no access to cash,” or “no daily value” would not rest well with participants.  Plan sponsors are also on the fence when it comes to guaranteed products – are they willing to take on the extra fiduciary responsibility once the participant retires, or would they rather let the participant off on their own?   

Changing the Focus 

Since the recession, plan participants have been bombarded with concepts that they have no control over – the markets, inflations, legislation, etc.  Egan and Fahlund say the industry needs to refocus onto things that participants can control, such as how much they save, when they retire, working part-time in retirement, and when to tap into Social Security.   

Fahlund spoke of the burgeoning “transition” phase of retirement that takes place around the ages of 55-68.  She described it as a “fairly long period of time when you’re getting your act together…and it can’t happen overnight.”  Every individual or couple is different, but the one thing everyone needs is a plan, she said.  Whether it’s a mortgage that hasn’t been paid off or higher-than-average medical costs, all pieces of the financial puzzle need to be attended to.

The fact is that with so many people not fully prepared for retirement, they will have to delay a “complete” retirement for a few years.  But Fahlund wants the industry to stop looking at delaying retirement with such “drudgery.”  Some of her ideas may seem counter-intuitive, but one idea is that if a participant who was planning to retire at age 62, keeps working until age 70, they should stop contributing to their plan.  She says they can take the money they would have deferred and have fun with it and let what they have accumulated keep growing in conservative investments.  Not only does this allow you to keep earning a salary, but contributions at that late stage in the game are almost like “a dollar in, a dollar out,” since that money won’t have any time to really grow.  Along the same lines, Fahlund also suggests having some sort of part-time job in retirement – even if it “just” pays $20,000 a year, that’s $20,000 you can keep invested.   

The main message Fahlund hopes will take hold is a general “reframing” of retirement.  People need to be able to work and play at the same time.  She says people should look at a delayed retirement as “extra money,” rather than “working longer.”