The U.S. Census Bureau projected five years ago that 114,000 Americans would be centenarians in 2010. The number is expected to swell to about 214,000 by 2020 and 447,000 by 2040. In 1990, there were 37,000, with four of five being women. As mentioned above, this extended lifespan creates pressure on our resources to support us while alive longer. More focus must be made upon conservative distribution to preserve principal to ameliorate our chances of the accumulated investments lasting until we run out of breath. Increased lifespan has also forced many of the changes in retirement behavior above such as partial retirement and return to workplace patterns.
Increased complexity and variety of financial instruments has instead of empowered us to make better decisions, in fact decreased our ability to make quick straightforward decisions. Take the infamous jam study (famous, at least, among those who research choice); Sheena Iyengar, conducted the study in 1995. In a California gourmet market, Professor Iyengar and her research assistants set up a booth of samples of Wilkin & Sons jams. Every few hours, they switched from offering a selection of 24 jams to a group of six jams. On average, customers tasted two jams, regardless of the size of the assortment, and each one received a coupon good for $1 off one Wilkin & Sons jam. Here’s the interesting part. Sixty percent of customers were drawn to the large assortment, while only 40% stopped by the small one. But 30% of the people who had sampled from the small assortment decided to buy jam, while only 3% of those confronted with the two dozen jams purchased a jar. That study “raised the hypothesis that the presence of choice might be appealing as a theory,” Professor Iyengar, “but in reality, people might find more and more choice to actually be debilitating. You know this personally. We often get stopped like dear in the headlights of an oncoming car when we are offered unlimited choices even on simply decisions like a wine list or cereal to buy in the supermarket.
The complexity of financial products and chaotic proliferation of information has forced into existence a significantly restrictive regulatory environment in the US as the governments try to grapple with ways to protect consumers from the seemingly endless array of choices that can be made. This forces more time to be spent on compliance, rather than on communicating and problem solving for the client.
Aging of Financial Professionals:
i. CPA’s –The percentage of CPA firm partners over the age of 50 has risen from 49% in 2005 to 53% in 2006 to 57% in 2007. It won’t be long until 60% or more of all partners are over 50
ii. Insurance Professionals: A disturbing reality is that the insurance industry is aging, with the average age of agency principals at 51, and the average age of the agency customer base at 53. Current statistics indicate that there are 2.3 million workers in the insurance industry, and more than 1.0 million of these workers will reach retirement age in the next 10 years.
iii. Investment Advisors – Now, the average planner is in his or her mid 50’s, meaning more advisors throughout the industry are sharing ideas and questions about succession planning
The basic life lesson that if we worked hard, graduated college, got a job, got married, worked loyally for a company for 30 years or so we would be granted a retirement funded by our pensions, social security and of course the American dream of a home we owned outright is mythology. Unfortunately, millions were raised on this cultural dream, and now expect it to be true, despite the obvious changes that have occurred here and globally. The cheese has been moved and millions are waiting for their cheese to reappear. This attitude of entitlement and rejection of the new reality of self reliance is causing the slow train wreck we are watching. A few of their unrealistic expectations:
• OVERESTIMATING INVESTMENT RETURNS.“Overestimating the rate of returns on investments is the most common error of retirement planning,” warns Jules Lichtenstein, a senior policy advisor with the AARP’s Public Policy Institute
• The percentage of workers saying they arevery confident that they are doing a good job of preparing for retirement remains level (21%, statistically equivalent to the 20% measured in2009 and 23% measured in 2008). Remember above when we mentioned that ~3% of retirees had over $100,000 for retirement and could probably keep present lifestyle even if Social Security was compromised?
• Cost of Medical Care – The July survey of the First Command Financial Behaviors Index™ reveals that 72% of Americans are at least somewhat concerned about health care costs in retirement, with those closest to retirement expressing the most concern. Respondents predict that they will need about $33,000 above traditional retirement savings to cover health care costs during retirement. While significant, this estimate is only a fraction of the $166,000 in out-of-pocket expenses estimated for someone retiring today and living to age 100
• Retirees want their retirement to include travel, vacation homes, new cars, dining out, etc. With extended lifetimes (typically 20 to 40 years), medical care that has a different inflationary rate than typical goods and services (8 to 15% annually) and lack of sufficient pension assets and personal savings, this is a pipe dream for the majority of the population.
• Withdrawal rates from accumulated portfolios- You can withdraw 7% or more and never run out of money! While there is no perfect consensus on what this withdrawal rate should be, the uncertainty of return, market fluctuations and increased life expectancies among other factors argue for being conservative with your withdrawals, especially during the first years of retirement. Many experts recommend withdrawal rates between 3-% per year, especially in the first 10 to 15 years of retirementHow do we proceed:Forming Team of trusted partners – Financial professionals have all had to become myopic just to steer clear of the regulatory issues in our respective industries, thus it is necessary for the individual to use a team approach of varied professionals to help navigate through this pockmarked landscape called retirement that can last three or more decades. A successful retirement plan requires addressing all of the following issues:
• Risk management
• Asset Protection
• Investment objectives for accumulation and distribution cash flow
• Long Term Care Planning for the client and other dependent parties
• Legacy desires through proper Estate Planning
• Business transfer mechanisms
This requires a team of professionals working cooperatively. CPA’s, attorneys, real estate professionals, insurance experts in property and casualty as well as life, health and morbidity and valuation experts all must work together synergistically to help you reach your maximum comfort level in retirement.
Communicate with Professionals – to keep on the right track, it is more important than ever to rise above the noise, reach past consumerism and trendy investment ideas and communicate regularly (annually at a minimum) to make better long term decisions for your retirement health.
Make sure your own home is in order. How can you effectively take care of others while in retirement or after if you do not have your basic planning done? Taking care of children, grandchildren or charities is perhaps irresponsible (strong word) if you do not have large basic questions answered:
i. Cash flow until death for basic lifestyle choices
ii. Planning for chronic, permanent illness in your household and the remarkable cash flow it requires ($100,000’s annually)
iii. Lawsuit, asset protection and risk mitigation to protect assets from litigious predators
iv. Cushioning long term investments in reasonable (perhaps this means conservative) investment strategies to ensure longevity of portfolio
v. Planning for the tax consequences of:
1. Distribution of assets for retirement
2. Gifting to loved ones and honored institutions while alive and after passing
Addressing these basic planning topics, with all of the professionals who are representing you, and are paid to do so can create a viable roadmap for your financial security in the decades to come. While this may all seem overwhelming, procrastinating will not serve you or your family. It will only acerbate the issues and make them insolvable as market fluctuation, unexpected illness or death and inflation erode the wealth you so assiduously created, nurtured and protected in your lifetimes. We are gifted with the resources and opportunities that allowed us to thrive and build wealth here in this place and time and care must be taken in the upcoming decades to keep the gift flourishing and to remain in control. Pick your advisors well, stay in communication, work as a team and as the old adage goes; “Plan for the worst, live for the best”.