Saturday, March 20, 2010

"Afford" Abilities

There are in this--or perhaps any—business certain moments of epiphany that shed light and clarity,

Moments where complexity becomes simplicity, where the shining light of comprehension illuminates what had, until that very moment, been hopelessly “confuddled”.

On the subject of retirement income, my moment of clarity came at the end of a conversation with my then soon-to-be-retiring father who was trying to sort through his options regarding his various savings programs and distribution options. At the end of what I hoped was an educational and enlightening discussion of his options and trade-offs, their upsides and potential downsides, when I was sure that I had been able to unwind and demystify the maze and presented him with a straightforward presentation of alternatives, there was this long pause—and then, he turned to me and, as politely as he could, said, “I just want to know how much money I’ll have to live on every month.”

It’s been many years since that conversation, but, IMHO, the question my Dad wanted answered is the question we all want answered—certainly the closer we get to retirement (younger savers are, of course, more likely to be asking other questions).

In recent weeks, I have been giving a lot of thought to the concept of retirement income. Aside from the relentless march of time, and the still-painful shake-up call from the markets, in recent weeks there have been a series of interesting—and surprisingly different—retirement income offerings coming to market (and some interesting innovations in the ones that have been out there). Legislation has been introduced in the Senate that would put the answer to my Dad’s question right on that 401(k) statement. Moreover, the Labor Department’s recent RFI on the topic has given a new visibility to this critical issue.

But as I wrote about a month ago (see Safety "Knot"), while I think that both plan sponsors and participants want—and are looking for—a product that can answer that question, even the most committed advocate of these programs will tell you that, while there is a LOT of interest, the take-up rate is, well, somewhat less.

There were elements of that on display in last week’s Retirement Confidence Survey (see Retirement Confidence Stabilized, but Preparations Still Lacking). Just 14% of current retirees reported that they “purchased a financial product or selected a retirement plan option that pays them guaranteed income each month for the rest of their life,” and a mere one in 10 (11%) of current workers indicated they were “very likely” to purchase a guaranteed-income product or select a guaranteed-income option from a retirement plan when they retire. In fact, a full one in five said they were “not at likely to do so.”

Even more intriguing: The RCS noted that, while workers/retirees offered a variety of reasons for their reluctance to make this purchase, the most frequently cited reason was that they didn’t feel that they could afford it (26% of workers, 24% of retirees)(1).

Now, considering how little understood these products likely are by most people, IMHO, this seemed an extraordinarily large number to be so astute about the costs.

Additionally, the report noted that workers’ stated likelihood of obtaining this type of product decreases sharply as age rises, and also decreases as assets increase. Intrigued, I followed up with Matt Greenwald (whose firm produces the report) and EBRI for some additional insights. Turns out that, among those who had accumulated less than $25,000, fully 42% say they would not purchase because they cannot afford it. But that number dropped dramatically (to 26%) among those that had saved $25,000-$99,999--and even more dramatically (to 6%) among those with financial assets of $100,000 or more (this group had other objections; generally, that they had a separate pension or preferred other options. IMHO, they probably just didn’t want to surrender the money (2). Moreover, when you dig inside what those lower income workers likely meant by “afford,” Greenwald and EBRI believe it is a combination of two factors: The first is that many people have accumulated very little and feel they cannot afford to tie up this money; the second, a lack of understanding about the products.

Now, in fairness, those with very small balances don’t really have much to spend--or annuitize, for that matter. And, if you only have $25,000 saved at retirement, well, no amount of annuitization can “save” you from that. Unfortunately, those who think they can’t afford these kinds of solutions may well be the very folks who can’t afford to be without them.

--Nevin E. Adams, JD


1 Other reasons mentioned include already having a pension, investments, or income (13 percent of workers, 15 percent of retirees), not knowing enough about the product (12 percent of workers, 3 percent of retirees), feeling they could do better managing the money themselves (10 percent of workers, 4 percent of retirees), not knowing it was an option (5 percent of workers, 9 percent of retirees), not trusting or believing in them (8 percent of workers, 2 percent of retirees), lack of interest (6 percent of workers, 4 percent of retirees), and not being offered one at work (2 percent of workers, 8 percent of retirees).

2 Those findings actually dovetailed pretty squarely with another report out last week—this one, Cogent Research’s In-Retirement Income 2010 report. That report was based on an online survey among a representative sample of 961 retirees and pre-retirees with a minimum of $100,000 in investable assets--the upper end of the spectrum. Citing the “incredibly high expectations of today’s retirees and pre-retirees,” Cogent Principal and co-founder Christy White noted, “In theory, pre-retirees love the idea of a guaranteed paycheck, but in reality they are unwilling to give up control of their principal for too long—and certainly not forever.”

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