No Retirement Crisis, But Advisors' Help Urgently Needed
WASHINGTON - Is the United States facing a retirement crisis? The response from retirement experts and academics at a recent conference was a resounding maybe.
With waves of baby boomers preparing to exit the workforce and concerns mounting about their retirement preparedness, participants at a retirement conference hosted by the Investment Company Institute made two important points: The first is that since a variety of factors, such as income, education and physical health play a role in how well situated individuals and couples are for retirement, it is impossible to generalize about the country's retirement situation.
The second is that, generalization or not, an aging population and worries over Americans' financial literacy argue for a greater role for advisors in helping workers plan for and transition into retirement.
"We need help managing our assets when we can't do it ourselves," says Olivia Mitchell, a professor at the University of Pennsylvania's Wharton Business School. "We know young people have trouble with financial literacy, but as more of us live longer and longer, we're going to need more guidance on how we manage our money through retirement. And ultimately, we're going to need insurance to protect against outliving our assets."
Financial professionals can play a critical role in helping clients navigate the actuarial calculation of matching a savings and withdrawal plan with a projected life expectancy. Regardless of how a client's retirement needs are calculated -- by a ratio of income replacement, consumption projections throughout retirement or some other measure -- the process of devising that calculation with a planner can boost savings rates while helping clients think through issues they'd probably prefer to avoid.
"Most people are terrified of the prospect of thinking about these kinds of questions," says M.I.T.'s James Poterba, who also serves as president of the National Bureau of Economic Research and as a member of TIAA-CREF's board of trustees.
"To the extent that people don't understand longevity risk, they're not going to save enough, they're not going to invest very well, and they're probably going to draw down too quickly in retirement," adds Mitchell. "We need more help figuring out how expensive it will be to retire."
On the literacy front, Mitchell cited a FINRA survey that assessed people's understanding of the basic financial concepts of interest rate, inflation and risk diversification. In that poll, just over a third of respondents answered all three questions correctly; a poor showing that Mitchell believes highlights the need for stronger financial education both in schools and in the workplace.
More unsettling in the context of retirement, she says, is the tendency for financial literacy rates to drop off as people head into their later years. "With age, people get worse with financial literacy," she points out.
Poterba and others also stress the complexity of the retirement market, where an array of mitigating factors from income to life expectancy can complicate the picture, making retirement planning very much an individual challenge.
"I think the reason why economists and financial planners struggle to give answers to the question, what is the right savings rate, or to give answers to the late-life question what is the right withdrawal rate," says the retirement expert, "is precisely because this is a much more complicated problem and a much more person-specific problem.
"This all suggests that the one-size-fits-all solutions for retirement planning probably just don't work, Poterba adds. Whether it's the public policy sphere or the private financial advising world, that telling people that one level of saving is enough for everybody, that one kind of benefit program is enough for everybody, probably doesn't do it."