Retirees and near-retirees are nearly panicked about their future. They fear they will live in poverty in their senior years, according to one-on-one interviews conducted with 264 Baby Boomers by Financial Engines, a supplier of automated investment advice online.
This level of panic has sent many into denial about their futures, causing them to procrastinate retirement planning altogether and to unrealistically hope that their finances and lifestyle in retirement will magically turn out alright.
This is why Financial Engines has come up with a four-part solution to address these fears head-on to prompt near-retirees to do a better job of saving for retirement.
The keys? Trust, reliable income, flexibility and fee transparency.
While industry surveys continuously indicate investors' fear and apprehension about retirement, Financial Engines' qualitative analysis, based on more than 300 hours of in-depth interviews conducted between 2008 and 2011, revealed the actual thinking of those close to or in retirement.
As one 66-year-old near-retiree told Financial Engines: "I wake with 'night sweats.' I'm really concerned about outliving my money. You never know how long you'll live and how much you'll need."
A 50-year-old near-retiree said: "My overall impression with investment advisors is that their ultimate goal is their own wealth, not mine."
Another interviewee, a 70-year-old retiree, said: "I'm trying to make sure that I make the right decisions so that I don't end up down the corner with a tin cup in my hand."
In general, interviewees indicated they were afraid they would either be pushed out of the workforce or be unable to work because of failing health.
A few fear their money will be exhausted in only a few years if their health forces them to enter a retirement home.
Asset management firms need to be aware of this level of anxiety and address the four key points that matter most to this target market, says Shinichiro Inoue, director of retiree services at Financial Engines.
The four points that matter the most to near-retirees and retirees and that can allay these fears, Inoue said, are:
* Trust-fostering a sense of trust that the asset management firm has their best interests at heart. While many participants said they would like to work with a financial professional they could trust to help them create a retirement income plan, they said finding an adviser and an investment firm that they could trust with their life savings is a quandary.
* Reliable, Steady Retirement Income-providing stable investment choices that provide monthly income. Given their experience with the dot-com crash of 2001-2003 and the financial crisis of 2008-2009, many 401(k) participants were hit with significant losses right before or in retirement. Many participants want investments that lower investment risk or provide a steady and reliable source of income-or both
* Flexibility Over Their Investments-investors don't want to relinquish entire control over their portfolio through an annuity, in case of an emergency or medical need. Retirees and near-retirees are well aware of healthcare risks and don't want to find themselves in a position where they have no choice but to rely on their children.
* Fee Transparency-An overwhelming number of participants said they want clear and easily understood fees.
More than half of the retirees and near-retirees interviewed said they are unsure what the future will bring. Nearly half said are afraid they will live in poverty in retirement. Nearly half are distrustful of the motivations or qualifications of financial services and insurance companies, and more than a third of near-retirees said they did not feel confident or knowledgeable when it comes to making important financial decisions.
"With the first Baby Boomers entering retirement in 2011, the retirement income of an entire generation of American workers will be heavily dependent on 401(k) plans-plans that did not even exist when many Baby Boomers started their careers," said David Ramirez, portfolio manager with Financial Engines, overseeing the management of 401(k) portfolios in Financial Engines' retirement income service.
"We conducted this analysis to better understand this generation of accidental investors, who now find themselves in the unexpected position of managing their own retirement assets and creating a retirement spending strategy," Ramirez said.
Perhaps the most significant finding of Financial Engines' research is the fact that many Baby Boomers feel paralyzed with fear. Thus, the best way for investment management firms and plan sponsors to reach them is to build trust so that they will seek professional help and save more, according to Financial Engines.
And saving more is clearly a sore point, as the median 401(k) balance of those interviewed was $130,000 and the average balance was $207,752. Since the average age of those interviewed was 62, clearly these people did not have many potential employment years ahead of them to make up for those shortfalls.
Many participants who expressed uncertainty about their future or distrust of financial services or who said they are not confident making financial decisions said they are avoiding thinking about planning for retirement altogether.
Those who said they were afraid of living in poverty engaged in what Financial Engines calls "magical thinking"-hoping that even if they don't do anything to plan for their retirement it will all work out in the end.
Those who said they were distrustful of financial services or not confident about making financial decisions most commonly turned to friends for advice, regardless of their qualifications or experience.
"This analysis shows how emotions can create barriers to accessing professional retirement help and highlights the need for improved understanding of participant emotions," Inoue said. "Meeting the retirement income needs of this generation starts with the development of solutions that address their emotions."
As a direct result of this research, Financial Engines in January launched an income-producing investment option for its 401(k) managed account platform. Called Income+ and aimed at near-retirees, the program relies on bonds and dividend-paying stocks to produce income, although an annuity option aimed at older investors is also available. Aon Hewitt has added Income+ to its 401(k) plan, and four other large employers are planning to add it to their plans, according to Financial Engines.