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MAKING CENTS OUT OF THE NEWS
Blog #25
(July 1st, 2010)
GROWING UP AND SMELLING THE COFFEE - FINANCIAL SURVIVAL IN RETIREMENT
By Tom McAllister, CFP®
In no way were we prepared, as youngsters, to answer the question our elders were so fond of asking: “What do you want to be when you grow up? Being a grown-up seemed so very far away. Marriage, parenthood, old age, death – the future was inconceivable!
Unfortunately, the inevitability of the future with its attendant challenges is something many adults seem to find inconceivable, as they contemplate the realities of retirement planning. In one recent survey, the overwhelming majority of respondents said they believe there is a retirement crisis in America. Of those between the ages of 44 and 54, more than half reported feeling unprepared for retirement. 77% reported feeling greater anxiety over outliving their assets than over death itself!
So where did it all go wrong? Just why are so many “boomers” finding themselves at the doorstep of retirement unprepared to walk through the door into the next phase of their lives? It comes down to a multitude of reasons, I believe, rather than just one.
One key disparity began when employers converted from defined benefit pension plans to defined contribution plans. Overnight, employees went from having virtually no control over how much they invested and over where the money was invested, to gaining significant control over their retirement accounts. With the employee-contribution based 401(k) becoming the dominant retirement plan structure, the emphasis was on mutual funds, rates of return, and “controlling one’s destiny”
As a long-time financial planner, I remember scoffing at the groundswell of demand from employees that their large companies offer them a 401(k) in place of the inherently more secure existing defined benefit plans. Unknowingly, these employees were demanding a program inferior to the ones they already had!
With 401(k)s (and 503(b)s for non-profit plans) firmly entrenched, participants may have been given far too much control over their own investment decisions. In recent years, the Internet has proven at once a blessing and a curse, leading many investors to thinking they can handle everything on their own just by surfing the Web! Not so, as the survey mentioned above demonstrates all too clearly.
Undeniably, there is much valid information available through the Internet. However, it takes good judgment combined with experience to process all that information and to make intelligent investment decisions. In taking over the investing their retirement plan money, employees were given responsibility they were ill-equipped to handle with no financial professionals advising them.
According to the survey, 46% of “boomers” work with financial advisors; another 29% reported being receptive to the idea. (The remaining 25% not only don’t have an advisor, they say they don’t want one.) Among those working with an advisor, most stated that, prior to establishing that relationship, when it came to financial planning, they were “self-taught”. Many admitted they should have learned more about financial planning earlier in life.
What do people want from their financial advisor? Not surprisingly, 86% said that ensuring the safety of a significant part of their nest egg was “very” or “extremely” important to them. 85% found a guaranteed income “very” or “extremely” important.
Investment products that address both those expressed needs, of course, is annuities. These insurance-based investments provide a guaranteed fixed income for life. But, with purchasing power having been cut 50% over the past twenty years, the challenge almost certainly will be finding ways to pay tomorrow’s bills with today’s dollars.
The solution, if there is one, lies in the planning process, not in any one investment panacea. At any age, the future may appear inconceivable. But for many, many Americans, the future is NOW!
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