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The details of the auto-IRA/Saver’s Credit proposal are still unclear, as are the kinds of opportunities that it might create for payroll companies, banks, or retirement plan providers. But the basic outline of the plan has taken shape.   

First, the program is voluntary for individual workers—but not necessarily for employers. Companies with at least 10 employees that that do not offer any retirement plan and have been in business at least two years would have to automatically enroll their employees in an IRA—probably a Roth IRA—and start monthly contributions equal to three percent of pay.    

Then there’s the incentive. The next-generation Saver’s Credit would be an updated form of the current Saver’s Credit, now used by about 5.5 million taxpayers. The old version provides a tax credit that accrues only to low- and middle-class workers who pay taxes. The new Saver’s Credit would match 50% (up to $500) of the IRA contributions of low- and middle-income workers whether they owe income taxes or not. 

“There are several models for providing auto IRAs,” said David John of the Heritage Foundation, a co-creator of the auto-IRA/Saver’s Credit concept. “In each case the individual company is the nexus. If a small business has a relationship with a bank, the bank might say, ‘We’ll add the auto-IRA to a full range of other services.’ Or, a small business owner could go onto website and, as with Medicare part D, see a list of all the providers who do business with a firm of that size and location.

“Or a business might belong to a multi-employer plan that uses an ‘Auto-IRA’ fund sponsored by XY insurance company,” he added. “If none of that works, a small business might be assigned to a consortium, and an asset manager could aggregate several thousand employees at several hundred companies.”

Each employee’s contributions to the auto-IRA would be deducted from his or her paycheck and be routed to an IRA custodian via the employer’s payroll system. Contributions would likely be invested in inflation-protected U.S. bonds (a special version of the “I-bonds” now sold to individual investors) or into an account with a target date or target-risk balanced mutual fund or fund-of-funds.

At some point, when their account balances become large enough—this part is still fuzzy—the employees could transfer their IRA assets to any financial services firm they choose. Then they would assume their places in the vast, disorganized and under-informed army of American investors.  

Who might profit from all of this?  Companies who have mastered e-commerce and achieved economies of scale in handling small accounts are expected to latch onto the idea. But it’s not for everyone. “We’ve talked to mutual companies, insurance companies, major banks, to recordkeeping firms and fund administrators, said John. “Some really love it and others say, ‘Who cares?’ 

“It doesn’t break down so much by industry sector as by business model. It takes a business model that’s set up to handle large numbers of customers. A payroll services company might handle the deduction from the paycheck, and forward the money to a funds manager. We’re seeing strong interest there.”

For those interested in the background details, here’s the Tax Policy Institute’s statement on the new plan:

Under current law, low- and middle-income taxpayers may claim a saver’s credit of up to $1,000 ($2,000 for couples) if they contribute to retirement savings plans. The credit equals the credit rate times up to $2,000 of contributions to IRAs, 401(k)s, or certain other retirement accounts by each taxpayer and spouse.

The credit rate for 2008 depends on income and tax filing status as shown in the following table. (For 2009, couples filing jointly must have income below $55,500, heads of household income below $41,625, and other tax filers income below $27,750 to claim any credit.) The credit is not refundable and therefore has limited value for people with little income tax liability.

President Obama proposes to make the saver’s credit refundable as a 50% credit up to $500 per individual (indexed for inflation).  The full credit would go to families with income below $65,000 ($48,750 for heads of household and $32,500 each for singles and married couples filing separately) and would be automatically deposited into the qualified retirement plan or IRA.  The credit would phase out when income exceeds those limits: the maximum credit would be reduced by 5 percent of income over the relevant limit.

The government would effectively pay half the cost of up to $1,000 deposited to a retirement account each year for all eligible households. For example, a family that puts $800 aside in a retirement account would receive a $400 tax credit, lowering the cost of the contribution to $400.

Turning the currently nonrefundable saver’s credit into a refundable credit would encourage low-income households to save more by boosting the effective return to their saving.  Because the credit would go directly into the saver’s retirement account, the default option would augment the amount saved by half and thus further increase the amount saved for retirement. The phase-out of the credit would, however, raise effective marginal tax rates for many middle-income taxpayers with potentially adverse behavioral effects on work effort and saving.

President Obama also proposes to establish automatic enrollment in IRAs and 401(k)s. Currently most employment-based retirement savings plans require workers to make a positive choice to contribute to the plan. The default option is not to contribute.  Under the president’s proposal, employers in business at least two years and with ten or more workers would have to enroll every worker automatically in a workplace pension plan unless the worker opts not to participate.

Employers who do not currently offer retirement plans would have to enroll employees in a direct-deposit IRA account unless the worker opts out. Research has shown that changing from a default opt-in provision to an opt-out provision markedly increases worker participation. The administration suggests that its proposal would increase the savings participation rate for low- and middle-income workers from the current 15 percent level to around 80 percent.

© 2009 RIJ Publishing. All rights reserved.

The blueprint for tighter oversight of the U.S. financial sector that the Obama administration released last week provided for the establishment of an unprecedented Office of National Insurance (ONI) within the Treasury Department.

And while the report did not offer the “optional federal charter” that large insurance companies support as an alternative to state-by-state regulation, it did not rule one out.

The ONI would “gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector,” said the blueprint, officially called “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation.”

The recommendation was based on the assumption that the insurance industry is too large and too inter-connected with the rest of the financial system-and too global-for the federal government to leave its regulation up to the individual states.

The 100-page report also for the ONI to “recommend to the Federal Reserve any insurance companies that the [ONI] believes should be supervised as “Tier 1 FHCs.” That is, financial holding companies whose failure could threaten the entire system.

“The current crisis highlighted the lack of expertise within the federal government regarding the insurance industry,” the report said. “While AIG’s main problems were created outside of its traditional insurance business, significant losses arose inside its state-regulated insurance companies as well. 

“Insurance is a major component of the financial system,” the text continued. “In 2008, the insurance industry had $5.7 trillion in assets, compared with $15.8 trillion in the banking sector. There are 2.3 million jobs in the insurance industry, making up almost a third of all financial sector jobs.

“For over 135 years, insurance has primarily been regulated by the states, which has led to a lack of uniformity and reduced competition across state and international boundaries, resulting in inefficiency, reduced product innovation, and higher costs to consumers,” the report said.

Six principles for oversight
Treasury supports the following six principles for insurance regulation, according to the report:

1. Effective systemic risk regulation with respect to insurance. The steps proposed in this report, if enacted, will address systemic risks posed to the financial system by the insurance industry. However, if additional insurance regulation would help to further reduce systemic risk or would increase integration into the new regulatory regime, we will consider those changes.

2. Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies. Although the current crisis did not stem from widespread problems in the insurance industry, the crisis did make clear the importance of adequate capital standards and a strong capital position for all financial firms. Any insurance regulatory regime should include strong capital standards and appropriate risk management, including the management of liquidity and duration risk.

3. Meaningful and consistent consumer protection for insurance products and practices. While many states have enacted strong consumer protections in the insurance marketplace, protections vary widely among states. Any new insurance regulatory regime should enhance consumer protections and address any gaps and problems that exist under the current system, including the regulation of producers of insurance. 

4. Increased national uniformity through either a federal charter or effective action by the states. Our current insurance regulatory system is highly fragmented, inconsistent, and inefficient. While some steps have been taken to increase uniformity, they have been insufficient. As a result there remain tremendous differences in regulatory adequacy and consumer protection among the states. Increased consistency in the regulatory treatment of insurance – including strong capital standards and consumer protections – should enhance financial stability, increase economic efficiency and result in real improvements for consumers.

5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business. As we saw with respect to AIG, the problems of associated affiliates outside of a consolidated insurance company’s traditional insurance business can grow to threaten the solvency of the underlying insurance company and the economy. Any new regulatory regime must address the current gaps in insurance holding company regulation.

6. International coordination. Improvements to our system of insurance regulation should satisfy existing international frameworks, enhance the international competitiveness of the American insurance industry, and expand opportunities for the insurance industry to export its services.

Comments from interested parties
The National Association of Insurance Commissioners, in a statement from president CEO Theresa (Terri) M. Vaughn, Ph.D., said, “While no one proposal is completely perfect, our initial read of the Administration’s financial overhaul plan seems to reflect what is most important to us: preserving the consumer protections and financial solvency oversight of the historically strong and solid system of state-based insurance regulation.”

American Council of Life Insurers president and CEO Frank Keating said “ACLI therefore appreciates Treasury’s commitment to work towards modernization of insurance regulation based on the principles of national uniformity, efficiency, effective oversight of systemic risk and better international cooperation. The White Paper identifies a federal charter as one possible way to achieve those objectives. ACLI strongly supports an optional federal charter as the only way to achieve them.

In commenting on the report, James Hamilton, a CCH analyst at Wolters Kluwer Law & Business, noted that the recommended Financial Stability Council “would also be able to propose regulations of financial instruments that are designed to look like insurance products, but that in reality are financial products that could present a systemic risk. But the legislation does not preempt state law governing traditional insurance products.”

Fred Joseph, president of the North American Securities Administrators Association, in a statement, praised the fact that the administration was “calling for a council of regulators to assist the Federal Reserve in monitoring risk throughout our financial system; addressing the pressing need for a fiduciary standard of care for broker-dealers providing investment advice and calling for legislation empowering the SEC to prohibit mandatory arbitration clauses in broker-dealer and investment adviser contracts with retail investors.”

© 2009 RIJ Publishing. All rights reserved.

Back in 2006, when the stock market was ramping up and Congress blessed target-date funds (TDFs) as a qualified default investment alternative (QDIA) for 401(k) plans, TDFs seemed to relieve the problem of incoherent or overly-conservative savings habits among plan participants.

These “point-and-shoot” funds-of-funds, whose names always include the approximate year when the participant would retire—2015, for instance—automatically evolved to a higher bond-to-stock ratio over time. A single TDF was said to be all a participant ever needed.

In reality, the solution wasn’t so neat. Some TDFs held high equity allocations well into retirement. Some TDF fund managers drifted from their investment styles. Many participants bought several funds in addition to a TDF, diluting the intended effect.

Worst of all, as a behavioral finance expert told U.S. officials in a hearing last week, many participants mistakenly assumed that a TDF would “magically” allow them to retire comfortably on their target date—no matter how much or how little they saved before then.

The 2008 market crash shattered that illusion, of course. Many 63-year-olds with money in “2010” funds took big losses. Last week, federal officials tried to locate the blame: Was it marketing hype by TDF makers, flawed TDF designs, America’s low financial literacy rate, regulatory lapses-or merely the caprice of the markets?

Judging by testimony from a parade of experts at the joint SEC-Department of Labor hearing/webcast on June 18, the culprit was “all of the above.”

Unintelligent design?
The TDF experts were divided into roughly two camps: those who saw them as a glass half full and those who saw them as a glass half empty.  TDF advocates said the funds were based on sound principles and answered a gaping need in fund plans for a point-and-clink investment technology for average plan participants.

But TDF detractors said the assumption underlying TDFs-that asset allocation could be based entirely on a hypothetical retirement date-was a gimmick that over-simplified and distorted the investment process.  “Age-based rules are unreliable and often perverse,” said Richard O. Michaud of Boston-based New Frontier Investors LLC.

Others agreed the using a single criterion such as age to solve a complicated problem like investing over a lifetime makes no sense. “To say that it is false is an understatement,” said Louis S. Harvey of Dalbar Inc. 

As for the lack of standardization among TDFs with the same target date, some experts viewed that as a flaw and others as a virtue. In practice, every TDF has a different “glide path,” with some reaching their lowest equity allocation in the retirement year (thus minimizing investment risk) and some not reaching it until several years into retirement (thus minimizing longevity risk by maintaining growth potential). For instance, 2015 funds today contain equity exposures ranging from 43% to 83%, according to Standard & Poor’s. 

That sort of disparity has been a cause of confusion among investors but also a sign of innovation among manufacturers. “Variety is a virtue,” said Lori Lucas of Callan Associates.

Because there were no standards, TDF managers could pursue better returns by over-weighing equities and taking on more risk. While this form of style-drift might have looked like a smart strategy and a competitive advantage when stock values were rising, it back-fired when the market tanked.

Financial illiteracy?
Sixty-one percent of plan participants who owned TDFs thought the funds contained an implied guarantee of principal or returns, said Jodi DiCenzo of Behavioral Research Associations in Evanston, Ill., who surveyed plan participants last March. 

“They believed in ‘TDF magic.’ Many thought they would be able to retire on the target date. A significant percentage thought the TDFs offer a guaranteed return ,” she said, asserting that the TDF label contained “implicit advice.”

Participants assumed an implied guarantee for three likely reasons, DiCenzo said, including “excessive optimism” on the part of plan participants, “framing effects” that positioned TDFs as an alternative to riskier solutions, and a “focus on simplicity” that suggested that TDFs did more than simply adjusted asset allocation over time.

DiCenzo seemed to scold the financial services industry for hyping TDFs as a shortcut to success, and for not making their limitations clear in marketing materials.. “There’s no magic in TDFs,” she said. “You can’t invest your way to a secure retirement. You must save.”

Another panelist observed that investors in TDFs also bought other funds, overlooking the idea that a TDF alone was meant to offer adequate diversification and missing the concept that the TDF effect-evolution toward a low-risk asset allocation-would be diluted by the purchase of other funds. “Participants don’t realized that TDFs are funds-of-funds,” said Anne Tuttle of Financial Engines.

Marketing hype and weak regulation?
Fund companies pushed TDFs not because they were good for plan participants, said Richard Michaud, but because they gave investors a reason not to switch funds. Plan record keepers like TDFs, he added, because they were relatively easy to keep track of.

“TDFs simply sales while encouraging people to stay in the same fund until retirement,” he said.

Many TDFs are non-compliant with the regulations of the QDIA, said Dalbar’s Harvey.  TDFs do nothing to limit investor losses, although that is a requirement of a QDIA, and many TDFs charge a fee if an investor exits the fund within 90 days, although that’s not permitted under existing regulations, he said. 

One retirement plan advisor faulted regulators for not making sure that plan participants were aware of TDF shortcomings. “These hearing should have been held five years ago, before the horse was out of the barn,” said David A. Krasnow, of Pension Advisors. 

“We have steered our clients away from the TDF concept,” he said. “It was put out to the masses before it was properly researched. Inadequate oversight has jeopardized Americans’ financial security. People may never be able to retire because they trusted the government.”

It’s unlikely that TDFs will vanish, because their footprint in the defined contribution world has become too large. Invented in 1993 by Barclays Global Investors, they are now manufactured by dozens of fund companies.

More than 60% of employers now use them as a default contribution option. Through Q3 2008, assets in this sector were US$187 billion, up from US$ 115 billion in 2006, according to Standard & Poor’s. Cerulli Associates Inc. recently predicted that TDFs could gather up to $1 trillion in assets by 2012.

© 2009 RIJ Publishing. All rights reserved.

The Automatic IRA, the Saver’s Credit, and the R–bond—these concepts are among the initiatives the Obama administration hopes will extend 401(k)–type savings opportunities to the millions of workers whose employers don’t offer retirement plans.

J. Mark Iwry, a co-developer of some of those concepts while at the Brookings Institution’s Retirement Security Project and during a stint in the Clinton administration, recently joined the administration as Deputy Assistant Treasury Secretary for Retirement and Health Policy.

At the end of May, Iwry (pronounced eev-ree) addressed a group of journalists at a four-day seminar on retirement issues hosted in Washington, D.C., by the National Press Foundation and sponsored by Prudential. The Automatic IRA, the Saver’s Credit, and the R–bond were the main topics of his talk.

Retirement Income Journal has provided a condensed, edited version of Iwry’s talk. Other resources provided during the retirement seminar can be found at www.nationalpress.org/info-url_nocat3517/info-url_nocat_show.htm?doc_id=934426.

These initiatives reflect the activism of the Obama administration, which wants to lift the savings rates of millions of workers whose employers don’t offer retirement plans, and thereby help them break the cycles of debt and poverty.  

The Automatic IRA, as Iwry described it, would give millions of employees in small businesses access to a 401(k)–style retirement savings plan without requiring owners of small businesses to do anything other than process the monthly contributions through their payroll systems.

“[The Automatic IRA] requires employers to make their payroll system available, but without a penny of out–of–pocket costs for the employer and with minimal tasks,” Iwry said. “Employers would simply make their unused [payroll] capacity available.”

With the Saver’s Credit, the Obama administration would reverse the current retirement savings incentive by replacing the simple deductibility of the traditional IRA contribution from earned income with a 50% refundable tax credit that would go into the IRA. “The size of the incentive would be determined by the size of the contribution, not by the income level,” Iwry said.

Under the current incentive system, people in higher income tax brackets get a bigger subsidy for savings, he added, and the Obama administration thinks that’s not using the one of the government’s largest subsidies to maximum effect. “All of the other tax deductions are dwarfed by the $100 billion that are foregone each year to encourage retirement saving in public and private plans,” Iwry said.

The R–bond is a type of government bond that would be offered as an option in employer–sponsored retirement plans and IRAs, as a safe investment for an individual’s first few thousand dollars in savings. Managed by the government, the R–bond program would relieve private investment firms of the task of managing unprofitably small accounts. “The money would be in the R bonds until the account gets big enough for the money to go to the private sector,” Iwry said.

In the administration’s plan, he said, all three concepts would work together to provide a retirement savings plan to the half of all current employees who don’t have access to one. They would be automatically enrolled in an Automatic IRA, their accounts would be augmented by the Saver’s Credit, and their first contributions could go into risk–free R–bonds.

Iwry was Benefits Tax Counsel at the U.S. Treasury Department from 1995 to 2001, serving as the principal executive branch official directly responsible for tax policy and regulation relating to the nation’s qualified pension and 401(k) plans, employer–sponsored health plans, and other employee benefits. With William Gale and Peter Orszag, Iwry co–edited “Aging Gracefully: Ideas to Improve Retirement Security in America” (Century Foundation Press, 2006).

The automatic IRA proposal he co–authored through the Retirement Security Project has been introduced as a bill in Congress, and his proposal to leverage state resources to expand pension coverage has been introduced as a bill in several states. He helped develop the Saver’s Credit, which is claimed on 5.3 million tax returns each year, and the SIMPLE IRA, which covers about three million workers.

© 2009 RIJ Publishing. All rights reserved.

How long do you expect to live? More importantly, how long would you like to live?

As the baby boomers (now as old as age 63 or as young as 44) approach retirement, we hear more and more about unprecedented gains in longevity. IRS tables¹ show that a 65 year old today can expect, on average, to live to age 86. Many will live much longer than that, as Thomas Perls, MD, MPH, and Margery Hutter Silver, EdD, so deftly illustrate in Living to 100: Lessons in Living to Your Maximum Potential at Any Age.

Perls and Silver also underscore the idea that there are steps we all can take to increase our odds of having a long, healthy life: Not smoking, exercising regularly, even simple steps like flossing your teeth, can add years to your life. Of course there are also factors that we can’t control. Women tend to live longer than men. And having good genes helps. People who have a history of longevity in their families tend to live longer than those who don’t.²

And what about the possibility of medical breakthroughs that could help us live healthier, more productive senior years by finding cures for diseases such as cancer, diabetes, heart disease, or Alzheimer’s? In their new book, Fantastic Voyage: Live Long Enough to Live Forever, Ray Kurzweil and Terry Grossman, M.D., suggest that, as more radical life-extending and life-enhancing technologies become available over the next two decades, “Immortality is within our grasp.”

An opportunity to connect
Clearly, a longer lifespan is considered a good thing, something we can all aspire to – as long as we remain active, healthy, and solvent. At the same time, no one wants to outlive their health or their money. This latter concern is something that we in the financial services industry are accustomed to calling “longevity risk.”

Indeed, longevity risk-the risk of outliving one’s money-has become a catch-all for a number of related, but separate, risks which can include: loss of principal, inadequate returns, inflation risk, and the risk of unexpected expenses for health problems or long-term care. Separately, any one of these can result in too quickly consuming one’s assets. In combination, these risks can be devastating.

But is calling longevity a “risk” the best way to connect with our clients and prospects on this critical and often sensitive issue? The American Heritage Dictionary defines risk as “The possibility of suffering harm or loss, danger.” Becoming physically or mentally disabled is a risk. Needing long-term care is a risk. Certainly, running out of money or not being able to maintain your desired lifestyle are risks. But, would we connect better with our clients on an emotional level if we instead found a way to embrace the longevity “opportunity” and to tailor our dialogue and solutions accordingly?

Address the individual, not the average
Of course life expectancy tables are based on averages, and there are many people who live much longer than the average. Conversely, this also means that some other people will have significantly shorter life spans. Many of our clients may have family histories, current health problems, or detrimental behaviors that suggest that they will not have to worry about longevity risk.

While these individuals may still be faced with many of the same risks as those who can reasonably expect to live longer than average, some of the solutions for them may be less appropriate than those for the longer lived. Certainly, a conversation focused on longevity risk for those who are more worried about immediate health issues and dying prematurely is not the best way to connect. Some basic discovery of each individual’s situation and attitudes is clearly essential in determining the best approach.

Legacy objectives also play an important role in determining the potential solutions that best fit each client. Does he or she want to have a more conservative lifestyle in retirement to provide more to beneficiaries or is the objective to spend their last dollar on the day they die?

Returns do matter
And let’s not lose focus on returns: Over long periods of time, they do matter a great deal. If the key challenge is how to help people with twenty or twenty-five year life expectancies ensure that their money lasts, returns are absolutely critical. According to Gerry Murtagh, manager of Ernst & Young’s Insurance and Actuarial Services’ Retirement Income Knowledge Bank (RIKB), “A 1.25% greater compound annual return (whether through better investment management or lower expenses) could potentially extend a 20-year payout by 4 years or a 25-year payout by 7 years.³ A 1.9% greater return could add 6 ¾ years or 14 years respectively.”⁴

Murtaugh’s figures are based on the 251 variable annuities they track (all VA’s in the RIKB offer some type of living benefit), where the average mortality and expense (M&E) charge is 1.25%. This M&E charge varies from 0% (on a product that has a $20 monthly fee) to 1.90%. Of course this charge is for the guarantees provided and is in addition to the investment management fees for the underlying investments. 

While these examples offer a simple illustration of the importance of average returns, we also know that the sequence of returns has a profound impact on asset longevity. That’s why variable annuities that offer guaranteed minimum withdrawal, income and/or annuity value benefits (living benefits), in addition to longevity protection, have such great appeal. For many clients, the living benefits that protect against market risk are even more valuable than the pure protection from longevity risk. At the same time, how do we evaluate the combination of benefits provided by a variable annuity for a client with shorter than average life expectancy? Should the industry provide rated premiums for annuities the way it does for life insurance?

In their book, Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance, Roger G. Ibbotson, Moshe A. Milevsky, Peng Chen, and Kevin X. Zhu provide a useful model for determining the point where it makes economic sense to purchase an income annuity designed to protect against longevity risk. For them, it’s the point at which the benefit of the transfer of mortality risk exceeds the increase in fees, all other things being equal. Examples they include show that, at younger ages, what you give up in return may not be offset by the benefits of this risk pooling. At older ages, with shorter average life expectancies, the risk pooling may be much more advantageous.⁵

Clearly these are complex trade offs. And they underscore the need for a comprehensive and personalized solutions for each client rather that a one-size-fits-all approach. Clients need sound advice from a knowledgeable advisor who can match appropriate solutions to a client’s needs.

So, how do we explain and simplify these complex solutions and trade offs for our clients?

No longer a predictable path
First and foremost, let’s change the way we begin the discussion with our clients and eliminate the awkward industry label of “longevity risk”. Instead let’s talk about longevity as an opportunity. While there may be many challenges in creating a retirement income stream, longevity presents a great opportunity for future generations of retirees to redefine retirement for the better.

In reviewing the results of The Merrill Lynch New Retirement Survey: A Perspective From The Baby Boomer Generation, Ken Dychtwald, Ph.D., President and CEO of Age Wave, found what he called “a birth of a whole different vision” of retirement. “It’s all very exciting,” he observes, “but when society no longer lays out a predictable path for retirement, individuals will have to be creative in planning what retirement means to them and deciding how to get there.” The Merrill Lynch study also suggests that a significant number of baby boomers will make their money last in retirement by continuing to work, either part time or by cycling in and out of the work force: 78% of the baby boomers surveyed envisioned an “ideal plan” for retirement as including work in some capacity.⁶

Other studies confirm this trend. In Rethinking Retirement, a 2008 study from Age Wave (sponsored by Charles Schwab), survey respondents were almost twice as likely to say that retirement is a time for a new, exciting chapter in life as they were to say it is a time for rest and relaxation. And 60% said they would like to get involved in a new line of work.⁷

Working in some capacity in retirement will undoubtedly be one of the key ways future generations will turn the so-called longevity risk into the longevity opportunity. If Stump, the 10-year-old Sussex spaniel (that’s 70 in dog years) can come out of retirement without any training to take the best of show in the Westminster Kennel Club’s 2009 competition, we baby boomers can be productive a bit longer too!

Let’s turn our focus to first helping our clients find ways to maximize their longevity opportunity and then to providing solutions to the many real risks that can “cause harm or loss.” Lifetime income annuities, variable annuities with living benefits, and structured products, as well as new products in development or those not even conceived as yet, may all be part of the solution.

I believe the key is to package these solutions with the positive message that longevity is potentially a great bonus, not a risk!

¹ IRS Publication 590, Individual Retirement Arrangements
² www.livingto100.com
³ Based on a 4.25% vs. a 3% real annual effective return and payments at the beginning of each month
⁴ Based on a 4.9% vs. a 3% real annual effective return and payments at the beginning of each month
⁵ Lifetime Financial Advice: Human Capital, Asset Allocation and Insurance, © 2007, The Research Foundation of the CFA Institute
⁶ Merrill Lynch Advisor^TM, 2005
⁷ http://agewave.com/research/landmark_rethinkingRetirement.php

A recognized expert in retirement income planning, Stephen Mitchell has spent more than 30 years in the retirement and financial services industry as a marketing executive at Fidelity Investments and at Merrill Lynch, where he lead the development of The Merrill Lynch New Retirement Studies – A Perspective From The Baby Boomer Generation (in 2005) and A Perspective from Individuals and Employers (in 2006). Today, Mitchell is chief operating officer for the Retirement Income Industry Association and a consultant to the retirement industry. Additional resources: www.riia-usa.com; www.stephenwmitchell.com. He can be reached at [email protected].

Notes: Polly Walker provided editorial assistance. This article first appeared in the DSG Dimensions Newsletter. The opinions expressed in this article are those of Mr. Mitchell as an individual, not as an officer or director of RIIA. RIIA in no way endorses the content or intends for the information provided on this site to constitute financial, investment, tax or legal advice of any kind.

 © 2009 Stephen Mitchell