Retirement income solutions: managing longevity risk for baby boomers

By Jason Lampa MBA

College Savings Bank


We know it is possible to provide your baby boomer clients' with enough income during retirement. The question is whether you’re willing to change your perspective.

Once virtually nonexistent, the world's population of centenarians is projected to reach nearly 6 million by midcentury. That's pushing the median age toward 50 in many developed nations and challenging views of what it means to be old and middle-age. Their numbers are projected to grow at more than 20 times the rates of the total population by 2050, making them the fastest growing age segment.

While living longer is a benefit, it also presents challenges. The greatest challenge facing baby boomers today is the high probability of outliving their income.

Longevity risk

Most investors have less money today than they did 10 years ago. After the sting from watching their retirement accounts lose half their value, their dreams of a comfortable retirement sift away as their money sits at the local bank in the "safety" of a CD or fixed annuity paying 3 percent annually.

The most disturbing part of this scenario is that the majority of these folks have received awful advice from their "trusted adviser."

For the past 11 years, I have worked with financial advisers from Fairbanks, Alaska to Key Largo, Fla. Though in my travels I have come across a select few who are a blessing to their clients, the vast majority have failed their clients. It is not all their fault. Most were just toeing the company line, offering the products their manager instructed them to sell.

The annuity and mutual fund wholesalers throw additional salt in the wound as their biased sales pitch, combined with a bag of golf balls and a gumball machine, convinced advisers back in 2000 that 20 percent of an investor’s portfolio should be allocated to emerging technology.

My apologies for the heavy dose of truth serum; it is time to wipe the slate clean. For those of you still reading who may have sold a product or two for a couple rounds of golf, let's talk about solutions.

My staff and I analyze and perform due diligence on investment strategies and income vehicles across the globe. We know it is possible to provide your baby boomer clients' with enough income during retirement. The question is whether you’re willing to change your perspective.
Secondary markets

The initial public offering market for closed end funds has always baffled me. Instead of waiting for the closed-end fund to trade in the secondary market, institutions convince investors to buy the IPO and pay upfront commissions of up to 5 percent. History has shown that investors receive a higher return on investment when purchasing investment vehicles in the secondary market.

Purchasing income producing closed-end funds in the secondary market is the first of five retirement income vehicles that should find a home in the portfolio of baby boomers. We suggest the second segment of the portfolio be placed in what I believe is the most socially responsible investment in the market today: life settlements.

For those who can separate fact from fiction, purchasing life insurance policies in the secondary market gives seniors an opportunity to live the final years of their life with dignity. If the insurance company that sold the life insurance policy was the only game in town, how much do you think the aforementioned seniors would receive for their policy? Unlike investing in GM or Kmart, the grim reaper has never filed for Chapter 11.

The next portion of the portfolio should be allocated to the secondary pension market. Legal, protected by insurance and paying yields close to 10 percent, the secondary pension market is an effective way to possibly provide baby boomers with rates of return equal to the historical returns on equity. Moreover, the secondary private pension market is not manipulated by program trading and the hedge funds that control more than 50 percent of the trade volume on the major exchanges.

Moving along, we recommend advisers explore opportunities for their clients to invest directly into private companies or purchase private shares of public companies that allow your client to buy private and sell public. The wealth creation that occurs in the private market crushes that which is created in the public market. That is why the majority of millionaires are current or former business owners.

The final strategy we recommend advisers discuss with their clients is agriculture. The amount of fertile farmland worldwide is decreasing, while the population is increasing. Food prices, in my opinion, will soar over the next 20 years. Often overlooked and underappreciated, the heartland of America is an excellent place to look for private equity opportunities.

By combining closed end funds, life settlements, secondary pensions, direct investing/private investments in public companies and agriculture, baby boomers may significantly enhance their probability of living their retirement years in comfort.