I was ready to retire: The opportunity of 2009
By Matt Neuman
The financial services industry is all about opportunity. Where do we focus our time, energy and resources to make the biggest impact? Where is the opportunity tomorrow that I can plan for today? Today, I'll hand you an incalculable opportunity that few have yet to realize, but one that everyone will capitalize on by the end of 2009.
Let's begin with a quick story: Michael and Barbara Clark have been referred from one of your ideal clients. They are a picturesque, healthy and vibrant couple who are on the brink of retirement. At ages 61 and 60, they've saved diligently for retirement, and have made sure to always live within their means. Working together, Michael and Barbara have a crystal-clear vision of what their next 30 (golden) years should look like: a simple country club membership for golf, tennis and social events; increased time with children and grandchildren; and an occasional vacation to places they've never seen and only read about. But as Michael and Barbara sit in your office today, it's evident that something is wrong. After a couple of questions, it's painstakingly obvious... their retirement portfolio is down 32 percent from a year ago and this amazing couple in front of you is lost in retirement planning. To be very frank, there's a decision they must make that's very tough to swallow. Do we retire now with a lower standard of retirement? Or do we delay retirement and build our portfolio back? For you, as an advisor, this is your opportunity.
Michael and Barbara Clark aren't alone in their situation. According to U.S. News & World Report (July, 2009) and the Boston College Center for Retirement Research, equities have declined $9.8 trillion since last year. Some of that affected commercial banks and insurance companies, but $7.2 trillion hit Main Street portfolios either directly or indirectly. Approximately $2 trillion of losses this past year directly struck 401(k)s and IRAs. We've repeatedly heard about the baby boomer generation being the biggest demographic force in American history. This is no different as the domestic economy is following their lead into retirement. Seventy-eight million baby boomers fully participating in $7.2 trillion of equity losses. The Clarks are far from alone in their situation.
To envision how this will develop in the future, we must first look into the past. Our most relative statistics from the extended bear market of 2000-2002 can shed some light.
Here are the market value declines from that period (these calculations come from online data from Dow Jones & Company, Inc., Standard & Poors, and The Nasdaq Stock Market, Inc.) :
|Index||Market peak (2000)||August 2002||Percentage change (2000-2002)|
|S&P 500||1527||916||-40.0 percent|
|Dow Jones||11,723||8,664||-26.1 percent|
*Note: For Market Peak values, S&P and Nasdaq data are from March 2000, Dow Jones data are from January 2000. At the peak of the most recent business cycle in March 2001, the values for the major stock indices were 1,160 for the S&P 500, 9,799 for the Dow Jones, and 1,987 for the Nasdaq.
Even more important for your 2009 opportunity is to realize the impact market losses and the precarious economy of 2000-2002 had on the job market. The Center for Retirement Research at Boston College published their findings about this exact topic below. Responding to the bear market, the labor force participation rate for older workers (age 55-64) jumped a full 2.0 percentage points -- an increase unprecedented in post-war U.S. economic history. Recessions have typically seen slow or even negative growth in labor force participation. But this time it was different, as the steep decline in market indices may have caused some older workers to postpone retirement and convinced other early retirees to rejoin the workforce.
Along with the above chart, the study also asserts that workers of past generations with defined benefit plans were largely insulated against the volatility of the equity markets, particularly in the last few years before retirement. The firms they worked for bore the brunt of risk in pension funding. A worker's pension was traditionally determined by salary and years of service, not the performance of the market. But in the marketplace of 2002 (and even more so today), workers must rely on their own investment planning within defined contribution plans. Older workers within defined contribution plans are required to make incredibly important decisions that will affect the quality of their retirement lifespan. Of course, they could protect themselves from unnecessary market risk as they near retirement, shifting from equity based investments to more risk-adverse vehicles, but how many individuals have this knowledge? And how many of the knowledgeable put a widely recommended strategy like this into action? In theory, it's simple; in practice a majority of investors rarely follow this model -- meaning retention of significant risk.
Even though clients retain investment risk during their working years, they still come into your office and ask for the predictability of a monthly income stream that can keep them ahead of inflation. Defined benefit pensions are no longer an option, so what is your solution? Your answer should never expose the client to losing control of their money; it also should not expose them to excessive risk and/or fee structures. What if you could show each client a worst-case guaranteed income scenario, while guaranteeing control of the money, eliminating market risk and drastically limiting fees? Many of the top annuity advisors I work with are doing exactly that these days. Guaranteed minimum income benefits (GMIB) offered through annuity carriers have radically evolved throughout the last two years. There are some on the market that will even guarantee an inflation hedge in the future for no extra cost. Pension plans are all but dead; you need an income solution to pick up the slack. Don't make it difficult, as you can very simply illustrate these income benefits to your client. Contact me for details on how the top annuity producer I work with ($33 million in 2008 personal production) offers this to every client and why he was the inspiration for this idea.
Fast forward to the fourth quarter of 2009. Michael and Barbara Clark are back in your office and they look much better than when you met two to three months ago. There is a certain glow about them and as you get further into conversation; they talk about the last couple months and how hard they've studied. Together, they planned more than ever, crunched every number you gave them and even started looking into that country club membership again last week. As you've laid out a financial plan to carry the Clarks through retirement, what do you think they'll be most mindful of in their savings? How influential will the memory of the last two recessionary markets be with them? How much risk do you think they'll want embedded in their portfolios? For your business, how many (of the 78 million) baby boomers are just like them?
Your business has the potential to double or triple by the end of the year. Now is the time to act and make this your opportunity to capitalize on. The financial services industry is all about opportunity. I believe you've just found yours.
*To receive your copy of the above mentioned (1) Boston College Center for Retirement Research study, (2) US News & World Report study or (3) Income Solution Sales Presentation please contact the author using the forum below.