Retirement income: What are your clients relying upon?

By Chris Conklin

Insurance Insight Group

You don’t need to look very hard to find study after study determining people are not saving adequately for retirement. For example, a recent survey by Wells Fargo revealed that while middle-class Americans think that they need $300,000 to fund their retirement, they typically have saved only $20,000.1
However, let’s suppose that your clients are not those people. Let’s suppose that they have been saving aggressively for retirement, and so it appears that they are in good shape. They are basing their assessment on the fact that they will receive retirement income from Social Security and a pension, plus they expect to generate a decent rate of return on their savings, and they will be able to supplement their other sources of income by continuing to work.
Thus, there are a number of factors they are relying upon. Are their assumptions reasonable? Let’s look at each one.
Social Security
  The Social Security program began in 1935 as a social welfare program to prevent the elderly from living in poverty. It is largely a pay-as-you-go system, with today’s wage earners paying for the benefits of today’s retirees. Thus, as birth rates decline and longevity increases, the program is more and more expensive. In 1950, there were 16.5 workers for every retiree. Today, there are only 2.9 workers for every retiree, and in 25 years, there will likely be only 2.1 workers for every retiree.2
2010 was the first year in history that the Social Security program paid more in benefits than it collected in taxes, a condition that will become chronic in a few short years. Thus, this program’s benefits, which are fairly modest at $20,900 annually to the average retiree and spouse, will nonetheless likely need to be adjusted downward over time relative to inflation in order to remain viable.
  Most private employers have already shut down their traditional pension plans, the type of plan that pays retirees a portion of their monthly income continuing for the rest of their lives. The number of plans in existence today is only one-quarter of the number that existed 25 years ago. Thus, most people already know that the burden of funding and creating a retirement income is squarely on their own shoulders.

However, if your clients currently are fortunate enough to have an employer that provides a traditional pension plan, can they rely upon it?Maybe not. The Pension Benefit Guaranty Corporation, a government agency that guarantees employer pension plans, collects $2 billion annually in insurance premiums from the pension plans it is expected to guarantee. It estimates that the amount of underfunding in corporate pension plans run by companies whose credit ratings are below investment grade or that meet one or more financial distress criteria is a staggering $168 billion – 84 years of its revenue.3
Even pension plans for public employees are in trouble. California Governor Arnold Schwarzenegger, while discussing California’s $325 billion in unfunded pension liabilities – which is $22,000 for every working adult in California – said, “In California, we had the Internet bubble, we had the housing bubble and I see in the very near future the public pension bubble.”4
Interest and investment earnings
  The financial press often tells our clients that a securities-based approach is ideal for retirement with statements such as this by Money Magazine Senior Editor Walter Updegrave: “Smart retirement investing … is about building a portfolio, specifically a portfolio of both stock and bond funds that gives you a reasonable shot at getting you to and through retirement.”5

As a result, people often build their retirement expectations around continuing to achieve high interest and investment earnings throughout the rest of their lives.
The reality is that most retirees are unwilling to execute such a strategy because risks to their personal savings are felt more acutely in retirement. The risks of a bear market wiping out their savings or low interest rates decimating their income are particularly painful for retirees because the effect of these risks are magnified when they are taking regular withdrawals from their savings. Their living costs don’t decline just because the market crashed.
What people often want and need in retirement is a steady income that reliably continues for the rest of their lives, no matter what the economic conditions or how long they live. They need a strategy that is safe, and that means less risk and perhaps a commensurate lower anticipated rate of return.
Income tax rates
  Right now, while our federal government is running record budget deficits, keep in mind that the massive baby boomer generation is still working and paying income taxes. Ten years from now much of that generation will be retired, no longer paying income taxes and instead receiving Social Security and Medicare benefits. Thus, we can expect tax rates to inevitably increase over time. Former Federal Reserve Bank Chairman Alan Greenspan has said, “I have no doubts that we have to raise taxes in order to close this huge deficit.”6
Continuing to work
The Wells Fargo survey cited earlier found that 72 percent of middle-class Americans between the ages of 25 and 69 expect to work through their retirement years.1  However, the reality is that most people end up retiring about five years earlier than expected due to health problems, job loss, or having to care for a spouse or other family member, while 90 percent of people stop working completely before age 70, whether they intended to or not.7
What are your clients relying upon?
  So, let’s return to our initial question: When your clients are relying upon these things, are their assumptions reasonable?
The evidence is clear to the extent that they are relying upon current levels of Social Security and pension benefits, high interest and investment earnings, current levels of tax rates, and their continued ability to work throughout retirement, you probably want to recommend that they use assumptions that are a bit more conservative.
2 Social Security Administration
3 Pension Benefit Guaranty Corporation
4 Los Angeles Times, April 23, 2010,
7 Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2010 Retirement Confidence Survey,

Chris Conklin, FSA, MAAA, MBA, is a licensed agent and Principal & Actuary of Insurance Insight Group and 
This article is for general information purposes only.  Neither the author nor Insurance Insight Group provides investment or tax advice.  If such advice is needed, the advice of a qualified adviser should be sought.