What happens if the "boom" in "boomer" is the sound of their retirement portfolios running out of money long before they've run out their youthful life force? If unprepared baby boomer clients face the prospect of running out of money in retirement, shouldn't their retirement portfolios include a guaranteed income?
The problem: There is going to be trouble in boomer retirement land -- big trouble -- and a lot of firms haven't figured it out yet.
How do I know? I have the best job in the world. I help protect our clients from the pain of an investor lawsuit or complaint. Our clients are wholesalers, financial advisors, broker/dealers, and insurance companies who all want to do the right thing for the investor and raise profits at the same time.
So I am on a mission. I want financial advisors and corporate execs to be able to sleep at night knowing their investors are happy, in great products, and the companies they recommend are solid and secure. I don't want any lawsuits, complaints, or worse -- criminal prosecutions -- on my watch.
When boomer assets "go boom" in retirement
Here is the situation: Baby boomers are woefully ill prepared for retirement. Based on numerous statistics I have seen over the years, it wouldn't surprise me if the unthinkable, running out of money in retirement, happens to 50 percent of them. And it could be more.
Baby boomers have their heads in the sand when it comes to retirement. Two-thirds of Americans believe they will have the same lifestyle in retirement as they do now, even though less than 42 percent have ever bothered to calculate their retirement needs, according to a study by the Employee Benefit Research Institute (EBRI). The U.S. Department of Commerce reports the average savings rate is now close to -1.7 percent, and the average savings for retirement is a pitiful $50,000.
According to Price and Associates, 80 percent of top executives who are making between $500,000 and a million dollars a year in income (not net worth!) are worried about running out of money in retirement, and with good cause, as it is likely to happen at all levels of society.
To compound the situation, boomers will have a longer retirement than any other generation. Some think it could be as long as 30 years. Some people might end up being retired longer than they actually worked.
So let's connect the dots: Baby boomers are likely to run out of money in retirement. It is going to be a big surprise to them. Investors hate surprises. Unhappy investors, particularly surprised and unhappy investors, run to their attorney's office.
Retirees who have run out of money do not have many alternatives, and those they do have are unpleasant: A.) go back to work (if they are physically able and someone will hire them); B.) decrease spending dramatically; C.) die; or D.) sue their financial advisor who didn't protect them against this catastrophe.
I predict many will choose "D" and file complaints and lawsuits in record numbers.
Some of you are probably thinking, "Well, that is 10 years away. The statute of limitations will save us." Think again. Remember your chief legal counsel coming to you with a great idea: mandatory NASD arbitration on all new account forms? She made a great case for you being in a more friendly, less expensive forum than the county courthouse. You now refuse to take an investor unless he or she gives up the right to sue you in a court of law.
There is good news and bad news in that. The good news: You probably saved some time and money in arbitration. The bad news: Arbitrators are unpredictable and have been known to completely ignore the statute of limitations, much to the detriment of the firm. So don't count on the statue of limitations to save your bacon.
To make matters more difficult, there is a great product that could help investors have a guaranteed income in retirement and allow them to have equities in their portfolio, one that retirees would never outlive. Unfortunately, many advisors are too scared to mention it. Why is this? Advisors are scared of unwarranted bad press and misunderstandings. And what is the product to which I am referring? The product is variable annuities.
Why you should consider variable annuities
There are a number of reasons why I like variable annuities from a litigation-prevention perspective:
1. The investor knows the worst-case scenario the day she signs the paperwork. Granted, she will not know the best case on the day she sends in a check; only time and the market will tell. But the worst is known. That means there are no surprises. Surprises are what drive unhappy investors to their attorney's office.
2. It takes the fear out of the marketplace. Investors sleep better knowing they have a safety net to their portfolio so they can invest in equities, get the upside-market upside, and have protection for the downside.
3. Take the following case, which happened to an advisor friend of mine, Edward Camp. The husband of an older couple retired, and shortly thereafter, the market tanked and cut their retirement savings in half. This is the worst possible thing that could happen to any retiree, because it is unlikely the person will have enough time to make it back. The agitated couple asked Camp to referee a serious fight.
4. The husband wanted to put all the money into equities. His reasoning? It was the only way to get the nest egg back to acceptable levels. The wife was insisting on a CD. She couldn't take the stress of being in equities and taking further losses. Camp had a great suggestion, one that addressed both of their concerns: a variable annuity with a living benefit rider that would guarantee a certain income in retirement. It met both their needs. Camp says they later contacted him and thanked him for saving their marriage. They were so angry and polarized over this issue, they had been ready to divorce before he provided a solution that pleased both of them.
5. Advisors can use a word we all love but can never say: "guaranteed." We can say it because there are contractual guarantees, guarantees that are very important to clients.
Is this the perfect investment for everyone? No, of course no product is perfect. It is a complicated product and not right for everyone.
The following cases are not good candidates and should be avoided:
- The client is young and has a strong likelihood of needing the funds, incurring either tax or withdrawal penalties
- The client can take a great deal of risk and has no interest in insuring his portfolio
- The client doesn't understand the product
Finally, this investment, more than others, should be sold carefully, with lots of disclosure.
What can it do for financial advisors? Variable annuities can help you sleep at night. Your clients have guaranteed income in retirement, and there are no surprises. That's good from an attorney's perspective, too. I like my shut-eye as much as the next gal.