Retirement Readiness Index

The newly released “MetLife Retirement Readiness Index: Are Americans Prepared for the Transition?” indicates that pre-retirees can learn valuable lessons from retirees on making retirement decisions and completing a series of 15 specific career tasks to help smooth the transition to retirement.

The study asked respondents to determine their progress on such issues as:

• when they’ll retire and, upon retirement, whether or not they’ll transition to part-time work and what they’ll do
• how they’ll balance leisure and work in retirement
• how retirement will affect their relationships
• how much money/income they’ll need and how much they’ll have
• how much contingency planning they’ve done

The study revealed that those with fewer than five years until retirement have higher scores than those further from retirement and that men have completed more retirement planning activities than women. Those who have already retired scored much higher than pre-retirees in all categories.

Key findings of the study include:

• Most people wait until the final few years prior to retirement to make significant decisions. Older workers, age 60–64, those within five years of retirement, and retirees have put significant effort into determining what’s necessary to receive corporate and government retirement benefits.
• 46% of respondents who are still working will delay their planned retirement age. However, of those who have already retired, 64% report they retired earlier than expected, while only 33% retired when planned. Only 3% report they retired later than expected.
• Males are much more likely than females to have thought about whether full-time retirement is financially feasible and how much they are willing to work in retirement. They are also more likely than females to have determined whether their retirement plans are adequate, identified what external factors could affect their retirement, and determined the steps necessary to receive the benefits due them.
• 52% of respondents are behind in their savings goals; 25% say they are significantly behind.
• Only 28% are confident they are on track or have reached their goals.
• Only a third (35%) of the 45- to 49-year-olds feel prepared for retirement, while 64% of the 60- to 64-year-olds and 81% of 65- to 70-year-olds feel prepared.
• Forty-six per cent of respondents have considered the importance of relationships with co-workers in making the decision to retire and 45% have considered how various aspects of their retirement might positively or negatively affect their relationships with family and friends.

Behavioral Finance

While discussion about the so-called “retirement crisis” has primarily focused on saving enough money to retire, the threat of outliving your assets in retirement is becoming a bigger risk for individuals. In an effort to better explain and solve this “post”-retirement crisis, Allianz, a global financial services company, has tapped into the vast body of academic research on behavioral finance.

An Allianz report entitled Behavioral Finance and the Post-Retirement Crisis provides insight from academics on the behavioral aspects of retirement decision-making which will directly impact retirees’ quality of life in the years after they retire.

There are several reasons to approach this crisis from a behavioral finance perspective.

1. With the shift from defined benefit plans to defined contribution plans, the responsibility to provide income for life is now increasingly borne by individuals instead of employers. Thus, understanding how people make financial decisions is critical.
2. Another reason: Behavioral finance has played a major role in helping with the accumulation phase of retirement. For example, work by behavioral economists helped change the design of 401(k) plans and boost employee participation rates. It was a key contributor to the Pension Protection Act of 2006.
3. Behavioral finance can also offer significant insight into post-retirement decision making. For example, the Allianz report explores academic research on topics such as risk aversion, cognitive impairment and active choosing, which shed new light on factors affecting retirees’ decision-making capabilities.

By considering the behavior of retirees, advisors can better address the needs of this client segment and tailor solutions to help them achieve a secure retirement. The report ends with a behavioral checklist to help policy makers and others evaluate retirement income strategies from a behavioral perspective.

Another Flaw in Retirement Calculators

A new study finds another glitch in the online calculators that help Americans figure out how much to save for retirement. Too few of them take into account longevity risk, the risk of outliving your assets.

John Turner, the director of the Pension Policy Center, has test-drove 25 Internet-based retirement calculators through their paces using two fictitious profiles, one designed to tilt the results in favor of annuitization or partial annuitization and the second designed to tilt the results against buying an annuity.

He found that most programs are designed to figure out whether the user has enough money and retirement income to provide a desired level of income for a fixed number of years, but they do not consider longevity risk and the value of annuitization.

Only one of the 25 programs suggested annuitization would be sensible for the first profile. To the contrary, nearly all of the programs suggested phased withdrawals as a way to cover a fixed lifespan.

The fact that these programs do not advise annuitization may be among the reasons why people do not annuitize.

The Impediment of Debt

Sixty-three percent of Americans report debt impeded their ability to save for retirement in 2009. In 2010, 61 percent expect debt to cause them to save less for retirement, according to Scottrade’s 2010 American Retirement Survey. The Survey shows that paying down debt has slid as a priority. According to the study, the number of Americans paying down debt is at a four-year low (55 percent in 2007 vs. 42 percent in 2010), as is the number concerned about having too much debt (42 percent in 2007 vs. 37 percent in 2010).

NHRA

The average age of the pro car drivers this season at any of the NHRA Nationals is 45-plus.

Anti-Spike Law

The California Public Employees Retirement System is supporting a proposed law that would prohibit controversial practices that inflate or "spike" public employee retirement benefits.

Under SB 1425, all CalPERS-covered agencies would be subject to the following new requirements:

• Require end-of-career pay increases to public agency and school members who are not a part of an employee group or class to be limited to the increase provided to similarly situated members in the closest related group of employees within the agency during the applicable final compensation period and the preceding two years.
• Require school employers to report member pay rate on publicly available pay schedules, consistent with what is currently required for public agencies.
• Require employers to immediately provide CalPERS notice of changes in their labor practices or agreements that will affect pay rate or special compensation, and authorize the CalPERS Board to assess a reasonable fee on employers that fail to do so.
• Give CalPERS the authority to recover audit and adjustment costs from employers that knowingly fail to report employee compensation correctly or fail to identify the pay period in which compensation was earned.
• Requires CalPERS to establish a review process whereby a new compensation item may be included on its special compensation list.

South Carolina’s 90-Day Window

Legislation has been enacted to allow the South Carolina Retirement Systems to accept a disability retirement application from an otherwise eligible member if the application is received by the Retirement Systems within 90 days of the member's date of termination from employment.

The Retirement Systems historically accepted disability applications from members if the application was received within 90 days of the member's date of termination from employment until a May 12, 2008, decision handed down by the South Carolina Supreme Court decision eliminated the 90-day window.

The new legislation provides that the 90-day window applies to any disability application received by the Retirement Systems on or after May 12, 2008. A member's disability retirement application will be rejected if it is received by the Retirement Systems more than 90 days after the member's last day of employment with an employer covered by the Retirement Systems.

Certificate in Retirement Management

The Retirement Income Industry Association (RIIA) has partnered with Boston University's Center for Professional Education to offer an online Certificate in Retirement Management. The certificate will prepare financial advisors and financial professionals for RIIA's new, advanced education designation in retirement income planning and management, the Retirement Management Analyst(SM) (RMA(SM)).

To earn an RMA(SM) designation, a financial advisor or other professional must complete a rigorous educational and ethics training curriculum that focuses on:

1. Building the Retirement Plan to Mitigate Risks

The objective is to learn to create complete plans for retirement income that assure the client a floor of retirement income and provide appropriate exposure to upside potential, based on each client's unique goals and circumstances.

2. Mastering the Advisory Process

Using a simple, but powerful "hub and spoke" approach, the client is at the center and the process looks at the client in a holistic frame that includes the household balance sheet; creating a life-cycle profile; assessing retirement risks; risk management allocation; and choosing the right products. The objective is to expand the focus from traditional  Financial Capital to now include Human Capital and Social Capital in every retirement income plan.

Boston University's Center for Professional Education will offer the Certificate in Retirement Management in a convenient online format beginning September 2010. facing an entire generation of Americans about how to create durable, inflation-adjusted

Regrets and Enjoyments among Affluent Canadians

Retired Canadians over the age of 50 with assets of at least $100,000 are enjoying retirement. More than half (56 per cent) say their quality of life has improved, according to the first annual Royal Bank of Canada Retirement Myths and Realities Poll. On the other hand, only 38 per cent of pre-retirees in this same demographic group expect life to improve after retiring, with half (50 per cent) expecting no change.

Regrets stack up as follows:

• Just over half of retirees (55 per cent) and 65 per cent of pre-retirees have them.
• Some regrets among retirees include:
• not taking better care of themselves (13 per cent)
• not starting to save earlier for retirement (12 per cent)
• not travelling enough (seven per cent)
• The main regret of pre-retirees was not starting to save earlier for retirement (18 per cent).

Hypersensitivity to Loss

Researchers have shown that investors experience the pain of financial loss more than the pleasure of financial gain. Eric Johnson, a professor of marketing at Columbia Business School, has found that for retirees, the stronger reaction to loss is even more acute. But at the same time, he has found that retirees respond less favorably to financial products with more protection and guarantees. The professor's explanation for this apparent contradiction is that retirees actually view giving up control of their money -- and giving up the ability to withdraw money when they want it -- as another type of loss. This means that products with guarantees and protection could be positioned as a way to gain control of finance and spending and policy makers should consider if a proposed solution is appropriate for retirees who are hypersensitive to losses.

Tangible Mental Accounts: Researchers have also shown that people tend to divide their money into separate mental accounts for various purposes (think travel or dining out) and that earmarking savings to specific goals (college savings, for instance) tends to increase saving rates. George Loewenstein, a professor of economics and psychology at Carnegie Mellon University, has proposed applying these concepts to retirement. The idea would be that retirees have separate accounts for various purposes and use different investment strategies with different levels of risk for each. For policy makers, the idea would be to ask whether the retirement income strategy offers "multiple accounts to facilitate different goals, such as paying the rent or spending money on vacations."