Boomers retire, shift from saving to spending


By David Pitt

When it comes to the stock market, investors are no longer in a code red state of anxiety. But it’s still code orange.

The market bottom was just two years ago, so investors are still fearful of steep loses. They’re looking for more ways to guarantee that they can turn their savings into a steady income stream without totally handing over control of their money.

“We refer to it as the retirement paradox,” said Lynne Ford, CEO of individual retirement services for ING Financial Services.

The contradiction is that today’s retirees want control over their retirement money yet they want advice and help on how to make it last, she said.

Much of the new expectations come from the baby boomer generation reaching retirement age. It’s been estimated that 10,000 people will turn 65 every day this year. That pace then continues for the next 19 years.

Those reaching the traditional retirement age are just coming off a dreadful recession that pulled down home values and retirement balances, experiences that have changed the way they think about saving, investing and spending. The expectations of this group are different for several reasons:

•A new fear of losing money caused by the recession and market downturn has investors wanting guarantees that they won’t lose their principal or at be least assured of a certain level of income.

•Bank failures and high profile fraud cases have investors less willing to turn money over to an adviser. They also don’t want to lock it all up in products that limit the ability to react to changing costs like health care or gas.

•Workers change jobs frequently and as a result have savings in multiple locations, which may include a mix of 401(k)s, IRAs and brokerage accounts. They want help to pull it all together.

•Fewer pensions mean workers must save enough of their own money to supplement Social Security, which typically replaces 40 percent of pre-retirement income. Saving enough is a big challenge since today’s 65-year-old retiree will likely need 20 years or more of income after leaving work.

Today retirees are increasingly focused on maximizing the income they generate from their retirement savings.

In many cases, a portion of the funds may be used to buy an annuity.

Annuities are insurance products that provide a stream of income from a lump sum of cash. Retirees may use all or part of their savings to buy an annuity. It’s becoming more common for advisers to recommend annuitizing at least enough savings to pay food, housing and other basic expenses. That leaves the remaining portion of savings to be spent as needed.

Sorting through all the choices, however, is complex and many workers entering retirement need help.

“They don’t have a road map on how to bring all this stuff together and that’s where a sense of being overwhelmed comes from,” said Ford, the ING retirement specialist. “They don’t see how it all comes together.”

That’s where employers and the companies that provide retirement plans can step in and help by providing more holistic advice, Ford said.

Some of the major retirement savings account players have rolled out new programs in recent months.

Vanguard Group launched an IRA with an annuity option. Money from a 401(k) is rolled over to an IRA as the worker retires. Vanguard partnered with Hueler Companies Inc., which provides online quotes and comparisons of various annuity products. Educational tools help retirees find the mix of products that meet their income goals.

The Profit Sharing/401k Council of America (PSCA) recently said it will make available to its member companies the same IRA rollover and annuity purchasing option as Vanguard. The nonprofit PSCA has 1,200 member companies with about 6 million employees.

MetLife Inc. in March teamed with bond giant PIMCO to create a retirement product in offering PIMCO mutual funds. These funds are designed to provide monthly payments to help protect against inflation risk. In addition, the retiree has an option to separately purchase a MetLife annuity to provide monthly lifetime income after mutual fund distributions end.

Other companies with new programs include:

•Putnam Investments: Began offering a suite of income-oriented funds that aim to help retirees develop strategies for monthly income. They will account for varying levels of risk to address changing financial needs throughout retirement.

•Fidelity Investments: Offers an online tool to help investors assess income needs, structure a portfolio and develop a withdrawal strategy. The tool combines a variety of bond funds, target-date and asset allocation funds to reach the goals. Managed accounts and annuities may also be used in the mix.

•Financial Engines: Its managed account program provides steady monthly payments from a 401(k) account. It uses various investment strategies to produce income then offers an option to buy an annuity in retirement.

Those are just a few examples of how companies that have specialized in helping workers save are jockeying to hang on to the assets as employees move into the retirement drawdown phase.

“They’ve seen this tidal wave coming and they’ve been issuing dozens of new products over the last several years with all sorts of different twists to try to capture their fair share of the market,” said Leslie Prescott, a consultant and author of a new report on retirement trends for Financial Research Corp. “I’m guessing in the next few years it is a major trend that’s going to shift the market.” — AP