The ultimate challenge: Longevity

Figuring out how to pay for a growing population of elderly

Dec 12, 2010 @ 12:01 am

By Mark Schoeff Jr.

One of Gary Gilgen's 69-year-old clients wonders whether she might outlive her retirement assets. The thought crosses her mind not because of actuarial tables or the latest scientific report about longevity but rather as a result of the real-life experiences of her mother, 92, who is running out of cash.

Mr. Gilgen, a senior financial adviser at Rehmann Financial, is witnessing firsthand how the lengthening life span of Americans is affecting the financial advice business.

“Getting clients to believe they can live a lot longer than they anticipate is a huge problem,” he said.

We can all thank science for the increase in life expectancy.

In 1930, if someone made it to 60, he or she could expect to live for another 15.2 years. By 2006, that had increased to 22.4 years.

As a result of medical advances, the percentage of the U.S. population over 60 is projected to increase to 26.4% by 2050, up from 16.7% in 2005.

Mark Nash, a partner at PricewaterhouseCoopers LLP, said that his firm has been modeling investment plans projected out to age 95 for the last two or three years.

Over that time, the country has suffered through a financial crisis and a severe recession, which has significantly reduced retirement nest eggs and raised questions about just how much money is needed to fund decades' worth of retirement.

“It is a real concern right now,” Mr. Nash said. “It will take more to support retirees than people assumed it would five years ago.”

A confluence of setbacks is depleting retirement funds. The housing crisis sliced home equity, rock-bottom interest rates are significantly limiting returns on certificates of deposit and fixed-income assets, and a focus on deficit reduction in Washington is raising questions about the long-term status of Social Security and Medicare.

Solvency challenges for government programs present red flags for retirement. Although Social Security is paying out benefits now, its reserves are projected to be exhausted by 2037, necessitating a 22% across-the-board benefit cut. Over the next 75 years, the system faces a $5.3 trillion shortfall.

Mr. Gilgen provides models to clients on how they will do in retirement with and without Social Security. He also adds an inflation rate that is higher than the Consumer Price Index because that measure leaves out volatile food and energy prices.

“Many times, it doesn't project well and it scares clients,” Mr. Gilgen said. “It's a bitter pill for people. They start using up their assets very quickly.”

The situation with Medicare is even more urgent. Estimated outlays for the program are $6.927 trillion between 2011 and 2020. Over the same period, however, only $2.578 trillion in Medicare payroll taxes is expected to be collected.

In addition to the problems that Medicare faces, the implementation of the sweeping health care reform measure that Congress approved this year on party line votes is in question. The new Republican majority in the House and the stronger GOP Senate minority have vowed to repeal the law.

The volatile mix presents a challenge to advisers when they try to help clients think through covering medical ex-penses in retirement.

“It's impossible to plan,” said Ed Bayarski, president of Strategic Wealth Planning Inc. “What assumptions can you make?”

Unfortunately, there's no silver-bullet solution that will ensure financial security in retirement.

“We're looking at this as a process,” Mr. Bayarski said. “You can't solve this problem with a product.”

While annuities provide some measure of retirement income certainty, consumers have been reluctant to embrace the product, because it would mean giving up control of their money.

“We don't see a lot of annuities in our client base,” Mr. Nash said. “We haven't seen people making the wholesale jump to annuities on the investment side, primarily because of the lack of flexibility.”

Other turnoffs include the complexity of the instruments and their fee structure, not to mention bad press over the years.

The insurance industry trumpets annuities as providing peace of mind regarding retirement cash flow. It realizes, however, that it has to step up its development and marketing efforts.

“We need to educate advisers on the benefits of annuities,” said Michael McCarthy, senior vice president and national sales manager for Axa Distributors LLC. “There's probably a spot for it in most people's portfolios; it's their own personal pension plan.”

In its marketing literature and discussions with advisers about annuities, Axa uses the acronym LIVIT to explain how annuities can address concerns in the areas of longevity, inflation, volatility, interest rates and taxes.

New York Life Insurance Co. also stresses that annuities can address growing worries about outliving retirement funds.

“It's what they'd like to have from their pensions, but they don't have pensions anymore,” said E. Thomas Johnson Jr., senior vice president for retirement income security at New York Life. “They haven't switched from accumulation models to deaccumulation models.”

Mr. Johnson said that his firm also is trying to educate investment advisers about the advantages of annuities, making the case that there are now institutionally priced “fiduciary-friendly” income annuities on the market. These annuities are designed to be included in a wrap program, thus allowing advisers to collect fees for managing income annuities.

“We're beginning to shift to the business model argument rather than just [focusing] on what's good for consumers,” Mr. Johnson said.

Some investment advisers are already convinced.

“These things are powerful tools if they're properly positioned,” Mr. Bayarski said of annuities.

Given lingering questions about Medicare, he's also a proponent of long-term-care insurance, recommending plans that provide a two-year benefit.

“Everyone needs to consider it,” Mr. Bayarski said.

Jeff Lewis, chairman of Generation Mortgage Co., is trying to convince advisers to consider reverse mortgages as a means of providing a monthly income stream for seniors through their home equity.

“They have not given our industry the fair look that they should,” Mr. Lewis said.

The number of retirement in-come options will likely proliferate, as will the number of years that get tacked on to the average lifespan.

“When we do planning and analysis, I like to use the age 100,” Mr. Gilgen said.

E-mail Mark Schoeff Jr. at


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