Wednesday, July 28, 2010

Could Lifetime Income Benefit Boomer Women?

Boomers are faced with some immediate challenges.  Among those, after working for decades on "how much I can accumulate" for retirement, we are now asked to look at "how much lifetime income" those investments can generate.  This is not necessarily good news for Boomer women.

Those who have followed me on this site know that as a rule, I don't like annuities. For most of us, this sort of  - and I hesitate to call it such - investment is something you purchase to guarantee income.  Part mutual fund, part insurance policy and wholly too expensive on both counts, annuities, for whatever reason you purchase them, offer the buyer some peace-of-mind.  For women, annuities are particularly troubling and expensive. But the concept of guaranteed income for women in particular, is worth exploring.

When Amy Matsui of the National Women's Law Center spoke to the Senate Special Committee on Aging recently, she opened with the cold hard facts of retirement.  Women she noted tended to have smaller balances in their defined contribution plans or IRAs when compared to men ($34,000 on average compared to the $70,000 men had accumulated).
She strongly criticized the concept of these sorts of plans in part because of the self-directed nature of the plans, the feeble if inadequate investment selections available and the inherent risks these plans pose to the average, even experienced investor. Because women tend to stay in jobs for less time than men, the chances that any defined contribution plan asset accumulation would be less, even below the minimum required balance that would allow them to keep the plan at an old employer.  So they receive the lump sum payment, with the taxes and penalties and of course, the problem of starting over.

Ms. Matsui also points out that women are exposed to "longevity risk" more so than men. When a lump sum is paid by a 401(k) at retirement, the investor is left with managing that money so as to not run out. This can be a particularly daunting task for women - not because they are less savvy investors, many are more so than men - but because they will live longer and may outlive their spouses as well.

But this becomes even more problematic for the women looking to guarantee a lifetime income.  Annuities do not favor the women who need them most. When they shop for annuities, women tend to have smaller amounts to invest and therefore are subject to higher fees and lower effective returns than their male counterpart. Add to that, as Ms. Matsui points out, unlike defined benefit plans (pensions) which are not allowed by law to use gender as a factor in payouts, annuities use what she calls "gender-distinct mortality tables".  Women, because they live longer, get paid less than men even if they purchase the same product with the same dollar amount.

Because of that she fears that Social Security has become the retirement plan women can rely on, even if it isn't for much. Yet the solutions are relatively easy.

Among those solutions is the inclusion of some sort of lifetime income investment in all 401(k) plans. Tucked inside these plans, because of the law guiding how these plans are governed, women would benefit from the gender neutral handling of those options.

Rollover requirements on small balances could be changed as well allowing women to leave smaller balances in their former employer's 401(k). And, with the help of Congress, annuity products could be changed in how they treat women who live longer.

This could alter how women participate in the plans available to them. While it is widely acknowledged that only half the workers in the US have access to defined contribution plans at their place of employment, women lag behind their male counterparts in how they utilize them (only 40% of the women who have access to these plans use them). Is it because women want to know what these investments would be worth when they retire?  If they did, participation might increase.

Ms. Matsui points to the discriminatory process involved in purchasing an annuity.  She points out that a women, purchasing an identical product offered to a man, would receive over 9% less in monthly payments. With increased participation from employees inside a 401(k), the annuity it is believed would cost less and pay more as the risk is spread across a wider, more diverse group.  This doesn't occur when purchasing the annuity as a stand-alone product.

She admitted that she understood the administrative costs associated with maintaining these low balances in an employer's plan.  But Ms. Matsui argued that these low balances can add significant value to a low or moderate income woman at retirement.  The trend towards thinking of retirement in terms of income stream is gaining momentum and small balances should be considered as well.  Some is better than nothing, in other words, and when the post-retirement account can be enhanced even slightly, the quality of the retirees life increases.

The NWLC also wants spousal protection to be among the considerations when looking at the retirement plans of women. Because of the lump-sum payout of the 401(k), the protection in retirement of the spouse is left to the discretion of the retiree.  In a defined benefit plan, the spouse can receive benefits.

When the rollover occurs, the spouse may not receive what they may have gotten once the investment is reinvested and beneficiaries are chosen.  (Wills do not govern how IRAs are distributed leaving the chance that these retirement investment could go to children, even former spouses.) A change that would guarantee 50% to the spouse, unless waived would be a great stride toward improving the spousal benefit and income.

While some of these changes would provide only minimal changes in the lifetime income stream of low- to mid-income level, women, those incremental improvements could go a long way in increasing the quality of life, offsetting the total dependence on Social Security and promote the way we look at retirement from a total return on investments to how much will I get in retirement.

You can read Amy's testimony in pdf form by clicking here.
Paul Petillo is the managing editor of and a fellow Boomer

Saturday, July 17, 2010

Top Retirement Blog Award!

Boomers Retirement, has received 2010 Top 25 Retirement Blogs award!

Wednesday, July 14, 2010

The Boomer Bummer: Many of Us are Still Not There

Boomers take note: we still aren't at the enviable position of having enough money in our retirement plans to allow us to outlive those reserves. Should it come as a surprise that our retirement plans have not made us comfortable enough to suggest that we won't run out of money?

In the July 2010 EBRI Issue Brief, written by EBRI Research Director Jack VanDerhei and senior research associate Craig Copeland detail the travails of various cohorts in the pursuit of outliving your retirement nest-egg.

What they found was a "don't-feel-bad-for-yourself" moment we should all take note of: the rich can become less so in retirement, just like us. Okay, most of us have a greater chance of outliving our money as compared to the highest income brackets.  But the thought does have some comfort but few lessons.

The EBRI Retirement Readiness Rating™ is based on EBRI's Retirement Security Projection Model® (RSPM), which the institute first used in 2003 to evaluate national retirement income adequacy seeks to portray where we are in terms of retirement in the hope that we can make the changes we need to our plans (such as 401(k)s) while we are still working.  It is also designed to show advisers which steps to take to protect their clients.

The latest version of the survey includes auto-enrollment and auto-escalation of contributions in 401(k) plans, which have come as a result of changes on the legislative level.  It also includes updates for financial market performance and the often chaotic state of employee behavior.  The report is based on a database of 24 million 401(k) participants.

By simply looking at how much has already been accumulated across this wide swath of workers, they were able to determine when the money will run out.

The results after 10 years of retirement:
Lowest-income quartile: 41 percent are likely to run short of money.
Next-lowest quartile: 23 percent.
Third income quartile: 13 percent.
Highest-income quartile: 5 percent.
After 20 years of retirement:
Lowest-income quartile: 57 percent are likely to run short of money.
Next-lowest quartile: 44 percent.
Third quartile: 29 percent.
Highest-income quartile: 13 percent.

But what does "running short of money" actually mean?  The ERBI study used a combination of basic expenses based on information obtained from the Bureau of Labor Statistics' Consumer Expenditure Survey.  This also includes the biggest unknown but the highest projected retirement costs: health care.  By adding the cost of some health insurance and out-of-pocket health-related expenses, plus expenses from nursing home and home health care expenses, at least until the point they are picked up by Medicaid, the nest-egg most of us have will be under serious stress in a relatively short time.

While there have been some improvements in how much money we have currently accumulated, the group referred to as the early Boomers, those aged 56 to 62, the likelihood of running out of money has improved since the survey began.  But it still sees 46% of this group with less than adequate assets to cover the basic needs in retirement.  Late Boomers are only slightly better prepared with 44% likely to run short.

In short, we haven't put enough money to work for our plans to be successful.  We haven't allowed the plans to use the risk available to grow the plans the way they need to be nurtured.  And we have not harnessed our own budgets in such a way as to alleviate the pressures that accumulated debt takes away from our ability to save and invest more.

Paul Petillo is the Managing Editor of and a fellow Boomer.

Monday, July 5, 2010

Annuities in Retirement

I have never been a fan of annuities.  The plain and simple truth to this belief rest on the fact that an insurance company should not be involved in your retirement future, past or present.  These businesses do have a role in protecting you from unforeseen problems and the possibility of those issue delivering a financial blow that could derail your plans.  Insure your life, your house, your car.  But insure your retirement?
First, an annuity is as I wrote, an insurance product with an investment aspect that offers to mask the true identity of what it is.  Now annuities have been gaining traction in the retirement discussion as a way to guarantee a lifetime income for those who feel as though they may run out of cash.  Just like every guarantee you are offered (on many items that at the time would be too expensive to repair on replace), the cost is built into the offer.  In other words, you are paying upfront for something that you may never use.
To read about this interesting subject more from Paul Petillo, managing editor of and a fellow Boomer, click here.