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Requirement IQ

In June of 2008 Metropolitan Life Insurance Company released their second Retirement Income IQ Study. The first was conducted in 2003 and it revealed that “pre-retirees” had a surprisingly poor grasp of what they faced financially in retirement. The first study stated that: “overall scores revealed that survey participants barely outperformed the results one would expect to achieve by randomly guessing.” Do you think pre-retirees did any better in 2008? Unfortunately, the new survey revealed some disturbing misconceptions.

• Seven out of ten respondents (69%) overestimated how much they can draw from their retirement savings each year, believing they could withdraw 10% or more while still preserving their principle. Most retirement experts suggest a withdrawal rate of no more than 4% annually.

• Nearly half (49%) underestimated the amount of income they will need in retirement, believing they will only need 50% or less of their current pre-retirement income to maintain their standard of living. Experts recommend figures of 80-90% of annual pre-retirement income. Underestimating future income needs leads to under-saving. Starting with too small a nest egg and then encountering a consumption rate nearly double what you had planned means depleting those savings very quickly.

• Almost three quarters (73%) of respondents know that someone 55 years old in 2008 is eligible to collect full social security benefits at age 66. But only four in ten (44%) knew that the actual average Social Security benefits paid in 2007 were only $ 1,078 per month. Again, they have seriously underestimated the funds they will have available to them.

When asked to identify the financial risks they will face in retirement pre-retirees responded as follows:

• Longevity risk (outliving their savings) 56%
• Inflation risk (loss of purchase power) 34%
• Investment risk (loss of principle) 7%
• Interest rate risk (underperforming investments) 3%

More than half of respondents (56%) believe longevity risk is the greatest risk they will face in retirement. At best, most pre-retirees are clearly ill-informed about the critical financial issues that affect their retirement, although they do show signs of becoming more aware of the pending dangers they face.

Without getting into a lot of analysis here the simple fact is that most people have very little saved for retirement. Going to rely on Social Security? That $ 1,078 per month won’t take you very far. Even if you know that longevity risk is a serious issue, if you don’t have much in savings, you don’t have to live very long to “outlive” it.

On the other hand, you could beat these statistics by never retiring and thus never “outlive” your savings because you’d still be living on earned income. While cute, this (only slightly) tongue-in-cheek idea may actually be the only solution for a surprisingly large percentage of our population. It’s either that or live off the kids. This is all worth thinking about because the statistics are grim.

Why drop such happy news on you in the midst of an otherwise fine late summer? Because you should keep this in mind when resolving claims for ANY working person. We used to focus mostly on baby boomers but, upon further reflection, realized that no special mechanisms are in place for younger workers that will make this problem any easier. Corporate America shed responsibility for your secure retirement way back in the 1980’s when they dropped traditional pension plans in favor of the ubiquitous 401(k) plans we all know today. Unfortunately, most workers lack the financial savvy (and sometimes the discipline) to save and manage their own retirement planning themselves. Nevertheless, the old pension plans are never coming back. Indeed, most of us are on our own.

If you found yourself in this position, wouldn’t you like a second chance? So will many of your claimants. For them, settlement represents that opportunity. Even a small allocation set aside now and deferred until retirement can grow to a surprising amount when left alone. And – just like the old pensions – you can set them up to be guaranteed and for life, continue to your spouse if you die first, etc.

It may be do-it-yourself, but these settlement-funded retirement plans are a remarkable opportunity to put back in place what has been lost – true financial security in retirement. Ah yes, and don’t forget the icing on the cake: settlement-funded retirement plans are fully tax-free, not merely tax deferred like 401(k) plans.

Think you’re doing a claimant a favor by structuring their settlement? You are. You can do working claimants an even bigger favor by exploring retirement security and making them aware of this option. If you need help explaining all this to a claimant just call Frank C. Kilcoyne, CSSC at 800-544-5533. I am here to help.