5 ways retirement planning is like an NBA game

photo(6)Teamwork, timing, and execution are all part of retirement planning. And, as I observed last night, they are also important elements of a National Basketball Association (NBA) game.

Yes, it’s time for another of my analogies. This time, I was inspired by a game between the Boston Celtics and Orlando Magic, which the Celtics won by a score of 120-105.

The common features I noted were as follows.

  1.  Players are on both offense and defense. Granted, last night’s final score shows that both teams were somewhat short on defense. Still, staying one step ahead of potential obstacles is an important strategy. In retirement planning, this may be in the form of a contingency fund or low-risk investments. Handling the defense well may enable one to take more risks on the offense.
  2. Keep your eye on the clock. Although real-life retirement planning does not come in 24-second spurts, the execution of a plan should be undertaken as soon as possible. Use this time wisely; every moment counts. And, keep in mind that the window of opportunity may be cut short by an unplanned event.
  3. Rebound, rebound, rebound. If you make a mistake, there’s a chance to catch it immediately and try again. Don’t let one missed opportunity derail your run toward retirement.
  4. Understand the risk-reward trade-off. A three-pointer can be exciting; yet, just as in real life, rewards are not as easy as they look. Sometimes, it’s worth it to take a little longer to reach a more likely, but smaller, result. Sometimes, it’s not. That’s why investors should consult their advisors, as the latter have the skills to handle a variety of situations that may arise.
  5. Saving the most important for last, teamwork leads to strong results. In last night’s game, four of the five Boston starters scored at least 16 points each, and the team combined for 28 assists. Yet, not all of the teamwork is on the court. Even before the game, plans are developed, analyzed, and explained by expert advisors. Good coaching—or advising—continues throughout the length of the game, and provides expert ways to refocus as needed.

This is just a short list of comparisons I jotted down last evening. Please feel free to add to this list by using the comment box. (And, for those wondering, the photo was taken from the first row of section 303 in Boston’s TD Garden.)

Reasons to look beyond your industry when marketing your business

OLYMPUS DIGITAL CAMERAWhen evaluating marketing strategy and tactics, executives need to emerge from their silos and seek out and draw analogies from other industries. My latest example of this inter-industry inspirational technique was a set of case studies in my marketing class, where students presented service-related issues encountered by a company or industry. By happenstance, both presentations made last week focused on firms that, following high-profile negative incidents, launched marketing campaigns that sought to bring consumers back to basics. According to the presenters, Carnival Cruise Lines refocused on onboard fun while JetBlue emphasized customer service.

Immediately, I saw applicability to the retirement income industry, particularly the variable annuity industry.

In early 2010, while working at Cerulli Associates, I authored a research report called Evaluating Your Variable Annuity Product Line. Among the findings were that, in the wake of the financial crisis, the industry had entered a period of “stabilization and rationalization” and a return to basics would emerge gradually in the years ahead. These findings met with some controversy, as the prevailing belief was that, despite data to the contrary, the presence of comprehensive guaranteed lifetime withdrawal benefits (GLWBs) increased sales. Yet, let’s fast-forward three-and-a-half years: many insurance companies reduced benefit levels or increased the costs, some discontinued the GLWB, and some firms exited the business altogether.

That said, the annuity industry—primarily the fixed annuity industry, however—has started to return to basics with the introduction of the deferred income annuity (DIA), a lifetime annuity variation that provides an income stream that commences a couple of decades from the time of purchase. Beacon Research estimates that sales of fixed annuity market DIAs have increased during each of the past six quarters, culminating in a 40% increase during second quarter 2013. At the same time, however, several insurers continue to tweak VAs by offering new products in which both parties share any losses the policies might incur. While this makes the VA more palatable (to both consumers and insurers), it is also a complex notion, yet one can argue that it is a way to preserve the traditional function of the GLWB.

While it is too soon to measure the impact of Carnival’s September 2013 campaign, my classmate related that JetBlue had success with its You Above All™ campaign in 2010. Nostalgia? Perhaps. Yet it also showed how companies can, or can hope, to rebound from a disruptive event by returning to their roots.

Cruise alliance is a model for the retirement industry

A few weeks ago, I deviated from my retirement research to focus on another area of interest – the cruise industry. The Cruise Canada New England Alliance held its 2013 Symposium in my city and I was privileged to attend this three-day conference that featured discussions with executives from cruise lines, port authorities, and other industry stakeholders.

As I listened to the presentations, I could not help but think of the applicability to the retirement industry. This was a discouraging exercise.

Let’s backtrack. The Cruise Canada New England Alliance consists of port authorities of five separate regions—New York City, Boston, Maine, Atlantic Canada, and the Saint Lawrence. Between them, they represent nearly 40 ports of call in 3 U.S. states and 5 Canadian provinces. The Alliance was established in 1988.

All of the members share the goal of maximizing passenger traffic to their ports. After all, an influx of tourists can have notable financial benefits for a locale. For example, the Historic Charlottetown Seaport in Prince Edward Island estimates that cruise ship calls during 2012 generated $13.4 million for the province. Therefore, it might be reasonable to draw the conclusion that these port authorities are competing for passengers.

Yet, that is not the case. Before you can get cruise ships to commit to regular visits to your port, you must first convince the cruise lines that the region itself is worth considering. And, that is the goal of the Cruise Canada New England Alliance.

And, that also exemplifies a key difference between the two industries I follow. In the retirement industry, financial services companies have a number of products worthy of consideration for a retirement portfolio, and many can fit together as neatly as a cruising itinerary. However, there is a strong tendency to point out the disadvantages of competitors’ offerings rather than join forces to explain how to address the retirement issue in the first place.

Not every product is right for every investor who is saving for retirement. And, any product recommendation should not be considered by itself—that is, it needs to be considered for its role in the overall journey. In that area, the retirement industry has a lot to learn. In the meantime, I am continuing to weigh my options for my next Canada New England cruise.


Want guaranteed income for life? Then opt in…again.

An article in today’s issue of InvestmentNews describes how one insurer’s plan to save a retirement income benefit could ultimately result in the loss of the benefit for some customers.

The Hartford Life and Annuity Company (The Hartford) will, as of October 4, require long-time variable annuity (VA) policyholders who elected the Lifetime Income Builder guaranteed lifetime withdrawal benefit (GLWB) to reallocate their underlying fund investments according to a prescribed formula. Those who do not will forfeit future guaranteed lifetime benefits.

This is a frightening prospect for a number of reasons.

The GLWB has been a key selling point for the annuity industry since the time of its introduction in the mid-2000s. According to the LIMRA report VA GLB Election Rates (2012, 4th Quarter), the GLWB election rate was 62% in fourth quarter 2012, easily eclipsing the 18% election rate of the second-most popular guaranteed living benefit.

Additionally, a large part of the growth of the GLWB in the industry involved so-called product development wars, in which insurers continuously one-upped each other to offer the most generous benefits to investors. Insurers even one-upped themselves to retain market share. And, when the economy faltered and hedging became extremely difficult, a reduction of benefits by one company opened the floodgates for the rest to follow.

Finally, advisors must now contact affected clients, some of whom were not theirs to begin with due to the passage of time and M&A activity in the years since the policies were sold. Inevitably, some will be unable to locate.

In all fairness, insurers have little choice when managing the risk inherent in these benefits. The implementation of investment option guidelines in concert with living benefit selection has been commonplace for years—whether in the form of asset allocation models or formulas that place limits on the percentage of funds allocated to specific asset classes.

Enacting such changes years after policy issue is permissible as the standard language in the contract between the insurer and policyholder included clauses that covered the insurer for a variety of contingencies. Even so, it was believed by many in the industry at the time that it would be unlikely for these to go into effect, other than fee increases.

Yet, this is my concern—given the copycatting that goes on in the VA industry, will it be long until other insurers terminate benefits unless customers take specific actions to keep them active? Discuss below.

Learning from sequestration – a case for a base income

A recent article in The New York Times described the human impact of reductions in unemployment compensation due to the federal government’s automatic budget cuts. According to the article, the level of emergency unemployment compensation (EUC)—defined as payments to those who have collected benefits for more than 26 weeks—decreased by nearly 11% effective this week for New Yorkers. (In my state, Massachusetts, EUC reductions will be 12.8% as of the first week of May.) These decreases, which will impact every state to varying degrees, will be in effect through September.

The New York Times profiled two individuals—a GenXer who is a married mom of a 7-month-old child, and a Millennial whose $60,000 per year job vanished nearly a year ago. There was no questioning their fear. How were they going to pay for groceries, for diapers, for medical needs? As one of them put it, “$40 a week adds up.” These are not luxuries; rather, they are basic living expenses.

Their stories got me thinking of parallels to income in retirement.

The key takeaway for me was that, no matter what your age, a base level of income is absolutely critical.

To be clear, there was nothing that long-term unemployed individuals could have done to avert their current financial situations. (Even an emergency fund would have, very likely, run dry by now.)  Yet, this brings to mind something they may be able to rely on later, once they’re able to amass several years’ worth of savings—an income, or immediate, annuity.

Data from the Beacon Research Fixed Annuity Premium Study shows that income annuities are growing in popularity. During 2012, income annuity sales represented 13.8% of total sales of fixed annuities, up from 11.1% in 2011, and sales of the product grew 8.5% year-over-year.  

So, will memories of unemployment be the impetus for even greater consideration of income annuities down the road?  Will Boomers, many of whom are also dealing with extended unemployment, roll over a portion of their 401(k) assets into income annuities? Only time will tell. Speaking for myself (a trailing-edge Boomer), the uncertainties of the financial markets have shown in real terms—not just via conceptual actuarial calculations—the importance of having a base income.

I will be paying close attention.

How a conversation with Mom put the retirement crisis into perspective

During a conversation with my mom a few nights ago, she mentioned something that both resonated with me and validated a position I’d maintained for some time.

It happened as I detailed my difficulties in finding employment as I approached my 50th birthday. My mom responded – most assuredly in a helpful manner – that people my age are usually getting ready to retire. Perhaps, she said, that was something I should consider. When I replied that I still had 15 to 20 working years ahead of me, it was her turn to be surprised. For Mom, age 50 meant that retirement was approaching. For me, age 50 means that I am in the second half of my career.

And, my family is fairly representative of others. Among the findings in the recently released 2013 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates was that today’s workers expect to retire at a later age than that of their counterparts of a generation earlier. Specifically, 36% of today’s workers expect to retire after age 65, up from just 11% in 1991. And, only 9% of today’s workers expect to retire before age 60, down from 19% in 1991 and 24% in 1998.

Even so, the EBRI/Greenwald survey reports that 37% of today’s retirees were younger than age 60 when they retired, continuing a two-decade-long trend of retirements occurring before they were expected. Many of these early retirements, according to the survey, were due to unexpected, negative events such as loss of employment. And, this leads us to an important point—one that I shared with Mom during our call. Today’s workers do not have the confidence that our retirement savings will sustain us for the rest of our lives. The EBRI/Greenwald survey found that 49% of today’s workers have little or no confidence that their retirement savings will be able to provide a comfortable lifestyle; this is up considerably from the 1995 survey, in which 27% expressed that same sentiment.

The selection of a retirement date is just the beginning. The retirement experience of my generation will bear little similarity to that of our parents, resulting in a population of trailing edge Boomers who will not be able to look to their parents for retirement advice. If we rely on the same strategies as our parents did, we will find ourselves in a critical situation when the time comes. The retirement crisis is very real, and education for advisors and individuals will be instrumental in helping Boomers forge a path to lifelong financial security.