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Retirement planning for middle-income workers

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Many financial institutions and advisers may not be positioned well to help older middle-income workers with their most important retirement planning decisions. Adding to the problem, many institutions' profit and compensation models don't align well with the goal of delivering help to these older workers. 

Let's examine the reasons why.

A recent study by the Stanford Center on Longevity (SCL), in collaboration with the Society of Actuaries (SOA), identifies the following retirement planning decisions as having the biggest financial impact on middle-income workers:

  • Deciding when to retire and whether to work part time for a period until full retirement.
  • Deciding when to start Social Security benefits, typically by delaying them.
  • Determining whether to use retirement savings to enable maximizing Social Security benefits (if you retire before you start your Social Security benefits).
  • Managing and reducing living expenses, specifically housing, transportation and medical costs. 
  • Deciding whether to move or deploy home equity to help finance retirement, given that many workers have more net wealth in their home equity than in their retirement savings.

Currently, many advisers focus on deploying savings to generate income in retirement. They often receive compensation from transaction charges that come from selling annuity products or by assessing asset-under-management (AUM) charges against invested assets. The SCL/SOA study identifies potential financial conflicts of interest in the following situations:

  • Risk-averse, middle-income retirees might realize more guaranteed income by using savings to delay Social Security benefits rather than buying an annuity that generates transaction charges for the financial institution or adviser. 
  • Similarly, if a retiree deployed retirement savings during the early days of retirement to enable delaying Social Security benefits, AUM charges would drop quickly once these assets have served their purpose. 
  • Retirees who have some assets in low-cost employer-sponsored 401(k) plans and some assets in IRAs may want to keep the money in the employer's plan. It might also be advantageous to have separate strategies for deploying 401(k) money and IRA money. An adviser isn't likely to realize transaction or AUM charges on money left in 401(k) plans.
  • AUM and commission-based advisers may also not receive any compensation by suggesting reverse mortgages and coordinating strategies to deploy financial assets. 
  • Finally, advisers may not receive any compensation from coordinating strategies with their clients' other resources of retirement income, such as traditional pension plans, existing whole life insurance or annuity products, and charitable gift annuities. 

It's also the case that retirees make many critical decisions at a single point in time and may not require ongoing monitoring and adjustment. For example, consider a retiree who:

  • Optimizes Social Security benefits
  • Deploys remaining retirement savings by investing substantially in low-cost index funds offered in the employers' 401(k) plan and using the IRS required minimum distribution (RMD) to calculate annual withdrawals
  • Obtains a tenure reverse mortgage payment to generate supplemental retirement income

This example is a variation of the Spend Safely in Retirement Strategy, which SCL/SOA recently identified as a viable retirement planning approach for middle-income retirees. A retiree may need a significant amount of help to understand and set up such a strategy but may not need much help or advice once it has been implemented. Ideally, financial advisers will devise services and payment schemes that fairly compensate them for the initial work at retirement and then subsequently get paid for services only as used.

Here are examples of one-time planning services that can really help older middle-income workers:

  • Estimates of their retirement income from all sources at various retirement ages so they can make informed decisions about when to retire
  • Analysis of the effectiveness of a downshifting strategy, where older workers enable their Social Security and retirement savings to grow by working just enough to cover current living expenses
  • Help with optimizing Social Security benefits
  • Analysis of whether and how they should deploy their home equity by a professional who has no stake in that decision

Here are some possible business models that can serve the middle-income worker and also possibly address the issues regarding financial institutions and advisers:

  • Advisers who charge an hourly rate or project fee, such as those who work for the Garrett Planning Network
  • Subscription services and planning tools that charge fees that don't depend on assets, such as those offered by
  • Low-cost advisers, such as United Income or Betterment, that offer comprehensive planning services and deploy sophisticated planning analyses and software

Of course, many financial institutions, advisers and insurance companies that charge in the traditional fashion can help you with these important initial planning decisions as part of their services. You'll want to make sure that they won't confine their services just to selling you their products or investing your savings. And you'll want to ask how much you'll be charged and for how long you'll be paying.

Employers are in an ideal position to help their older workers by shopping for unbiased and skilled retirement advisers, or by providing financial wellness programs. You might want to ask if your employer's 401(k) plan offers such advice.

More important, employers can also help by offering alternative career paths for older workers to enable them to downshift and continue receiving valuable medical and other benefits until they eventually retire.

Note that the considerations for planning services discussed here apply to middle-income workers, defined as those with less than $1 million in retirement savings. However, the traditional financial advice business models can still work well for more affluent retirees who need customized solutions, more refined strategies and ongoing advice throughout retirement.

Many older workers face daunting retirement planning challenges. You'll need to be a savvy shopper to find a pro who can make the biggest positive impact on your retirement.

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