By Barry Rabkin, Senior Research Analyst, Financial Insights, an IDC Company
I live in the small town of Hopkinton, Massachusetts. There are about 13,000 of us except for the one day during the year when the population swells to about 100,000. That day is Patriot's Day - the day the Boston Marathon is run. Our town has hosted the starting line for the Boston Marathon for the past 100 years or so. Years ago, there was a marathon runner named Johnny Kelley who ran in sixty-one of the Boston Marathons. He won twice, placed second seven times and placed in the top five runners fifteen times. Remarkably, he ran his final marathon at the age of 84 in 1992. To those of us from Boston, Johnny Kelley was the Boston Marathon. To show its appreciation for one of its own citizens, Boston had a statue built of Johnny Kelley (see Figure 1). The statue is somewhat different than other statues because it shows a young Johnny Kelley linking hands with an older Johnny Kelley as they supposedly crossed the finish line.
For me, this statue dramatically illustrates the challenges all of us face as we strive to successfully navigate the weeks, months and years from where we are now to where we want to go in our retirement years. My intent for this brief article is to discuss the current challenges we need to consider as we navigate the path from here to there.
Changing Financial Landscape
John Lennon once famously said that "life is what happens to you when you are making other plans." Events that unfolded during 2008 demonstrated that John Lennon was one Beatle who was quite prescient. All of us were so merrily going our various ways of getting from here to there that we didn't notice or understand that one very important reason for the seemingly financial success of the times was based on an incorrect assumption: home prices would continue to increase ever-upwards. In late 2008, we all were educated about some relatively arcane financial instruments that were built on that, ahem, house of cards: credit default swaps (CDS) and collateralized debt obligations (CDO).
Hit List - Disappearing Financial Giants
It is not necessary for the purposes of this brief article to get into the details of how investment banks and other financial institutions securitized and sold various layers (or tranches) of these toxic CDS and CDO assets. The unfortunate point is these securities derivatives ushered in the beginning of a vicious cycle of never-ending economic problems damaging world economies and their citizens as well as corporations and their employees. In the United States, large quasi-governmental and private financial institutions fell victim to the real estate and CDS bubbles:
• Freddie Mac and Fannie Mae were folded back into the federal government
• Lehman Brothers was allowed to fail by the federal government
• AIG became a vessel of the federal government due to the actions of the Financial Products division in London (which is where the tour buses should have gone in the first place)
• Bear Stearns and Washington Mutual were acquired by JPMorgan Chase
• Merrill Lynch was acquired by Bank of America
• Wachovia was acquired by Wells Fargo
Insurance Companies Not Unscathed
A cynic might remark that life insurers have been hoisted by their own petard. Over the course of several decades of the previous century, life insurers took great pains to re-brand their companies as financial service companies. Now with branding firmly in place in society, these newly crafted insurance and financial service companies, whose products and services are based on the strong tenets of life actuarial principles, find themselves battered by the same storm that has so far claimed large investment firms and banks listed above.
Why are life insurance companies impacted by the bursting of the CDS and real estate bubbles? Life insurers' financial viability relies on the quality of their asset- and mortgage-backed securities. Moreover, life insurers who have a large book of variable annuity business are dependent on a stable and hopefully rising stock market. Late last year in a dramatic news story (at least to those of us from the insurance industry), The Hartford and MetLife discussed a potential merger but left each other at the alter. In early October 2008, Allianz provided The Hartford with a $2.5 billion capital infusion. MetLife raised $2 billion in new capital from an October 8, 2008 stick offering. Overseas, The Netherlands infused $13.4 billion into ING, an important financial services company providing retirement products here in the United States. Jumping to March 2009, The Hartford is now considering selling its life operations to Sun Life Financial.
Key Retirement Challenges
The current financial crisis has severely damaged a key element of retirement planning or asset management more generally: trust. The Madoff revelations only exacerbated an already worsening environment. People do not know which financial services institutions to trust. By extension, people will or should also look at their asset management advisors with a skeptical eye. Just a week or so before writing this article, it cost more for a person to make a withdrawal from a Citi ATM than the Citi share price. New world indeed!
In addition to not knowing which insurance and financial institutions to trust, people on their retirement journey - whether just beginning to travel the path, half-way there, almost retired or already in retirement - are facing negative news at every turn:
• Falling housing prices preventing people from tapping their home equity
• Increasing unemployment causing currently employed people to think more than twice about taking on any more debt
• Tightening consumer credit hindering or precluding people from playing the float game between now and some future point in time
• Banks offering CDs or savings accounts with very low interest rates
• Falling stock market evaporating company pension plans like 401(k)s and personal investment portfolios, and in a somewhat morbidly ironic move,
• Corporations no longer contributing to the 401(k) plans
In short, the path to retirement or the dream of doing what we want to do on our own time in those so-called "golden years" has gotten much harder if not impossible to attain. People who recently began their retirement have to develop plans to ensure they have an income stream to get through all of their the years ahead. People who have been in retirement for many years, specifically the oldest old (people aged 85+) realize they probably do not have time to recoup their losses.
Decreasing Amounts of Savings Available ...
Last Fall, the Boston Globe published an article that captured some retirement statistics shown in the table below ("How Can people Retire?") from AARP. There isn't a part of the graph that is not frightening. Keep in mind that these figures were collected before the financial and economic crises began to unfold with all of its negative impacts on financial instruments. Also, around that time period, the Congressional Budget office (CBO) reported that retirement plans had lost over $2 trillion over the prior fifteen (15) months.
On March 12, 2009, the Federal Reserve released their "Flow of Funds Accounts of the United States" report that captured the result that household net worth in the United States dropped by $11 trillion. The air is rapidly coming out of the balloon or more to the point, capital is disappearing too quickly from people's savings. The journey to get from here to there has begun even harder than it was before the financial crisis hit. To stretch the Boston Marathon metaphor a bit more, the people on their retirement journey have just hit "Heartbreak Hill."
Wikipedia describes heartbreak hill: "Heartbreak Hill is an ascent over 0.4 mile (600 m) of the Boston Marathon course, between the 20 and 21 mile marks, in the vicinity of Boston College. It is the last of four "Newton hills", which begin at the 16 mile mark. The Newton hills confound contestants (out of proportion to their modest elevation gain) by forcing a late climb after the downhill trend of the race to that point. Heartbreak Hill itself rises only 88 vertical feet (27 m), from an elevation of 148 feet at the bottom to an elevation of 236 feet at the top, but is positioned at a point on a marathon course where muscle glycogen stores are likely to be depleted--a phenomenon referred to by marathoners as "hitting the wall."
For all of us on our journey to retirement, there is no 'likely to be depleted' at play - financial wherewithal has been and is being depleted during this financial crisis.
... Increasing Numbers of Elderly People
The world and the US are getting older. One source (http://www.ageworks.com) has stated that two-thirds of all the seniors in the world who have ever lived are alive today. In the United States the number of Americans aged 65+ is projected to increase from 40 million in 2010 to 89 million in 2050 (see chart below "Forecasted Numbers of US Citizens 65+").
Another Beatles reference easily comes to mind from their song "When I'm 64": "Will you see need me, will you still feed me, when I'm 64?" The answer is shaping up into a definite maybe. And the ability of people to afford to live in their targeted lifestyles is also extremely doubtful unless they are aged somewhere between 20 - 35 and experience investment success to replenish their currently depleted savings.
Flight to Safety
People midway through their journey to retirement or those on the doorsteps of retirement will look to safer financial instruments. Fixed annuities will become a even more valuable product offering than it is currently. Variable annuities without living benefits will become harder to sell. A.M. Best's states in their U.S. Life/Annuity - Review & Preview" report dated February 23, 2009 that "variable annuity sales through the third-quarter of 2008 decreased on both a gross and net-flow basis, a trend expected to continue through 2008 and into 2009. ... Variable annuity sales remain heavily driven by products with enhanced death and living benefit features, including guaranteed minimum withdrawal benefit (GMWB) and guaranteed minimum accumulation benefit (GMAB) / GMWB combination riders."
The watchwords of these current times will be quality, safety and for the people who really do their research, transparency. People will investigate the ratings of the financial institutions they are doing business with or might conduct business with regardless of the amount of money at stake. Google will get more of a workout as people strive to identify financial institutions - and by association, financial advisors - they can really trust.
One challenge for the people running this life course is to realize the severe imprudence of putting their money into a safe. Lack of trust now could equate to people being in significantly worst financial shape when the time comes to create an income stream off of their assets.
Final Thoughts
Our journey through life may be like running a marathon in some respects but the lessons for us as humans shaping and reshaping our retirement plans come more from the differences than the similarities. From the latter perspective, the journey through life fortunately takes quite a while to complete for most people. Beginners perceive the finish line as a vague abstraction that they hope they are prepared to cross. Finally, injuries or unexpected situations can occur during the marathon or through life's journey.
But it is the differences that offer the more valuable lessons we need to consider as we craft our retirement plans. Not every one chooses to run a marathon. Every person must run life's course. Marathoners train over the course they will officially run; none of us knows how the economic or financial terrain will look in the future - neither near nor long term - or how that constantly reshaping terrain will impact us. Marathon runners know where the finish line is and have an idea of how the course would have impacted them physically and an approximate estimate of when they will reach that finish line. We do not know when we will reach our individual finish lines or our physical or financial conditions just before crossing the line.
The wealth management solutions we purchase must be flexible to cover known, probable and unknown futures. We need a portfolio of advisors and assets that can provide the security we need to not outlive our assets and their concomitant revenue streams. We can not get locked into the idea that the past foretells what the future will be like. We must be ready for change to happen at a moment's notice because it will.
I live in the small town of Hopkinton, Massachusetts. There are about 13,000 of us except for the one day during the year when the population swells to about 100,000. That day is Patriot's Day - the day the Boston Marathon is run. Our town has hosted the starting line for the Boston Marathon for the past 100 years or so. Years ago, there was a marathon runner named Johnny Kelley who ran in sixty-one of the Boston Marathons. He won twice, placed second seven times and placed in the top five runners fifteen times. Remarkably, he ran his final marathon at the age of 84 in 1992. To those of us from Boston, Johnny Kelley was the Boston Marathon. To show its appreciation for one of its own citizens, Boston had a statue built of Johnny Kelley (see Figure 1). The statue is somewhat different than other statues because it shows a young Johnny Kelley linking hands with an older Johnny Kelley as they supposedly crossed the finish line.
For me, this statue dramatically illustrates the challenges all of us face as we strive to successfully navigate the weeks, months and years from where we are now to where we want to go in our retirement years. My intent for this brief article is to discuss the current challenges we need to consider as we navigate the path from here to there.
Changing Financial Landscape
John Lennon once famously said that "life is what happens to you when you are making other plans." Events that unfolded during 2008 demonstrated that John Lennon was one Beatle who was quite prescient. All of us were so merrily going our various ways of getting from here to there that we didn't notice or understand that one very important reason for the seemingly financial success of the times was based on an incorrect assumption: home prices would continue to increase ever-upwards. In late 2008, we all were educated about some relatively arcane financial instruments that were built on that, ahem, house of cards: credit default swaps (CDS) and collateralized debt obligations (CDO).
Hit List - Disappearing Financial Giants
It is not necessary for the purposes of this brief article to get into the details of how investment banks and other financial institutions securitized and sold various layers (or tranches) of these toxic CDS and CDO assets. The unfortunate point is these securities derivatives ushered in the beginning of a vicious cycle of never-ending economic problems damaging world economies and their citizens as well as corporations and their employees. In the United States, large quasi-governmental and private financial institutions fell victim to the real estate and CDS bubbles:
• Freddie Mac and Fannie Mae were folded back into the federal government
• Lehman Brothers was allowed to fail by the federal government
• AIG became a vessel of the federal government due to the actions of the Financial Products division in London (which is where the tour buses should have gone in the first place)
• Bear Stearns and Washington Mutual were acquired by JPMorgan Chase
• Merrill Lynch was acquired by Bank of America
• Wachovia was acquired by Wells Fargo
Insurance Companies Not Unscathed
A cynic might remark that life insurers have been hoisted by their own petard. Over the course of several decades of the previous century, life insurers took great pains to re-brand their companies as financial service companies. Now with branding firmly in place in society, these newly crafted insurance and financial service companies, whose products and services are based on the strong tenets of life actuarial principles, find themselves battered by the same storm that has so far claimed large investment firms and banks listed above.
Why are life insurance companies impacted by the bursting of the CDS and real estate bubbles? Life insurers' financial viability relies on the quality of their asset- and mortgage-backed securities. Moreover, life insurers who have a large book of variable annuity business are dependent on a stable and hopefully rising stock market. Late last year in a dramatic news story (at least to those of us from the insurance industry), The Hartford and MetLife discussed a potential merger but left each other at the alter. In early October 2008, Allianz provided The Hartford with a $2.5 billion capital infusion. MetLife raised $2 billion in new capital from an October 8, 2008 stick offering. Overseas, The Netherlands infused $13.4 billion into ING, an important financial services company providing retirement products here in the United States. Jumping to March 2009, The Hartford is now considering selling its life operations to Sun Life Financial.
Key Retirement Challenges
The current financial crisis has severely damaged a key element of retirement planning or asset management more generally: trust. The Madoff revelations only exacerbated an already worsening environment. People do not know which financial services institutions to trust. By extension, people will or should also look at their asset management advisors with a skeptical eye. Just a week or so before writing this article, it cost more for a person to make a withdrawal from a Citi ATM than the Citi share price. New world indeed!
In addition to not knowing which insurance and financial institutions to trust, people on their retirement journey - whether just beginning to travel the path, half-way there, almost retired or already in retirement - are facing negative news at every turn:
• Falling housing prices preventing people from tapping their home equity
• Increasing unemployment causing currently employed people to think more than twice about taking on any more debt
• Tightening consumer credit hindering or precluding people from playing the float game between now and some future point in time
• Banks offering CDs or savings accounts with very low interest rates
• Falling stock market evaporating company pension plans like 401(k)s and personal investment portfolios, and in a somewhat morbidly ironic move,
• Corporations no longer contributing to the 401(k) plans
In short, the path to retirement or the dream of doing what we want to do on our own time in those so-called "golden years" has gotten much harder if not impossible to attain. People who recently began their retirement have to develop plans to ensure they have an income stream to get through all of their the years ahead. People who have been in retirement for many years, specifically the oldest old (people aged 85+) realize they probably do not have time to recoup their losses.
Decreasing Amounts of Savings Available ...
Last Fall, the Boston Globe published an article that captured some retirement statistics shown in the table below ("How Can people Retire?") from AARP. There isn't a part of the graph that is not frightening. Keep in mind that these figures were collected before the financial and economic crises began to unfold with all of its negative impacts on financial instruments. Also, around that time period, the Congressional Budget office (CBO) reported that retirement plans had lost over $2 trillion over the prior fifteen (15) months.
Sources: AARP Data, Boston Globe October 18, 2008
On March 12, 2009, the Federal Reserve released their "Flow of Funds Accounts of the United States" report that captured the result that household net worth in the United States dropped by $11 trillion. The air is rapidly coming out of the balloon or more to the point, capital is disappearing too quickly from people's savings. The journey to get from here to there has begun even harder than it was before the financial crisis hit. To stretch the Boston Marathon metaphor a bit more, the people on their retirement journey have just hit "Heartbreak Hill."
Wikipedia describes heartbreak hill: "Heartbreak Hill is an ascent over 0.4 mile (600 m) of the Boston Marathon course, between the 20 and 21 mile marks, in the vicinity of Boston College. It is the last of four "Newton hills", which begin at the 16 mile mark. The Newton hills confound contestants (out of proportion to their modest elevation gain) by forcing a late climb after the downhill trend of the race to that point. Heartbreak Hill itself rises only 88 vertical feet (27 m), from an elevation of 148 feet at the bottom to an elevation of 236 feet at the top, but is positioned at a point on a marathon course where muscle glycogen stores are likely to be depleted--a phenomenon referred to by marathoners as "hitting the wall."
For all of us on our journey to retirement, there is no 'likely to be depleted' at play - financial wherewithal has been and is being depleted during this financial crisis.
... Increasing Numbers of Elderly People
The world and the US are getting older. One source (http://www.ageworks.com) has stated that two-thirds of all the seniors in the world who have ever lived are alive today. In the United States the number of Americans aged 65+ is projected to increase from 40 million in 2010 to 89 million in 2050 (see chart below "Forecasted Numbers of US Citizens 65+").
Source: Population Division, U.S. Census Bureau, August 14, 2008
Another Beatles reference easily comes to mind from their song "When I'm 64": "Will you see need me, will you still feed me, when I'm 64?" The answer is shaping up into a definite maybe. And the ability of people to afford to live in their targeted lifestyles is also extremely doubtful unless they are aged somewhere between 20 - 35 and experience investment success to replenish their currently depleted savings.
Flight to Safety
People midway through their journey to retirement or those on the doorsteps of retirement will look to safer financial instruments. Fixed annuities will become a even more valuable product offering than it is currently. Variable annuities without living benefits will become harder to sell. A.M. Best's states in their U.S. Life/Annuity - Review & Preview" report dated February 23, 2009 that "variable annuity sales through the third-quarter of 2008 decreased on both a gross and net-flow basis, a trend expected to continue through 2008 and into 2009. ... Variable annuity sales remain heavily driven by products with enhanced death and living benefit features, including guaranteed minimum withdrawal benefit (GMWB) and guaranteed minimum accumulation benefit (GMAB) / GMWB combination riders."
The watchwords of these current times will be quality, safety and for the people who really do their research, transparency. People will investigate the ratings of the financial institutions they are doing business with or might conduct business with regardless of the amount of money at stake. Google will get more of a workout as people strive to identify financial institutions - and by association, financial advisors - they can really trust.
One challenge for the people running this life course is to realize the severe imprudence of putting their money into a safe. Lack of trust now could equate to people being in significantly worst financial shape when the time comes to create an income stream off of their assets.
Final Thoughts
Our journey through life may be like running a marathon in some respects but the lessons for us as humans shaping and reshaping our retirement plans come more from the differences than the similarities. From the latter perspective, the journey through life fortunately takes quite a while to complete for most people. Beginners perceive the finish line as a vague abstraction that they hope they are prepared to cross. Finally, injuries or unexpected situations can occur during the marathon or through life's journey.
But it is the differences that offer the more valuable lessons we need to consider as we craft our retirement plans. Not every one chooses to run a marathon. Every person must run life's course. Marathoners train over the course they will officially run; none of us knows how the economic or financial terrain will look in the future - neither near nor long term - or how that constantly reshaping terrain will impact us. Marathon runners know where the finish line is and have an idea of how the course would have impacted them physically and an approximate estimate of when they will reach that finish line. We do not know when we will reach our individual finish lines or our physical or financial conditions just before crossing the line.
The wealth management solutions we purchase must be flexible to cover known, probable and unknown futures. We need a portfolio of advisors and assets that can provide the security we need to not outlive our assets and their concomitant revenue streams. We can not get locked into the idea that the past foretells what the future will be like. We must be ready for change to happen at a moment's notice because it will.
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