How The Marketing of Health Benefits Has Changed


By Mathew Augustine, GPHR, REBC
CEO, Hanna Global Solutions

The advent of state insurance exchanges last year has promoted a paradigm shift in the distribution and sales of insurance programs as part of employee benefit programs. Individuals using their ‘own’ funds to pick from virtual ‘store shelves’ of a wide range of insurance products is not an experience limited to employees of large corporations supported by big technology and service operations anymore. Consumers are making ‘purchase’ decisions as opposed to employees making ‘enrollment’ decisions; choice is being driven from ‘lowest price’ to ‘highest value’; decisions are moving away from employers preselecting a set of comprehensive plans on behalf of their employees, to employees putting together a portfolio of insurance products to suit their specific situation.
Many have compared this paradigm shift to the change that happened in pension plans from defined benefit to defined contribution. This one is even more significant. An employee can make some default decisions (or employers can decide for them) when it comes to 401(k) plans, at the time of enrollment, and then later change fund selections and rebalance their portfolio at any time during the year. This is not the case when it comes to insurance products in an employee benefit portfolio – you have to choose your portfolio at the time of enrollment and are stuck with it for a year until the next open enrollment window.
This places a lot of responsibility on advisors and employers to educate employees and communicate all the benefits and programs that are being made available. It takes the responsibility of employee benefits communication up a level. Classic marketing discipline must be applied to do this right. It is useful to consider the four P’s of marketing – product, place, price and promotion.
Product: A full variety of insurance products can be put together. If offered a range of medical plans, these plans must be complemented by supplemental plans such as critical illness and accident plans so that those choosing high deductible plans can gain protection against catastrophic situations. A young, healthy person should be able to select a low cost, high deductible plan design and redirect the premium savings to a health savings account (HSA) to build a fund for later years of higher utilization.
Place: These products must be offered in an easy to understand, easy to select ‘shelf’. Only those products that are eligible to a person must be presented to him or her, with clear ‘labeling’ of product features and price. That person should also be able to make comparisons among options available, without being limited in their options or decisions being made for them based on some broad generalities.
Price: The benefits manager in a company takes on the role of a product portfolio manager with the responsibility to set the right product-price mix. Use of the defined contribution model of employee cost sharing, with the right combination of options for employees to use their employer contributions, can help realize an employer’s benefit strategy, and help employees make decisions that are appropriate to their family situation and risk tolerance.
Promotion: Clear communication of the benefits program has always been a significant contributor to the level of satisfaction that employees have of their benefits program. The range of options presented, the independent decision making by employees on their choices, and additional products available, all make communication more challenging and necessary. Add to this the compliance overheads of statutory notices and plan documents, the proper promotion of benefit programs requires a professional marketing approach.
The good news is that this marketing approach, if executed well, will deliver results in multiple areas – employee satisfaction, cost control, regulatory compliance, and employee engagement. It is time for HR and employee benefits teams in companies to develop marketing in their skillsets or employ full-time product management or marketing communications specialists to market their employee benefits portfolio.

Download a complimentary copy of the UBA white paper, “A Business Case for Benefits Communications,” click here.


5 tips to make retirement education meaningful

Originally posted on

Through the use of education and communication, employers and benefit advisers can have a huge impact on their employees’ retirement readiness. Making that education meaningful, however, is key to employee engagement and understanding. Here are five tips from Grinkmeyer Leonard Financial and investment advisers with Commonwealth Financial Network on how to make retirement education meaningful.

1. Paint a picture of their "future self"

Employees who can envision their future selves are more likely to understand their financial needs during retirement. The advisers with Commonwealth Financial Network suggest one strategy for embracing your future self is to have employees envision not only their financial retirement goals, but also lifestyle retirement goals. By forcing today’s self to recognize how he or she will look in the future, employees are more likely to save for that future, they say.

2. Help them plan for an achievable number

For too long the financial services industry has focused on the daunting pot of money people should accumulate in order to retire, the advisers say, adding that breaking the number down to monthly saving increments is less scary and seems more achievable to employees.

3. Account for health care

A 2013 study conducted by Fidelity's Benefits Consulting Group estimated that out-of-pocket health care costs for a 65-year-old couple with no employer-provided retiree health care will be $220,000, assuming a life expectancy of 17 years for the man and 20 years for the woman. As part of a comprehensive financial education plan, the Commonwealth Financial Network advisers say it is imperative that medical and insurance costs be incorporated into the retirement planning discussion.

4. Start 'em young

The power of compounding interest is evident in retirement plan balances, the advisers say, adding that evidence has shown the benefits of starting to save at a young age. Interest adds up over time, so even starting to save at 30 instead of 40 can save exponentially more money.

5. Keep the message relatable

Paramount to the success of any education strategy is using simple terms and relatable examples to illustrate potentially complex issues, the advisers say. For example, telling a group of participants that inflation will erode the buying power of their dollar over the entirety of their retirement may be lost in translation, they say. But telling that same group of participants that the $5 sandwich they enjoy today will cost $22.93 in 30 years will likely keep their eyes from glazing over.

Why employees need 401(k) investment advice

Originally posted August 21, 2014 by Michael Giardina on

This retirement disconnect is not surprising, according to Schwab Retirement Plan Services, which released a survey this week of more than 1,000 401(k) plan participants. “We often see that participants are hesitant to take action when they’re not completely comfortable with the matter at hand, and this is especially true when it comes to financial decisions,” says Steve Anderson, head of retirement plan services at Charles Schwab.

Aside from health coverage, the survey found nearly 90% of workers agreed that the 401(k) is a “must-have” benefit, more than extra vacation days or the ability to telecommute. However, employees said they spent more time researching options for a new car (about 4.3 hours) or vacations (about 3.8 hours) than researching their 401(k) investment choices (2.1 hours).

“The fact that an overwhelming majority of workers demand 401(k)s is good news, because it shows that people understand that they are responsible for their own retirement,” Anderson tells EBN. “Participating in a 401(k) program helps workers develop the discipline to save, and the earlier they begin to save, the more prepared they will be for retirement.”

Meanwhile, about half of plan participants said that their defined contribution plan’s investment options can be more confusing than their health benefits options. But gaining the needed assistance to understand the real value of their retirement plan was not top-of-mind for employees, as respondents said they were more likely to hire someone to perform an oil change to their vehicle, landscape their yard or help with their taxes than to seek out assistance for their 401(k) investments.

Anderson adds that while educational resources from plan sponsors may be just what employees need to make sound investment decisions, he says that “if participants have to seek out these resources on their own, chances are they won’t utilize them to their full benefit.”

Even with the prevalence of auto-enrollment and auto-escalation, employers may still have to do more. Only one-quarter of employees with access to professional 401(k) advice report having used it, says Anderson.

“Now employers can take the next step in plan design by proactively delivering advice to their employees,” Anderson explains. “We know getting advice can make a big difference for workers, as we’ve witnessed the impact of 401(k) advice on participant outcomes.”

For example, 70% of respondents noted that they would feel extremely or very confident in their investment decisions if they used a financial professional. Meanwhile, only 39% highlight the same confidence level if they opted to make those investment choices themselves.

“Participants who receive advice save more, are better diversified and stay the course in times of market volatility,” Anderson explains.

7 more retirement and annuity facts you should know

Originally posted August 8, 2014 by Warren S. Hersch on

How many women and Gen-Xers have calculated how much money they will need to retire?  To what extent does working with a financial advisor increase individuals’ retirement confidence? What are the tax implications of boomers who are retiring later, saving more and planning better?

Answers to these questions, among many others, are forthcoming in the Insured Retirement Institute’s “IRI Fact Book 2014.” The 198-page report, an all-encompassing guide to information, trends and data in the retirement income space, explores the state of the industry, annuity product innovations, and solutions for generating immediate and future income needs.

The report also details consumer use and attitudes towards annuities, spotlights trends among baby boomers and generation X women, examines boomer expectations for retirement this year, and delves into the regulation and taxation of annuities.

Fact 1: Three-quarters (75 percent) of households that own fixed annuities claim balances of less than $100,000, while 68 percent of variable annuity owners report balances below $100,000.

For households with between $500,000 and $2 million in investable assets – the sweet spot for advisors serving the “mass affluent market,” more than a quarter have a fixed annuity balance of $1-$19,000 (28.1 percent) or $20,000-$49,000 ($24.4 percent)

Others with investable assets between $500,000 and $2 million have the following fixed annuity balances:

● $50,000-$99,999: 8.7 percent of owners

●$100,000-$299,999: 15.5 percent owners

● $300,000-$499,999 3.2 percent of owners

● $500,000-plus: 0 percent of owners

Fact 2: Nearly half of households (43 percent) cite guaranteed monthly income payments as the primary reason for purchasing an annuity.

This fact holds true, the report states, among investors with less than $2 million in investable assets. Investors owning investable assets between $2 million and $5 million place the greatest importance on potential account growth (41 percent). The wealthiest investors value insuring portions of their assets (39 percent).

Households with $2 million to 5 million in investable assets cite the following reasons for purchasing a variable annuity:

● 33.7 percent: To generate a guaranteed payment each month in retirement.

● 41.0 percent: To provide a potential for account growth.

● 35.5 percent: To receive tax-deferral on earnings in the annuity.

● 30.7 percent: To provide diversification by adding another type of investment to the portfolio.

● 32.2 percent: To protect assets by insuring a minimum value of payments from the account.

● 17.4 percent: To set aside assets for heirs.

● 16.7 percent: To exchange an old annuity for a new one.

● 5.6 percent: Not sure why I purchased an annuity.

Fact 3: The economy has had a detrimental effect on retirement savings and planning for many women.

The report indicates that few women are confident that they will have enough retirement savings or that they have done a good job preparing financially for retirement.

● 51 percent of Boomer women and 57 percent of Gen-X women have weak or no confidence that they will have enough money to live comfortably in retirement or are unsure.

● Significant numbers of both Gen-X and Boomer women (69 percent and 46 percent, respectively) have not attempted to calculate how much they will need to retire.

● Though expecting personal savings to be a significant source of retirement income, only half of Boomer women with savings have $200,000 or more in retirement savings. And only one-quarter of Gen-X women have $100,000 or more saved for retirement.

● Fewer than half have worked with a financial advisor to plan for their retirement. Those who do seek an advisor report that retirement planning is a top reason.

Fact 4: Working with a financial advisor greatly increases retirement confidence.

● Among those who consult with a financial advisor, 73 percent feel very or somewhat prepared for retirement compared with 43 percent of those who did not.

● Among Boomers who have calculated their retirement savings needs, 44 percent are extremely or very confident compared with 29 percent of those who did not. Among Gen-Xers who completed the calculation, 47 percent are extremely or very confident, compared with 28 percent among those who did not.

● Annuity owners have higher levels of retirement confidence. Among boomers who own an annuity, 53 percent are extremely confident, compared with 31 percent who do not. Among Gen-Xers who own an annuity, 49 percent are extremely or very confident, compared with 31 percent among those who do not.

● 7 in 10 Boomer and 6 in 10 Gen-Xer annuity owners have completed a retirement savings needs calculation. This compares with 44 percent of Boomers and 34 percent of Gen-Xers who do not own an annuity.

● Nearly three-quarters (74 percent) of Boomer and 62 percent of Gen-Xer annuity owners have consulted with a financial advisor. This compares with 35 percent of Boomers and 30 percent of Gen-Xers who do not own an annuity.

Fact 5: Boomers are showing some optimism that their financial situation will improve during the next five years.

The report reveals also that boomers are retiring later, saving more and planning better.

  • A quarter of Boomers postponed their plans to retire during the year past.

● 28 percent of Boomers plan to retire at age 70 or later.

● 80 percent of Boomers have retirement savings, with about half having saved $250,000 or more.

● 55 percent of Boomers have calculated a retirement savings goal, up from 50 percent in 2013.

Tax policy implications and positive actions

● Three in four Boomers say tax deferral is an important feature of a retirement investment.

● Nearly 40 percent of Boomers would be less likely to save for retirement if tax incentives for retirement savings, such as tax deferral, were reduced or eliminated.

● Boomers planning for retirement with the help of a financial advisor are more than twice as likely to be highly confident in their retirement plans compared to those planning for retirement on their own.

Fact 6: Most advisors (71 percent) have increased the net number of retirement income clients served during the year past.

The report shows that 60 percent of advisors have modestly increased their net number of retirement income clients, while 11 percent have significantly increased the number. An additional 28 percent and 2 percent, respectively, experienced no change or decreased their retirement income clientele.

The research adds nearly 6 in 10 (58 percent) advisors describe as well developed the processes and capabilities they’ve established for their retirement income clients. An additional 37 percent of advisors believe they have some but not all of the needed processes and capabilities.

Nine in ten advisors say that enhancing their retirement income processes and capabilities is a “priority.” For a majority, the priority level is high (54 percent). Fewer advisors describe the priority level as moderate (37 percent) or low.

Fact 7: Advisors generally rely on a combination of four major investment product categories for retirement income clients: mutual funds, ETFs, variable annuities and fixed income annuities.

For 1 in 3 advisors, all four categories are used in combination. About 2 in 9 advisors use mutual funds, ETFs and variable annuities. Other grouping include mutual funds and variable (1 in 8 advisors), income annuities (1 in 11 advisors), plus mutual funds and ETFs (1 in 12 advisors).

The following is a percentage-based breakdown of the most typical product combinations:

● 38 percent –Fund/ETF/FA/Fixed

● 22 percent –Fund/ETF/VA

● 8 percent—Fund/ETF

● 5 percent—Fund only

● 12 percent—Fund/VA

● 9 percent—Fund/VA/Fixed

Include health care cost in plans

Originally posted August 3, 2014 by Redding Edition on

The possibility of having to pay major health care costs in the future is a primary concern of planning for retirement these days. Is there some way to plan for these expenses years in advance?

Just how great might those expenses be? There’s no rote answer, but recent surveys from AARP and Fidelity Investments reveal that too many baby boomers might be taking this subject too lightly.

For the last eight years, Fidelity has projected average retirement health care expenses for a couple — assuming that retirement begins at age 65 and that one spouse or partner lives about seven years longer than the other. In 2013, Fidelity estimated that a couple retiring at age 65 would require about $220,000 just to absorb those future health care costs.

When it asked Americans ages 55 to 64 how much money they thought they would spend on health care in retirement, 48 percent of the respondents figured they would only need about $50,000 each, or about $100,000 per couple. That pales next to Fidelity’s projection and it also falls short of the estimates made in 2010 by the Employee Benefit Research Institute. EBRI figured that a couple with median prescription drug expenses would pay $151,000 of their own retirement health care costs.

AARP posed this question to Americans ages 50 to 64 in the fall of 2013. The results were 16 percent of those polled thought their out-of-pocket retirement health care expenses would run less than $50,000 and 42 percent figured needing less than $100,000.

Another 15 percent admitted they had no idea how much they might eventually spend for health care. Not surprising, just 52 percent of those surveyed felt confident that they could financially handle such expenses.

Prescription drugs may be your No. 1 cost. EBRI currently says that a 65-year-old couple with median drug costs would need $227,000 to have a 75 percent probability of paying off 100 percent of their medical bills in retirement. That figure is in line with Fidelity’s big-picture estimate.

What might happen if you don’t save enough for these expenses? As Medicare premiums come out of Social Security benefits, your monthly Social Security payments could grow smaller. The greater your reliance on Social Security, the bigger the ensuing financial strain.

The main message is save more and save now. Do you have about $200,000 after tax saved for future health care costs? If you don’t, you have yet another compelling reason to save more money for retirement.

Medicare, after all, will not pay for everything. In 2010, EBRI analyzed how much it did pay for, and it found that Medicare only covered about 62 percent of retiree health care expenses. While private insurance picked up another 13 percent and military benefits or similar programs another 13 percent, that still left retirees on the hook for 12 percent out of pocket.

Consider what Medicare doesn’t cover, and budget accordingly. Medicare pays for much, but it doesn’t cover things like glasses and contacts, dentures and hearing aids — and it certainly doesn’t pay for extended long-term care.

Medicare’s yearly Part B deductible is $147 for 2014. Once you exceed it, you will have to pick up 20 percent of the Medicare-approved amount for most medical services. That’s a good argument for a Medigap or Medicare Advantage plan, even considering the potentially high premiums. The standard monthly Part B premium is at $104.90 this year, which comes out of your Social Security. If you are retired and earn income of more than $85,000, your monthly Part B premium will be larger. The threshold for a couple is $170,000. Part D premiums for drug coverage can also vary greatly. The greater your income, the larger they get. Reviewing your Part D coverage vis-à-vis your premiums each year is only wise.

Takeaway: Staying healthy may save you a good deal of money. EBRI projects that someone retiring from an $80,000 job in poor health may need to live on as much as 96 percent of that end salary annually, or roughly $76,800. If that retiree is in excellent health instead, EBRI estimates that he or she may need only 77 percent of that end salary — about $61,600 — to cover 100 percent of annual retirement expenses.

Average worker needs to save 15% to fund retirement

Originally posted July 22, 2014 by Nick Thornton on

A typical household needs to save roughly 15 percent of their income annually to sustain their lifestyle into retirement, according to a brief from the Center for Retirement Research at Boston College.

Generally, workplace retirement savings plans should provide one-third of retirement income, according to the study. For lower income families, defined contribution or defined benefit plans should provide a quarter of all retirement income. Higher income families will need their retirement plans to provide about half of all retirement income.

Middle-income families will require 71 percent of pre-retirement income to maintain living standards after they leave the workforce. About 41 percent of their retirement income is expected to come from social security.

Low-income families need an annual savings rate of 11 percent in order to sustain their lifestyle into retirement, which is lower than middle-income families (15 percent) and high-income families (16 percent).  For lower income families, social security will replace a greater portion of pre-retirement income.

The Center’s National Retirement Risk Index says that half of Americans lack adequate savings to maintain their standard of living into retirement. A “feasible increase” in savings rates by younger workers can greatly affect their retirement wealth.

For those middle-income workers ages 30 to 39 who lack enough savings, a 7 percent increase in annual savings can provide adequate retirement funding. But middle-income workers age 50 to 59 who lack retirement savings would have to increase their annual savings rate by 29 percent, an unlikely expectation, the report adds.

For those older workers behind the curve, a better funding strategy would be “to work longer and cut current and future consumption in order to reduce the required saving rate to a more feasible level.”

Delaying retirement to age 70 greatly reduces the annual savings expectations workers need to meet in order to fund retirement.

A worker who starts saving at age 35 will need a 15 percent annual savings rate in order to retire at age 65. But if the same worker delays retirement until age 70, only a six percent annual savings rate is necessary.

A worker who starts saving at age 45 would need to save 27 percent annually to retire at 65. But by delaying retirement to age 70, the same worker only has to save 10 percent to maintain their standard of living after retirement.

Getting Employees To Save More For Retirement

Originally posted by Brian Walker, VP - National Director of Business Development at The Principal Financial Group®, a UBA Strategic Partner.

There's no denying it. The vast majority of workers won't be ready financially for retirement. Seventy percent are behind schedule in saving for retirement and half of all Americans have less than $10,000 in savings. Of immediate importance is the fact that nearly half of the oldest boomers are at risk of not having sufficient retirement resources to pay for basic retirement and healthcare costs!

Why should you care about retirement readiness? The answer is simple: Because retirement delays can hurt your bottom line.

The majority of employers expect the cost of health care and other benefits to rise due to delayed retirements. And they're exactly right. In fact, for each employee over the age of 65, a plan sponsor could be paying $5,000 more per year for health care. (Source: EBRI estimates)

In addition, the cost of employees working beyond the normal retirement age can have potentially significant implications for your business as a whole.

So how do you know if employees are saving enough, and how do you measure success?

Simple plan design changes can have huge impacts on participant outcomes. Features like automatic enrollment and automatic deferral increases, for instance, use participants' inertia to their advantage.

In fact, 91% of participants stay in the plan when automatically enrolled. And 88% of employees participate in an automatic escalation program when it's a default feature--only 12% opt out. But when they have to sign up on their own, just 6% participate.

PowerPoint presentation slides on this topic were created by The Principal Financial Group.

Health care employers need cure-all for retirement epidemic

Originally posted Jully 11, 2014 by Michael Giardina on

Like other industries, health care employers and benefit plan managers in the health care sector are struggling mightily with their ability to address the retirement preparedness of their evolving workforces.

Whether it’s the remnants of the baby boomers or introduction of millennials, the workforce dynamic in the health care industry is going through a change as the it continues to cope with the ongoing hiccups of the Affordable Care Act. Plan fiduciaries at health worksites also caution the need to motivate their employees to save adequately and helping them learn how to invest wisely.

The health care segment includes more 4,000 defined contribution plans, with approximately 5,200 retirement plan participants. In total assets, the health care sector has more $317.8 billion, which is about 40% of the overall DC not-for-profit market.

Ty Minnich, vice president, not-for-profit institutional markets at Transamerica Retirement Solutions, says the root of the problem is the “pendulum shift” from defined benefit to DC retirement plans, which adds to the retirement confusion.

“The aging population, although affecting all industries, is creating a workforce management issue – particularly in health care, where the demand for younger employees is there,” says Minnich. “The technical expertise, the knowledge they need with the sophistication of the changes in medical delivery [is critical], yet they have employees entering the retirement period of their careers and they are not retiring because they are not ready to retire, from a financial perceptive.”

According to health care retirement plan sponsors, approximately 75% say that employee engagement is one of the most significant challenges in managing a retirement plan. Of the more than 100 hospital administrators and chief financial officers surveyed by Transamerica and the American Hospital Association, most agree that helping employees save for retirement and retaining employees are top goals for their retirement plan.

Another wrench in the operation of health care businesses has been the ACA, and its overnight transformation – according to some in consultancy space – of how business is done in the field.

“[Health care] is undergoing an enormous change, from the perspective on how they get reimbursed for their delivery model,” says Minnich. “What you seeing is that the smaller regional community-type organizations just can’t exist in this marketplace.”

David Zetter, of Zetter Healthcare Management Consultants, explains that he is seeing similar shifts in all aspects of benefits and services – from small practices to large groups and health systems that the health care accounting and consulting firm works with.

“I don’t see how health care practices are going to do it,” explains Zetter, also a board member of the National Society of Certified Healthcare Business Consultants. “It’s just getting so expensive, and reimbursements are going down. It’s tough for a doctor to make ends meet at this point in time and if they keep wanting to be the employer of choice they are going to have to ante up. Unfortunately that’s going to cost them quite a bit of money, especially from a benefits standpoint.”

Meanwhile, there has been a change in how plan sponsors measure plan success in the medical industry. There is more of a focus around retirement readiness rather just solely participation rates, according to the study. And this intensified focus on improving employee interaction and tailoring print and electronic education touch points exemplifies how health care retirement plan sponsors are reacting.

“It all indicates that the plan sponsors are not only realizing they have to do more to help participants get ready for retirement, but also helping participant to help themselves,” says Grace Basile, assistant director of market research at Transamerica Retirement Solutions. “There’s no more ‘set it and forget it,’ there’s no more just getting into the plan.” Instead, she says it’s all about “increasing [engagement] over time, [and] making sure your investments are appropriate for where you are in your age and career.”

Overall, employers and their employees have been riddled with uncertainty of retirement since the recession. However, according to the Employee Benefit Research Institute, retirement confidence reported some meager gains from the losses over the past five years. Approximately 18% of Americans are very confident and 37% are somewhat confident with the future financial needs.

Nevin Adams, co-director of the Employee Benefit Research Institute Center for Research on Retirement Income, adds that all employers – not just those in the health care space – are faced with the challenges of finding the sweet spot of automatic enrollment, default rates and participation.

“One of the things that we are really hearing from employers is that employee benefits are going to continue to be sort of a differentiating factor,” Adams tells EBN. He says that demographic shifts are one of the biggest challenges for employers to deal with.

“The baby boomers [are] kind of hanging around, and the millenials looking for a place to come in,” he notes. “The benefit package and how it’s put together really will make a difference.”

Treasury issues final rules regarding longevity annuities

Originally posted July 1, 2014 by Daniel Williams on

Good news on the retirement front.

Today, the U.S. Department of the Treasury and the Internal Revenue Service issued final rules regarding longevity annuities.

According to the ruling, "these regulations make longevity annuities accessible to the 401(k) and IRA markets, expanding the availability of retirement income options as an increasing number of Americans reach retirement age."

In commenting on the ruling, J. Mark Iwry, a Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy, said:  “As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”

Cathy Weatherford, president and CEO of IRI weighed in on the ruling: “The availability of longevity annuities in workplace plans and IRAs will facilitate access to a steady stream of guaranteed income throughout a retiree’s later years and help Americans enhance their retirement security at a time when they are most vulnerable to outliving their financial assets or facing reduced standards of living."

You Could Live to 100: How to Plan for a Long Retirement

Originally posted July 1, 2014 by Casey David on

They say there are only two certainties in life: death and taxes. But that doesn’t mean we have any control over the actual timing of our death, which makes retirement planning hard.

Projecting your life expectancy is a critical part of executing a retirement plan as it determines how much you need in your nest egg and your drawdown tactics.

According to the Social Security Administration, a 65-year-old male has an average life expectancy of 19 more birthdays to reach 84. Women can expect to live a little longer: A female turning age 65 today can expect to live, on average, until age 86. In fact, 1 out of 4 65-year-olds will live past age 90, and 1 out of 10 will live past age 95.

Living longer is good news, but it increases the risk of outliving your retirement savings if you don’t plan accordingly.

Retirement income certified professional and Director at the American College, David Littell, offers the following tips to help boomers plan for longevity risks in retirement:

Boomer: What are some solutions to longevity risks for baby boomers?

Littell: The most direct solution for longevity risk is to increase income sources that are payable for life. This can be accomplished in a number of ways. The best place to start is to defer Social Security benefits to increase lifetime payments. Social Security has an added advantage in that benefits increase for inflation each year as well. Another option is to choose a life annuity payout option—instead of a lump sum—from an employer- sponsored retirement plan.

In addition, there are a number of commercial annuity products that can provide lifetime income. A life annuity can create a stream of income over a single life or over the joint lives of a couple. Annuities can be purchased that provide an income stream starting immediately – or, with a deferred income annuity, income can be purchased prior to retirement. A deferred income annuity can be purchased to limit longevity risk in one’s later years. For example, buying an annuity at age 60 that begins at age 80 can be a cost effective way to limit longevity risk. Deferred annuities can also be used to create income for life as these can be annuitized at a later date, allowing the owner to lock in lifetime income. Deferred annuities can be purchased with riders that provide for a lifetime withdrawal at a rate specified in the contract. Be sure to read all the disclosure before investing in annuity to make sure you understand all the potential risks, fees and terms.

Boomer: How important is it to make a good estimate of life expectancy for planning for longevity risk, and how can we create our own estimate?

Littell: Unless all of a retiree’s income sources are payable for life, part of the plan will be taking withdrawals from an existing IRA and other accounts. Determining how much can be withdrawn each year depends in part on how long retirement will last. So making a reasonable estimate (and updating that estimate over the years) is an important part of retirement income planning.

This process begins by considering average life expectancy. According to the Social Security Commission, the average life expectancy at age 65 is almost 20 years, and there is a one in four chance of living to age 90. In addition, there are some interesting tools available on the web for making a more personal calculation. For example, the Living to 100 calculator provides an estimate based on answers to questions about personal and family medical history as well as questions about lifestyle habits.

Boomer: What is a contingency fund and what is in it?

Littell: One solution to address longevity risk, as well as other risks faced in retirement, is to maintain a separate source of funds that are reserved for these contingencies. A contingency fund can be a diversified investment portfolio. If the purpose is to have funds available if life is longer than expected, then it is appropriate to choose investments that emphasize long-term growth.  A tax-efficient approach is to build this fund within a Roth IRA. With this approach, the value is not diminished by taxes and if the funds are not needed, the Roth IRA is a very tax efficient vehicle to leave to heirs.

A contingency fund does not always have to be an investment portfolio.  It could also be the cash value of a life insurance policy, or a reverse mortgage with a line of credit payout option. Both of those options have limited tax consequences as well.

Boomer: How does longevity risk impact some of the other risks faced in retirement? 

Littell: Some describe longevity risk as a risk multiplier. When a person lives longer in retirement, it means greater exposure to most of the other retirement risks such as inflation, increasing costs for health care and long-term care and more exposure to public policy changes that could put your savings at risk.

Boomer: How can boomers develop an income plan that evaluates all of the risks that retirees will face post retirement?

Littell: Building a retirement income plan requires strategies for creating consistent income to replace a paycheck and address other financial goals, such as leaving a legacy for heirs. But it also requires considering each of the major risks faced in retirement and having one or more strategies to address each risk.

One thing that becomes apparent when looking at all the risks is that the solutions to some risks require locking into income annuities and other low risk investments, while other risks require the flexibility of a diversified portfolio that can be adjusted based on changing circumstances over time. A critical guide for these choices is an informed advisor (such as someone who has earned the Retirement Income Certified Professional (RICP®) or Chartered Financial Consultant (ChFC®) designation from The American College) that can help you react (but not overreact) to changing circumstances.