Money Management Executive
Forget spending retirement in a rocking chair on the front porch — affluent recent retirees and baby boomers approaching retirement are more likely to travel the world than watch it go by, according to a
And this active lifestyle is probably going to take more out of retirees' savings sooner than they might expect, according to the Toronto company.
A U.S. division of Sun Life surveyed 2,000 people in January. Half of the participants were recently retired, and half were approaching retirement. All of them relied on advisers and had at least $250,000 invested.
In the first five years of retirement, according to the survey's results, many retirees may spend more than they earned in their last few years of working.
"Retirement is not a flat line," said Mary Fay, senior vice president and general manager for Sun Life's annuities division in Wellesley, Mass. The old rule of thumb that retirees should plan to live on a fixed annual income equal to roughly 80% of their annual salary in the years leading to retirement is outmoded, she said.
The top three objectives for the survey participants within the first five years of retirement were domestic travel, hobbies, and international travel. Beginning a new career, starting a business, buying a second home, and taking classes or pursuing a higher degree also were among the top 10 objectives.
"Boomers are eager to live their life to the fullest," Ms. Fay said.
Companies that want to cater to that lifestyle are going to have to develop products that give retirees a flexible income, not a fixed one, she said.
Sun Life has launched Income On Demand, a guaranteed annuity income product for those over 55. After investors reach the age of 59 and a half, they can begin taking payments, but they can also suspend payment when they do not need the drawdown, thereby "storing" the guaranteed income, to be taken as a lump sum later. For example, a retiree who defers a 5% annuity payment for five years and then decides to take a trip around the world can withdraw the stored income, taking a 25% payment.
"Conventional wisdom is beginning to change," Ms. Fay said. "Retirement is customized based on an individual's circumstances. There will be bumps along the way."
Tom Modestino, a senior research analyst with Cerulli Associates in Boston, said planning for such bumps is something that concerns boomers.
While 64% of the Sun Life survey respondents who were already retired said they felt prepared for retirement, only 38% of those approaching retirement felt ready.
Laura Varas, a research analyst with Bisys Group Inc.'s Financial Research Corp. of Boston, said the discrepancy is partly because those who are new to retirement or have not yet retired just do not know what retirement will cost them.
According to Sun Life's report, perhaps 25% of retirees squander savings too soon, but many more might be overly conservative.
Mr. Modestino cited a sense of worry about the future as a major driver of product development, especially in the face of increasingly unsecured Social Security and the rising cost of health care. A study released last month by Fidelity Investments of Boston said that the average 65-year-old couple retiring today will need $215,000 to cover medical expenses alone, chewing up at least half their Social Security payments.
"How do you meet those income needs? Now that you've been accumulating and met some goals, you need to draw down that asset base," Mr. Modestino said. "It's not an easy thing to do, and it's not an easy thing to make up for if you make mistakes."
Ms. Varas' research shows that 20% of recent retirees have not drawn on their invested assets in all-neither nor capital-and dividends. Instead, they are living on cash savings, even if their adviser tells them otherwise, she said.
"Tomorrow's retirees are going to have to learn to draw down their assets," she said. "There is a real strong learning curve, but the longer you've been retired, the more prepared you feel."
Many companies, including Genworth Financial Inc., Massachusetts Mutual Life Insurance Co., and Merrill Lynch & Co. Inc., have tried to lessen the learning curve with programs of their own. For example, Merrill offers Total Merrill, a platform that it bills as something akin to a personal pension plan but acts something more like a monthly allowance, drawn from a retiree's own assets.
Total Merrill also allows investors essentially to have their checkbooks managed, with regular bills paid automatically.
A MassMutual product, on the other hand, slowly rolls investors out of equities and bonds and into annuities, hedging against the possibility that they will outlive their savings.
Other companies have products such as annuities with withdrawal benefits, Mr. Modestino said, and he expects more products to come to market soon.
"Everyone has been jumping into the game," but it is hard to know which product may work best overall, or which one may work best for a particular investor, he said. "The market is still in its infancy. It's too early to see how things like cost and performance will shake out."
