How to Help Baby Boomers Manage Their Wealth
By Sy Sternberg
As Social Security enters its 70th
year, the program has become
the topic of fierce controversy:
Can the system survive under
the weight of the 77 million baby boomers
who will begin reaching retirement age this
decade? In peril or not, do we dare risk
retooling a program that more than two thirds
of all seniors depend upon for more
than 50 percent of their total retirement
income?
This quandary is just one component of a
much larger issue. Every aspect of retirement
income—from broad social policy to
personal retirement—boils down to a discussion
of risk management. There will
always be people who, because of limited
resources, poor planning or unanticipated
financial crises, face insolvency at some
point in their retirement. The Social Security
program was never intended to be a
comprehensive solution for managing this
risk. We must seek broader solutions.
Just 21 percent of workers in private industry
are now covered by defined benefit
pension plans, which prior generations
counted on for a lifetime stream of income.
At the same time that the boomers
can have far less confidence in company
pensions and government safety nets, they
are likely to live longer. For a healthy couple
in their mid–60s, there is now a 50 percent
chance that one spouse will live
beyond his or her 92nd birthday.
For years, financial planners have been
telling clients to create a retirement nest
egg that will be sufficient for the average
life expectancy of 85 years. However, half
of the people who follow this advice may
very well outlive their money.
Even if a cure for the ails of Social Security
were to be enacted tomorrow, it would
offer little relief for these enormous financial
risks. Social Security, by itself, cannot
today furnish a secure retirement for seniors:
Current benefits cover only about 40
percent of the average American's post-retirement
income needs. Regardless of
how the Social Security program is modified
by raising the eligibility age,
through progressive indexing or with the
addition of private accounts—most
retirees can count on further reductions to
their lifetime benefits.
No single program can address retirement
income shortfalls. But we can begin by:
- Simplifying retirement investment programs.
The new "automatic" 401(k) accounts,
where participants delegate all
decisions to professional investment managers,
are proving extremely popular and
have been dramatically effective in boosting
long–term savings rates. These programs,
offered by a growing number of
employers, help define the retirement
goals for each participant, select investments,
specify contributions—and adjust
these factors over time, as necessary. Managed
401(k) accounts put inertia to work
for individuals, instead of against them,
since they only need make one choice—to participate.
- Replacing lost sources of lifetime
income. Traditional pension plans (and
Social Security) have two huge advantages
over other retirement income solutions.
First, they offer a regular paycheck
as long as someone lives. Second, once an
individual’s base retirement income is
assured, he or she is better able to take
greater risks—and seek better returns—in
personal investment accounts.
We are just now seeing the emergence
of a new generation of annuity products
that, in effect, offer retirees the option of
creating their own customized lifetime
pension plan—a monthly paycheck they
cannot outlive. One new variation, specifically
designed for longevity protection,
pays higher monthly benefits (up to five
times the initial amount) after a predetermined
number of years. With the assurance
of a guaranteed lifetime income,
seniors can spend down their nest egg savings
more aggressively—and live much
more comfortably—during the earlier,
more active years of retirement.
If the acrimony over Social Security
serves any good purpose, let’s hope it
inspires more comprehensive solutions to
the broader challenge. The alternative is
not pleasant: an entire generation repeating
an all–too–familiar lament, "If I knew
I’d live this long, I would have taken better
care of myself."
Sy Sternberg is chairman and chief executive
officer of New York Life Insurance.
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