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Counting Their Nest Eggs Before They Hatch: Pre- And Post-Retirees Bank On Assets They Don’t Have

Foregoing Advice from Professional Advisors, Many Make Unrealistic Assumptions about Longevity, Home Equity and Inheritance

PARSIPPANY, NJ NOVEMBER 15, 2005 — Pre–retirees and retirees may be relying on assets they don't have to fund their retirement, according to MainStay Investments 2005 Across Generations Retirement Income Survey. When it comes to calculating the total dollars they will have in retirement, many are gleaning a false sense of security from projected assets—real estate appreciation, inheritance, future savings—that are speculative, at best.

"We've known for a long time that many investors—even those with a sizable net worth—are seriously under–funding their retirement savings; now we're beginning to get a better understanding as to why," notes Christopher Blunt, president of MainStay Investments, a division of New York Life Investment Management LLC.

Building on NYLIM's expertise in generational investing, MainStay Investments 2005 Across Generations Retirement Income Survey was created to gather data specific to retirement income issues. The survey, conducted in May 2005, polled 1,209 middle and high net worth Americans of pre– and post–retirement age on their retirement income needs, goals and use of financial professionals.

Great Expectations, But Pre–Retirees Face Significant Shortfalls
In addition to over–estimating their available assets by factoring in home equity, pre–retirees expect to have greater savings—and a higher net worth—than current retirees did when they retired. On average, today’s pre–retirees are predicting retirement savings of roughly $1 million and a net worth of $1,534,000. Given that their current savings and net worth average $660,800 and $904,000 respectively, pre–retirees have quite a bit of ground to make up over the next few years.

“With retirement five or fewer years away, pre–retirees face a significant retirement shortfall,” Blunt observed. “Today’s pre-retirees seem to be basing their nest egg calculations on ‘aspiration’ rather than ‘reality.’ We are seeing a pattern of denial on the part of pre–retirees about how they actually expect to miraculously create this additional wealth in just a few years’ time. These individuals need sound financial advice to help provide an accurate view of the future based on their investment portfolio and other financial holdings.”

Financial Planning Not Matching Life Expectancy
"The life expectancy of today's 65–year old is estimated at 82 years for a man and 85 years for a woman," continued Blunt. "However, we need to remember that this is a just a median—for a healthy couple in their mid–60s, there is a 50% chance that one spouse will live to at least their 92nd birthday and outlive his or her assets."

Though retirees and pre–retirees are aware that they may live longer, and recognize that they don't want to run out of money, very few of them are actually financially planning to live longer.

Only one–third of pre–retirees "tried to match retirement savings and income to life expectancy," according to the survey. Less than one in four people retired 5+ years tried to match retirement savings and income to life expectancy. Similarly, one in five (19%) say they "plan to, but haven't yet" begun to try and match retirement savings and income to life expectancy.

"Though they plan on living longer, investors appear not to have prepared adequately for the financial burden those extra years will carry. Not only does a longer life expectancy mean assets have to support them for a longer period of time, but with healthcare costs rising at a rapid rate, they'll need to ensure that their portfolio protects against a significant loss of purchasing power in retirement," Blunt continued.

Betting It All On Real Estate
"When it comes to real estate, there is a gap between the assets many investors believe they have accumulated and the liquid assets that are actually available to them," said Blunt. "The real estate bubble and interest–only mortgages have given many pre– and post–retirees a false sense of retirement security."

On average, 44% of respondents cited the value of their home as their most important financial safety net. In addition, 27% of homeowners plan to fund their retirement by selling either their primary home or a vacation/investment property and 26% would do the same in an emergency.

Going At It Alone
Among active investors age 50 to 90, nearly 60% of current retirees and 50% of individuals who expect to retire within the next five years are developing their own short– and long–term financial plans rather than seeking the advice of a financial professional. When it comes to calculating the total dollars they will need to support themselves in retirement, a similar percentage of investors (44% of pre–retirees and half of current retirees) have figured out their income needs on their own, without the aid of a professional advisor.

While most respondents claim to have a financial plan for retirement, many admit they are informal, at best. Retirees are significantly more likely to have a financial plan than pre–retirees (81% vs. 69%). However, over 60% of these plans are informal, and/or unwritten. Approximately 15% of pre–retirees expect to create a plan in the near future, while nearly 18% in each demographic do not have or do not intend to create a financial plan.

"It's imperative that pre–retirees and retirees have sound financial plans, and have them in writing," continued Blunt. "Most have basic knowledge about products that are available for retirement such as IRAs and mutual funds, but they're lacking concrete advice on how to allocate their assets, or how to convert those assets into an income stream. It's not enough to comprehend the financial risks involved with longevity – people need to act on that risk and mitigate it through planning. It's also critical that their plans be based on realistic assumptions about current and future sources of income."

Among the survey's other key findings:

  • Help Wanted: Pre–retirees are voicing a strong need for advice on how to generate a steady stream of income in retirement. One–third of pre– and current retirees feel they need help understanding "ways to convert savings into guaranteed income." Not surprisingly, then, nearly half (44%) of pre–retirees and 1–5 year retirees (46%) also say they need some or extensive help in understanding the features/benefits of income annuities.
  • Inheritance: Will Today's Retirees Leave a Financial Legacy? Survey results show that pre–retirees and recent retirees are more interested in doing what they want without concern about leaving an inheritance, while older retirees are significantly more likely than their younger counterparts to want to pass money on to their heirs. Fully two–thirds of pre–retirees see retirement as a time to "do the things I want to do without concern about leaving an inheritance," compared with 56% of 1–5 year retirees and 47% of 5+ year retirees. Ironically, a sizable percentage of pre–retirees themselves expect to benefit from an inheritance. Nearly 1 in 4 pre–retirees (24%) list "inheritance" among their sources of retirement income, compared with 17% of recent retirees and 13% of 5+ retirees.

The first MainStay Investments 2005 Across Generations Retirement Income Survey was conducted by an online research firm in Summer 2005. The survey polled 1,209 individuals ages 50 to 90 focusing on three specific retirement segments. Pre–Retirees include respondents who expect to retire within five years. In addition, two segments of retirees were polled: 1–5 year Retirees who retired within the last five years, and 5+ Retirees who have been retired for more than five years. Respondents were U.S. residents with a total net worth of at least $100,000.

New York Life Investment Management LLC and its affiliates, with more than $196 billion in assets under management as of September 30, 2005, provide a wide range of investment services to institutional, individual, corporate, public, and Taft–Hartley clients, including institutional asset management, retail investments, retirement services, guaranteed products, real estate investments, and alternative investments. For more information, visit the New York Life Investment Management Web site at www.nylim.com This link will open a different site in a new browser window..

FOR MORE INFORMATION:
Bliss, Gouverneur & Associates
Meghan Lantier
(212) 840-1661
meghan@blisspr.com

New York Life Investment Management LLC
Nancy Paris
(973) 394-4410

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Counting Their Nest Eggs Before They Hatch: Pre- And Post-Retirees Bank On Assets They Don’t Have

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