Answering retirement’s big question

Let’s face it: Boomers are probably not much different from every other age cohort. We are an eclectic mix of selfish, selfless, brainy, moronic and mostly average individuals whose singular defining characteristic may be that we will live longer than our parents did — if we lay off the junk food. Therefore, talking about boomer retirement as if we are all members of the same club is absurd. Some boomers are wealthy; many are poor. Most, probably, are in the middle, and most are probably trying to figure out the kind of life they will be able to afford in retirement. The question gnawing at many of them: “Will I have enough?” There is no easy answer, as most financial advisers know. Software helps but isn’t perfect. Uncertainty over health, longevity, asset values and other factors add to the angst. And the weirdness of our nation’s retirement policy brands all our decisions with a big question mark. Social Security and Medicare, which are critical for the poor and significant for the middle class, are Tinker Bells. We know that their finances are a fiction, but we hope that if we believe in them hard enough, they won’t fade away. Defined benefit plans, the one-time centerpiece of private-savings efforts, are on the road to extinction, save for government employees. (Who would have thought that retired schoolteachers would be among the aging boomer elite?) The new bulwark of private savings — the 401(k) plan — sprang from an overlooked wrinkle in the tax code. Millions of Americans who can’t balance a checkbook are now effectively their own pension fund managers. Never intended as a total retirement solution, 401(k) plans won’t answer the “Will I have enough?” question, especially since so little advice is provided to participants. Certainly, average plan balances — about $120,000 for long-term participants — are insufficient for a sustained retirement. Some kind of fairly priced sure-thing investment might provide boomer retirees with “enough,” or at least enough of “enough,” to quell anxiety. Annuities, of course, provide guaranteed predictable income but typically require the buyer to cede control of a chunk of assets. Zvi Bodie, a professor of finance at Boston University, thinks that insurers and securities firms should be able to create new hybrids that offer flexibility, as well as a guarantee. Speaking at a meeting last week of the Boston-based Retirement Income Industry Association, he posed several interesting questions: Why should financial products be different from other major consumer purchases that come with guarantees? If the financial industry is so convinced that equities are a sure thing for the long term, why don’t they package equities with a guarantee? Does the unwillingness of financial companies to offer guarantees imply that the risks of investing are too great? Those are provocative questions. Given the market demand for retirement solutions and the creativity of the financial industry, new products are bound to be forthcoming, and some even may have guarantees. In the meantime, maybe the best advice for boomers is simply to save more and spend less. That is hardly a message that makes the heart race. Still, for many years to come, imparting it is likely to be advisers’ greatest challenge. Evan Cooper is a senior managing editor of InvestmentNews.