Local Knowledge

GETTING REAL ABOUT

RETIREMENT

A new study reveals that investors are brushing off key lessons learned from the financial and economic crisis.

Healthy, happy and very much in love, Marilynne (79) and Art Haws (83) are living the retirement dream. After a lifetime of prudent living and disciplined saving, their retirement mantra is “We’re on the 10-year plan.” Pragmatics both, they soon realized that if there was something they really wanted – like a flat-screen TV – they better get it now, admitting that time was not on their side. At this time in their lives, there is probably only one risk that could put a blemish on their 10-year plan: inflation.

Inflation is underestimated. According to a study of US investors carried out by Allianz Global Investors from 27 July to 10 August 2009*, only 9% rank inflation as the number one factor threatening their retirement. The study shows that there is an apparent lack of understanding about the impact of inflation or what to do about it. In fact, even though 73% of the investors surveyed reported factoring inflation into their retirement planning, 45% didn’t have a clue as to which inflation rate they should factor in.

“Inflation may be the single biggest risk to sustaining a reasonable lifestyle in retirement,” warns Brian Gaffney, CEO of Allianz Global Investors Distributors. “While there is a widespread belief that stocks are an adequate hedge against inflation, that has not always been the case. We believe the best way to protect against unexpected upticks in inflation is by maintaining exposure to real-return assets like Treasury Inflation-Protected Securities (TIPS), real estate or commodities.”

A second marriage for them both, Marilynne uses a financial advisor to help make her investment decisions. Art does not, causing Marilynne to quip, “Art’s more of a risk-taker.” But when comparing portfolios, it becomes clear that they have both been quite conservative in making their investment decisions. Art is invested in ranch property, commercial real estate, stocks and cash, while Marilynne is invested in bonds and strong companies that pay good dividends, and is keeping more cash on hand. Even so, their portfolios experienced strong dips during the financial crisis and are ill prepared for inflation. 

TO STEP INTO the Williams’ house is to get a first-hand look at chaos theory in action. Busy careers, three children, boundless activities; it is a family in continuous motion. John (54), a speechwriter for Baker Botts L.L.P., and Lori (52), executive director of public affairs and media relations at Baylor College of Medicine, met as young reporters at The Beaumont Enterprise in Beaumont, Texas. Today, some 27 years later, they have been through enough – including losing almost everything they owned in the Houston flood of 2003 – to be guardedly optimistic about the current financial crisis. John is taking steps to counteract the effects of current losses by putting an additional 2% into retirement savings, and though he feels confident they will be able to accumulate enough money to support a comfortable income, they are focused on the basics of meeting day-to-day costs and health care, pushing back retirement until they are 70 or even older.

Like almost half of the investors surveyed, John and Lori are holding on to conventional investment and retirement wisdom. Despite the failure of many traditional strategies to withstand the crisis, their approach of putting 60% of their savings into equities and the rest into bonds is the type of 60/40 split long considered the model allocation. “While it’s highly unusual for all major asset classes to fall at once, severe tail events – improbable events that cause significant adverse portfolio effects – occur more frequently than many people realize,” says Gaffney. “We believe that now is the time, while the downturn is still front-of-mind, for investors to take a closer look at their asset allocation and consider alternatives like commodities and TIPS that, unlike stocks and bonds, positively correlate with inflation and help lower overall portfolio risk.”

THEY ARE A PERFECT FIT. Both entrepreneurs, Ginger Wilchar (53) is a real estate broker and developer, and fiancé John Mitchell (58) is the owner of the largest privately owned reverse-mortgage company in the United States.

Fittingly, Ginger is focusing her retirement strategy on real estate. “It’s a tangible, proven investment. I like being an active investor,” she effuses. Even though real estate can be a good hedge against inflation, her strategy is dependent on market values and bank fluidity. Recent market troubles have affected Ginger’s cash flow and caused her to lower expectations of her standard of living in retirement. John, on the other hand, uses a financial advisor to help him with his portfolio of stocks, bonds, money market accounts and certificates of deposit. Considering himself a conservative investor, John believes it is more important than ever to work with a professional financial advisor.

UPBEAT, HIP AND SENSIBLE, Chris Robinette (44) and Jeanne Fleming (37) seem to epitomize California chic. Chris is employed by Regen Inc., a solar-energy-focused startup, while Jeanne is a producer for fashion photography shootings. They have a 15-month-old son and two grown children from Chris’s first marriage. “We don’t live on the edge,” says Jeanne, “and we plan the large things well, like low rates on our home and cars that are paid off for many years.” Though they are disappointed in the losses following the financial crisis, they feel they have plenty of time to recoup. Like 64% of the investors surveyed, Jeanne and Chris say covering health-care costs is a must-have in retirement.

Like the statistics-defying majority of respondents (77%), they expect to have better-than-average health throughout retirement. “It’s tough to confront the possibility of deteriorating health, let alone how to pay for it,” says Gaffney. “But reform notwithstanding, health-care costs [in the United States] are likely to remain considerable for most retirees, as Americans enjoy ever longer and more active retirements. Ignoring these expenses in a retirement plan is like buying a beach house without storm insurance. Eventually, you’re probably going to take a hit, and the consequences might be devastating.”

Even those faring well financially want to learn more about the many issues related to retirement planning. Of investors surveyed, 72% said they would like assistance in finding out more about the best way to generate income during retirement. “Estimating health-care costs and generating lifetime income are complex issues,” concludes Gaffney. “It’s not surprising that even relatively successful investors are seeking professional guidance.”

* Allianz Global Investors Distributors LLC recently conducted a survey among investors and financial advisors to better understand their knowledge, attitudes and behaviors in relation to the new retirement planning reality. This Harris Interactive survey was conducted online within the United States between July 27 and August 10, 2009, among a nationwide cross section of 1,013 pre-retiree household financial decision makers aged 30 or older with at least $250,000 in investable assets. Respondents for this survey were selected from among those who have agreed to participate in Harris Interactive surveys. The data have been weighted to reflect the composition of the U.S. adult population. Because the sample is based on those who agreed to participate in the Harris Interactive panel, no estimates of theoretical sampling error can be calculated.  Figures for age, sex, race/ethnicity, education, region and household income were weighted where necessary to bring them into line with their actual proportions in the U.S. population. Propensity score weighting was also used to adjust for respondents' propensity to be online. All sample surveys and polls, whether or not they use probability sampling, are subject to multiple sources of error that are most often not possible to quantify or estimate, including sampling error, coverage error, error associated with non-response, error associated with question wording and response options, and post-survey weighting and adjustments. Therefore, Harris Interactive avoids the words "margin of error" as they are misleading. All that can be calculated are different possible sampling errors with different probabilities for pure, unweighted, random samples with 100% response rates. These are only theoretical because no published polls come close to this ideal. Respondents for this survey were selected from among those who have agreed to participate in Harris Interactive surveys. These statements conform to the principles of disclosure of the National Council on Public Polls.

Published by PROJECT M in April 2010

(Photos: Claudia Götzelmann)