Editor's Note: The following is adapted from an article in a recent edition of Bank Insurance & Securities Marketing, and thus has a particular focus on bank reps and their interaction with clients.

Retirement income is now recognized as one of the critical financial issues (and opportunities) of our time. Unfortunately, as baby boomers watch the growing number of television commercials showing "mature" couples enjoying their golden years, they begin to develop unrealistic expecta-tions. They want the good life they see on TV but generally do not understand what it really takes to get there. This starts with a faulty understanding of the level of resources required for a given life-style, which is then exacerbated by a lack of un-derstanding of how resources must be deployed in retirement to optimize one's situation. If serious retirement savings/planning starts early enough, these issues can be minimized or even eliminated. The problem is that we have a very large group of recent or near retirees who will find they are not prepared, and for many of them, it may be too late.

To help these clients understand and optimally deal with the current reality, it will help to under-stand their perspective. Significant research has been conducted throughout the industry including over ten years of projects by our firm. Much of this has shown a world of confused consumers who are struggling for answers.

• Many do not know how much money they need for retirement or even how to calculate the amount.
• There is confusion as to what age full Social Security benefits kick in.
• Most have an unrealistic view of expected in-vestment returns.
• At the same time, many consumers lack a ba-sic understanding of financial market fundamentals — even the directional relationship be-tween interest rates and bond values.

Advisors must understand this perspective, or lack thereof, when dealing with their clients.

Retirement Risks

In a recent interview, Harold Evensky, an interna-tional authority on financial planning topics, ar-ticulated four key risks inherent in the distribution phase of a retirement account: longevity, under-spending, inflation and volatility. It is worth look-ing briefly at each of these.

Longevity. Today's retirees are not just living longer. They are spending longer. This "double whammy" greatly increases the risk of outliving one's assets.

Under-spending. Depending upon their concern about longevity and withdrawal strategy, many consumers may unnecessarily constrain their re-tirement lifestyle out of fear of outliving their money and lack of knowledge about various product alternatives.

Inflation. Many people do not realize the impact of even modest inflation. Some economists now argue that inflation for the elderly is actually greater than that for the general population due, in large part, to the rapidly rising cost of health care.

Volatility. The sensitivity of a retirement (spending) account to volatility is much greater than during accumulation. This is particularly true in the early part of the distribution phase. The size of withdrawals and their timing relative to market movements can be very impactful.

Consumer Expectations

Lack of planning and understanding has led to sometimes significant differences between pre-retirement expectations and (post) retirement real-ity. In a recent study conducted by the Employee Benefit Research Institute (EBRI), 34% of work-ers expected their retirement spending to be "a little lower" than current, but only 24% of retirees actually found this to be the case.

It was noted that those who have planned and saved for retirement are more likely to have a set withdrawal plan.

Recent research sponsored by AIG provides fur-ther insights as to evolving consumer understanding and prioritization. While acknowledging that they are not prepared financially for a 30 year retirement, baby boomers identified three key financial goals:

1. Lifetime income
2. Protection against principal loss
3. Growth potential

There are now many annuity products that can address the above stated goals, and, when survey respondents understood the full product features, two-thirds expressed interest in putting a portion of their 401(k)/IRA money into a variable annu-ity. In addition, AIG's research indicates that con-sumers might be willing to give up as much as 2% of total return to have all of their key goals met. Other research has also confirmed consum-ers' desire for products that meet multiple goals, but found that many people have a bias against "annuities" (the term) apparently based on nega-tive misconceptions. The key is getting the cus-tomers to understand the products, their benefits and their costs.

Bank Reps' Perceptions

While banks are not at the forefront of providing retirement income solutions, they recognize the importance and are taking steps. Banks focus on a much broader retirement income market than other channels with a larger volume of cli-ents/prospects, covering a wide range of financial demographics. This requires segmentation of cus-tomers and services in order to meet as many needs as possible economically and compliantly. Recently DSG completed a research study for the Bank Insurance & Securities Association (BISA), and sponsored by Symetra, that focused on bank reps' perceptions relative to the Retirement In-come Market. Findings include:

• 74% of bank reps rated the importance of retirement income to their practice as a "4" or "5" on a scale of 1 to 5 (with 5 being "very important").
• Most bank reps target the middle income to mass affluent market (up to $1 million in assets). These are the people who often need the most help with planning their re-tirement income.
• The top recommendations reps make for retirement income solutions are:
• Income and dividend paying investments,
• VA's with living benefits, and
• Systematic withdrawal strategies.
• Often reps must address a client’s retirement income needs without access to or even knowledge of the full portfolio. In fact, al-most 30% of reps deal with less than 50% of a client’s total portfolio when developing a retirement income plan.
• Bank reps need access to retirement income planning software.
• 43% of reps report that they use no soft-ware for retirement income planning.
• 39% use "modified accumulation" soft-ware.
• 8% use a "home grown" system.
• Only 10% use a comprehensive retirement income account management system.

Managing Bank Reps

The key to bank representatives’ success in the retirement income market will be the training and support available to them. Reps have reported that the top two items they need are true retire-ment income software and related retirement in-come illustration systems. Needed training includes:

• Understanding customer desires, needs and perspectives.
• Understanding solution options and how they fit in specific situations.
• Understanding positioning and how to "sell" in this market. This includes knowing how to help customers understand the reality of their individual situation and accept the op-tions available to them.

A focused retirement income support group for the reps would likely pay real dividends. Our re-search has shown that only 10% of bank reps have this resource, but, of those who do have ac-cess, 80% use it.

But one final word of caution. This new paradigm of creating and managing one’s own retirement income is often daunting to consumers and finan-cial advisors. Reps must understand "reasonable" investment return expectations and how/when to set up appropriate guaranteed income streams and principal protection for their customers. And they must have appropriate support and supervision on an ongoing basis.DSG

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