Sent: 08-09-2009 10:09:01
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Retire, then what?
A great deal of time and effort has gone into developing products and marketing approaches for the accumulation (pre-retirement) phase. However, a change of emphasis would appear to be prudent given that large numbers of Baby Boomers are going to be 'retiring' over the coming 20 years. A recent article from Wharton reported on a conference that was focused on exactly this issue.
The report from the conference opened by stating that, "as Baby Boomers retire and start spending their nest eggs, they will need new financial products to make their money last" so the conference explored emerging patterns in spending during retirement. As Olivier Mitchell, executive director of Wharton's Pension Research Council noted, significant research exists on the adequacy of retirement savings and how people move from accumulating to spending but now it is time to consider how people should manage that money in retirement.
This is interesting as previous research I was involved in with IFSA some years ago found that many people had no idea what was available for the post retirement years and believed that they had to do it all themselves. Many stated they were concerned as to how to manage the money, providing enough for them to spend on the things they wanted to do but ensuring it lasted as well. Hardly surprising given that they have little (or no) idea of what the inflows and outflows will be, let along how long the money will actually have to last! What I found particularly surprising at the time was the total lack of knowledge of what products are currently available or where to find information about them.
Returning to the Wharton conference, Mitchell commented that financial service providers, researchers, and regulators "have devoted substantial attention to the 'accumulation' portion of the life cycle, focusing people on saving more for retirement and diversifying their retirement savings." However some researcher has been looking at the post retirement period and how people are managing their financial situation.
What recent US research has found is that many retirees simply go back to work. They discovered that between 30% & 50% all workers, who partially or fully retire, return to some level of employment. As one of the presenters commented, the traditional path for retirement was: Work. Work. Work. Retire. The situation today however is changing with many undertaking a more gradual approach, reducing the amount they work before making a permanent exit from the workforce.
Added to this are those who simply reverse their retirement and go back to the labour force in some capacity. Whilst these types of jobs have been called "bridge jobs", it has been found they can last as long as five years, with those partially retired working a median of 16 hours a week and 40 weeks a year. Another consequence of the decision to return to work has been found that some alter investment patterns in retirement. Some are willing to take on a riskier portfolio in early retirement knowing they can return to the labour market after a while.
What the researchers also noted was that for many retirees, the biggest chunk of their net worth is tied up in their homes. Naturally dramatic increases in real estate prices have prompted interest in how retirees might tap that equity to finance retirement. They found that with the rises in housing values over the last few years, home equity can make up more than 60% or a person's net worth.
However, as they pointed out, no matter how much their home has appreciated, retirees still need to pay something for housing after they stop working, regardless of whether they sell the house and cash in on their real estate appreciation. That is a factor I have found many people fail to grasp. I have mentioned on a number of occasions people wishing to use their homes as the major portion of their retirement plan, but also stating they did not want to move once they have retired.
The report continues with further interesting insights, many of which I am convinced apply equally in Australia as they do in the US. Consequently I will continue with this theme next time.
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