It has been impossible to miss that millions of people around the world are heading into longer periods of retirement. Of special interest have been the 77 million US baby boomers but it is equally true in all major economies, which face significant uncertainty around retirement, driven by a combination of increasing life expectancy, earlier retirement, rising health care costs, reducing corporate pensions and uncertain social security benefits.
Analysis typically goes on to suggest that many of the assets that this generation controls will become available as people move from ‘accumulation to decumulation’, and completely rethink their financial situations – asset allocation, product selection and provider choices.
Many financial services companies have launched retirement business units that are charged with going out and capturing a disproportionate share of this change in customer behaviour.
The underlying rationale behind this thinking is typically along the following lines:
- Retirement is a major life event.
- The generation heading into retirement is deeply anxious about its finances in retirement.
- At, or close to, the point of retirement, this anxiety will trigger a significant re-evaluation of their financial situation, including a large need for ‘guaranteed income’.
- Financial services companies focused on retirement will be big winners in this re-evaluation process.
Perfectly logical, you might say. But research suggests that retirees and those approaching retirement, unfortunately, have no inclination to conform to this logic. For this generation has a completely different definition of retirement – one that does not involve retiring. The traditional notion of retirement as a ‘life of leisure’ is being replaced by retirement as a time to reinvent one’s lives, do new things, and most importantly, continue to work in some form or another and not, as one retiree said, “let one’s mind turn to mush”.
These different views of retirement have two key implications. First, retirement will not be the major life event/financial trigger that it is expected to be. And given that people will cycle in and out of the workforce, traditional linear models of accumulation/decumulation will not be relevant – people’s financial situations will be more unpredictable and complex than is allowed for in these models.
When it comes to anxiety around finances in retirement, at the risk of generalising broadly, most well-off households are not worried about their finances in retirement. Many of these people have trusted advisory relationships – and the need for advice will continue. And while they may modify their financial management strategies at the margin (reducing portfolio risk, increasing the share of fixed income products), they certainly do not want to hand over all their assets to an insurance company in exchange for lifetime guaranteed income.
Analysis suggests that existing advice providers are most likely to emerge as big winners in the retirement market. Hence there is significant opportunity for incumbent advisers to deepen their share of wallet with affluent households through systematic financial planning and active targeting of retirement assets held elsewhere. In the US, for example, it is likely that large retirement plan providers (such as Fidelity and Vanguard) will lose retirement assets to advice providers (such as Merrill and UBS) – provided the advisers get their act together and truly deliver an advice-based proposition. This means that advice providers have much work to do, but they are in a fundamentally advantaged situation that is theirs to take or squander.
By contrast, some 80% of the US, UK and Australian population does not have significant assets. They are worried about their finances in retirement, but their individual asset levels make it difficult to serve them profitably with advice. This group will provide significant opportunities for companies willing to develop new and creative ways to monetise non-financial assets (such as homes) to help them fund retirement. And yes, they will continue to pose a public policy challenge that governments and society will have to continue wrestling with.
Monish Kumar and Andy Maguire are Partners in the Boston Consulting Group.
