Category Archives: Retirement planning

Managed risk equities can reduce retiree loss aversion

Many individuals entering or nearing retirement encounter the risk tolerance paradox. They seek asset growth with an aversion to losses. This conflicting mindset prompts some investors to acquire low-risk assets when markets become volatile, essentially locking in losses while trading market risk for longevity risk.

According to Milliman’s Wade Matterson, “introducing managed risk equities into the portfolio of clients close to (or in) retirement can provide exposure to higher returns while managing the inherent higher risk.” He provides perspective on what investors should consider when using managed risk equities in his article “Solving the risk tolerance paradox for retirees.”

Milliman clients join “Save 10” initiative

Five Milliman clients were awarded “Save 10” recognition by the Financial Services Roundtable (FSR) at a recent event in Hartford, Conn. Save 10 is a business-to-business, peer-to-peer initiative encouraging responsible employers to help their employees secure a better retirement by enabling them to save 10% of their income.

“Helping people save for their financial future can be as simple as companies automatically enrolling their employees in workplace savings programs,” said FSR President & CEO Tim Pawlenty. “Save 10 recognizes these kinds of efforts by employers across the nation. We hope that by highlighting these companies’ terrific efforts, more companies will offer similar savings tools to their workers.”

The Milliman clients recognized are Hall’s Fast Motor Freight, Northeast Controls, Pinnacle Foods Group, Steuben Trust Company, and The Eastern Company.

Managing Australians’ longevity and investment risks closer to retirement

Reducing an investor’s exposure to growth assets as retirement is approached is common. However, this strategy may increase the chance that an investor will outlive retirement savings. This is a predicament that many Australians face. In his article “Australia’s retirement challenge,” Milliman consultant Wade Matterson offers some perspective on how strategies employing derivatives can help Australians manage longevity and investment risks.

UK reforms opens a secondhand annuity market

Individuals in the United Kingdom will be allowed to sell their annuities starting in April 2017. A few important questions arise in light of this development: Is a secondhand annuity market sustainable? Who needs to participate in the market to sustain it? Is such a market appealing to consumers? A recent FT Adviser article written by Milliman consultants Colette Dunn and Chris Lewis explores these issue.

Here is an excerpt:

As the Chancellor stated “For the vast majority of people, continuing with their existing annuity will be the right choice.” This is a view that has been strongly reiterated by the Economic Secretary to the Treasury, Harriett Baldwin, and by Minister of State for Pensions, Baroness Altmann.

However, without doubt there will be demand from some consumers. Some will simply be tempted by the short term cash over an income for life. Others may have bought an annuity when they were required to have a £20k income per year to enter flexible drawdown (a rule which no longer applies) and now wish to sell it.

Anyone who plans to sell their annuity, should consider more than just the price. They need to think about the tax implications, the potential loss of means tested benefits and whether it will result in them paying more towards any care costs.

The price is important too! Although we cannot know how the market pricing will develop, we have calculated illustrative cash-in values based on current interest rates, an assumption of current good health and possible transaction charges.

Utah-based Milliman clients recognized by “Save 10” initiative

Griffith-RobertMilliman was pleased to collaborate with the Financial Services Roundtable (FSR) to recognize Utah-based employers as part of our ongoing participation in the “Save 10” initiative. The initiative is a business-to-business, peer-to-peer effort encouraging responsible employers to help their employees better prepare for retirement.

The Salt Lake City event to recognize the employers was highlighted by a speech from Orrin Hatch, the senior U.S. senator from Utah. Senator Hatch discussed the importance of retirement savings and the need for strong organizations to provide their employees with the ability to have adequate savings for retirement. The event included a roundtable discussion where Tom Topik, Human Resources (HR) Strategic Business Partner of ARUP Laboratories and a client of Milliman, discussed the importance of retirement savings and the tools available for his employees to take charge of their retirement programs. Tom specifically highlighted the auto enrollment process and the use of Milliman’s InvestMap™ product to help employees properly invest using a custom asset allocation appropriate for their age and risk tolerance.

In addition to ARUP Laboratories, these other Milliman clients were recognized: America First Credit Union, OOCL (USA), and Twinlab Consolidated Corporation. All of these organizations were recognized for their dedication to retirement savings by including auto features in their retirement plans (either auto enrollment, auto escalation, or both) and enabling employees to save at least 10% of their incomes for retirement.

Save 10 Utah - Award Winners
Utah-based employers recognized by the Save 10 initiative.

The Save 10 initiative is a program that encourages retirement savings to remain in the forefront of employers’ and employees’ minds. The initiative also helps incentivize other companies to take a look at their retirement programs to see if they can make them better.

Read more about Save 10 and qualifying criteria at www.Save10.org. For more on Milliman’s retirement planning tools, click here.

Generation X: Factoring healthcare costs into retirement planning

pink-lesleyThis is the final blog in a three-part series exploring the economic history and future of Generation X. The series focuses on what this generation can do to prepare for retirement. In the first installment, we highlighted some of Generation X’s financial predicaments and, in the second installment, we discussed savings, pensions, and Social Security. The last blog focuses on Generation X and healthcare.

Many of us Generation Xers are not factoring healthcare costs into our retirement planning, which is a mistake. As healthcare expenses continue to rise and as we age, having a plan in place makes sense.

The cost of healthcare in the United States is increasing every year. According to the most recent Milliman Medical Index, in 2015, the cost of healthcare for a typical American family of four covered by an average employer-sponsored preferred provider organization (PPO) plan was $24,671. Healthcare costs for this typical family have more than doubled over the past decade.

To combat rising healthcare costs, there is something Gen Xers can do now—start a health savings account (HSA). An HSA has several tax advantages. The money isn’t taxed on the way in and grows on a tax-deferred basis. Additionally, it can be withdrawn tax-free when used to pay for qualifying medical expenses both at present and in retirement.

What many people—including Gen Xers—don’t realize is that an HSA could be an investment option relating to medical costs in retirement. Medicare doesn’t cover all healthcare costs, like nursing home and assisted living expenses. HSAs could be useful when paying for medical bills and paying for long-term care. But Gen Xers should also consider whether it is better to save money for long-term care in an HSA or buy a long-term policy. Doing the due diligence on the options now can save money down the line.

According to Dawn Helwig, a principal at Milliman, it is smarter to buy a policy sooner rather than later. As she said in a 2014 Wall Street Journal article, “For each year applicants in their 50s delay buying coverage, carriers typically raise premiums by 3% to 4%, simply because they are a year older….” Helwig also noted that those who wait to buy this insurance may encounter higher premiums down the line because carriers are dealing with losses on existing policies. With those losses, they have raised premiums between 4% and 8%.

Another option that we Gen Xers can consider when we reach retirement age is rethinking Medicare plans. Medicare itself has four parts: hospital insurance (Part A), medical insurance (Part B), Medicare Advantage plans (Part C), and prescription drug coverage (Part D). At age 65, most people are automatically enrolled in Medicare. But Medicare doesn’t cover everything, and participants must pay copayments and deductibles.

Those who have Medicare Parts A and B can decide to receive all their healthcare services through a provider organization under Part C, also known as Medicare Advantage. Most Medicare Advantage programs have low monthly premiums, and they cover all of the services offered under original Medicare except hospice. To determine whether Medicare or Medicare Advantage is a better option financially, it is important to compare and contrast the costs associated with each one.

As one Gen Xer says, “My parents got to think about what they wanted to do at 65. I don’t have that option. We are running into something that our parents didn’t have to deal with.”

Clearly, Generation X hasn’t had it easy and faces numerous challenges on the way to retirement. But by doing some research and planning for the long term, we might just be okay.

Generation X: Savings, pensions, and Social Security

pink-lesleyThis is the second blog in a three-part series exploring the economic history and future of Generation X. The series also focuses on what this generation can do to prepare for retirement. In the first installment, we highlighted some of Generation X’s financial predicaments.

Generation X faces major retirement challenges.

Besides the issues of job security and stagnant wages, there is the topic of cold hard cash—saving enough, having enough, allocating enough.

Some Gen Xers know that they started saving too late and wouldn’t be able to make up the difference. Others were worried because they’d been saving since they got their first jobs—20+ years ago—and felt that that money still wouldn’t be enough when they reach retirement age. And others just couldn’t save. As one fellow Gen Xer put it, “My wife and I don’t make enough together to save for retirement and the kids.” And let’s not fool ourselves—“retirement age” no longer has a firm definition.

We Gen Xers aren’t alone. According to the 2015 Retirement Confidence Survey published by the Employee Benefit Research Institute, “Almost two-thirds of workers (64 percent) say they feel they are behind schedule when it comes to planning and saving for retirement.” This survey also notes that cost of living and day-to-day expenses top the list of reasons why workers don’t save (or don’t save enough) for retirement.

Pensions, often referred to as defined benefit (DB) plans, used to be a mainstay. But they are not as common as they once were, and this, too, is affecting Generation X. In fact, according to Jennifer Leigh Parker on CNBC.com, Generation X is the first generation to see its pension leg replaced by 401(k) savings plans, which were increasingly adopted during the 1980s. The 401(k) plans are portable but aren’t designed as a monthly “pension paycheck.” The owner of the account balance has to take significant action to understand and convert any or all of it to that pension paycheck. Gen Xers , in general, will find that its collective savings plan account balances are woefully deficient and for many, sitting in a tax-deferred account. And the Internal Revenue Service (IRS) can’t wait for us to start cashing them out.

Additionally, we Gen Xers, who have been paying Social Security payroll tax for years, may not receive full benefits upon reaching retirement age.

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Generation X and retirement: The background

pink-lesleyIn this three-part series, we explore Generation X’s economic history and discuss what this generation can do to prepare for retirement.

While the so-called “me me me generation” of Millennials has received most of the financial spotlight of late, this blog focuses on my demographic brothers and sisters, those of us from the Reality Bites and Pearl Jam era. We are Generation X, and we face major retirement challenges. Reality does, it seem, bite for us. But there is some hope.

There are about 46 million of us born between the mid-1960s to the late 1970s. It’s been noted here and here that Gen X was hit especially hard during the 2008-2009 financial market collapse. According to the Pew Charitable Trusts, Generation X lost almost half of its wealth during the economic downturn.

Forbes wrote in 2013 that “…a recent census report found that people between 35 and 44 saw a 59% decline in median household net worth between 2005 and 2010, the largest drop of all age groups.”

The repercussions from that recession will reverberate for years. As Ivory Johnson wrote in 2014 on CNBC.com, “Members of Generation X face the daunting task of planning for a retirement that will likely include no pension, a potential Social Security haircut, stagnant wages and high education costs for them and their children.”

We in Generation X continue to contend with stagnant wages and job insecurity.

According to a recent report from the Economic Policy Institute, real hourly wages fell or stagnated across the wage spectrum between 2013 and 2014 even for those with a bachelor’s or advanced degree. The report says, “Comparing 2014 with 2007 (which was the last period of reasonable labor market health before the Great Recession), hourly wages for the vast majority of Americans have been flat or falling.”

Besides stagnant wages, we are also facing unique issues in the workplace, which come from being wedged between the two largest generations in history. With Gen Yers nipping at our heels and Baby Boomers blocking the path to advancement, Gen X is in an uncomfortable position. In a 2010 Washington Post piece, Joe Frontiera and Dan Leidl wrote, “As both groups [Baby Boomer and Millennials] jockey for position, Gen Xers are left to alternately fend off overeager newbies and patiently wait to earn a rare opening at the top.” Frontiera and Leidl also note that many Gen Xers have been in the same position for a long time and are “butting up against the Gray Ceiling, a stagnating phenomenon…”.

And those Baby Boomers (born between 1946 and 1964) don’t appear to be going anywhere. Gallup notes that Baby Boomers are staying in the workforce longer: “As the largest generation born in U.S. history, Baby Boomers’ sheer numbers coupled with their reluctance to retire will likely ensure that their influence endures in the workplace in the coming years. The generation still constitutes about one-third (31%) of the workforce…”.

In this blog series, we take a look at the financial challenges that Generation X has been dealing with recently and how this generation can plan for the future. We also talked to several fortysomethings about their retirement concerns and what can be done to address them (quotes are sourced from conversations in 2015).

Milliman clients recognized by “Save 10” initiative

Milliman announced this week that a group of its clients will be recognized by the Financial Services Roundtable’s “Save 10” initiative, which is a business-to-business, peer-to-peer effort encouraging responsible employers to help their employees better prepare for retirement by helping them to save 10% of their income.

“One of the best ways to help people save for their financial future is for companies to automatically enroll employees in workplace savings programs,” said former Minnesota Governor Tim Pawlenty, chief executive officer (CEO) of the Financial Services Roundtable. “Save 10 recognizes such companies, and we hope that by highlighting their terrific efforts, more companies will become Save 10 employers.”

The Milliman clients joining the Save 10 effort include Mankato Clinic, Francis Investment Counsel, Fish & Richardson, Tiller Corporation, Southern Minnesota Beet Sugar Cooperative, CliftonLarsonAllen, Felhaber Larson, and Communications Systems, Inc.

“We work with our clients to provide a meaningful retirement benefit,” said Milliman principal Kevin Skow. “Features like auto-enrollment and auto-escalation allow employers to better help their employees save for retirement. Our plan participant tools help to educate employees on how much they need to save and how they can accomplish their retirement goals.”

Nearly 82% of employees save for retirement when their employers offer an auto-save program compared with just 64% when employers do not. Save 10 aims to fundamentally change these facts.

To be considered for recognition as a Save 10 employer, companies must certify that they engage in certain activities that qualify them as Save 10 certified. This includes offering a retirement plan, providing employees opportunities to save 10% of their income, contributing to employee retirement accounts, ensuring employees can “keep 10” by providing access to disability and life insurance plans, and other criteria.

Other companies that have joined the Save 10 effort include Allstate, Assurant, AXA, EZE Castle Integration, First Horizon, Franklin Resources, IBM, LPL Financial, Mastercard, Nationwide, Northern Trust, Popular Community Bank, Principal, Prudential, Putnam Investments, Quicken Loans, State Farm, SunTrust, TransAmerica, Toyota Financial Services, United Technologies, and UNUM.

Read more about the Save 10 initiative and qualifying criteria at www.Save10.org. For more on Milliman’s retirement planning tools, click here.

Baby Boomers and Millennials: Two generations prepare for retirement

Murray-SarahMuch has been said and written about the differences between generations. Indeed, two separate studies recently highlighted retirement planning trends among two different cohorts. Baby Boomers were the subject of a December 2014 report issued by the nonprofit Transamerica Center for Retirement Studies (TCRS), “Baby Boomers Are Revolutionizing Retirement: Are They and Their Employers Ready?” and a younger generation got the spotlight in the Principal Financial Group’s 2015 Millennial Research Study.

The people of the Baby Boom generation have been trailblazers in many ways and it seems their retirement plans are no different. According to the TCRS report, Baby Boomers are changing the traditional idea of what the golden years should look like, out of necessity if for no other reason. A somewhat grim statistic from the report is that 41% of Baby Boomers expect their standard of living to decrease when they retire. With longer life expectancies, the rising cost of healthcare, and a lack of adequate savings, it’s no surprise that many people in this generation expect to work beyond the traditional retirement age of 65. Some expect to never stop working completely. Many call working in retirement the “fourth leg” of the traditional “three-legged” stool.

TCRS’s research found that there is a strong desire among Baby Boomers for phased retirement options, but in reality less than half of employers have practices in place—such as the ability to move to a part-time position while drawing retirement benefits—that allow employees to transition into retirement slowly. TCRS’s report discusses ways Baby Boomers can positively change their retirement outlook, such as keeping job skills up to date and seeking advice from a financial advisor. In addition, the report mentions ways employers can help employees transition into retirement, such as providing phased retirement options and educating employees on Social Security and Medicare.

What about the Millennials? While the Principal Financial Group’s report summarized results regarding all aspects of Millennials’ finances, the research included trends in retirement savings. Here are some encouraging statistics in Principal’s report:

• 82% of Millennials feel it is important to save for retirement
• 63% of them started saving for retirement at or before age 25
• 59% of them plan to maximize the amount of pretax contributions allowed in their accounts

Principal’s study also indicates that most Millennials believe they should be contributing more of their pretax pay to their employer-sponsored retirement plans than they currently are, but at least a majority of them have made the crucial step to start saving, no matter how small the contribution.

One notable difference in the generations is technology preferences and usage. Millennials are used to communication through employer websites, email, texting, and even social media sites such as Facebook. While these concepts certainly aren’t foreign to older generations, Millennials are more likely to expect their employers to communicate with them electronically rather than through traditional methods such as regular mail.

Another difference between the two groups is whether or not they expect to be able to rely on Social Security. While many Baby Boomers have already started receiving Social Security, the Principal report states that only 22% of Millennials include Social Security in their retirement planning, presumably because the system’s purported problems have been well covered in the media.

But let’s not pretend that different generations have nothing in common. It’s safe to say that the majority of American workers, regardless of age, know that retirement planning is important, but find it intimidating at times and can benefit from employer assistance. While Principal’s study states that 60% of Millennials expect to be better off financially than their parents, younger people may still find themselves in need of options such as phased retirement and can reap the benefits of an older generation paving the way for change.

As is always the case, the optimal retirement scenario occurs when both the employee and employer contribute to the success of the employee’s retirement goals. Employers can benefit from creating a workplace that supports workers of all ages. Recognizing the differences between generations, developing retirement planning resources that help employees at every stage of their lives, having a broad employee communication and education approach, and supporting phased retirement options can help achieve this goal.