Rethinking what’s ahead in retirement Allianz Life Insurance Company of North America Perspectives ENT-1154-N Allianz Life Insurance Company of New York Page 1 of 20 Table of contents The evolution of retirement . 2 Potential land mines dotting the retirement landscape . 7 Searching for guarantees in retirement income . .11 New attitudes – new opportunities . .15 Please note: This document was accurate at the time of release and reflects the responses and interpretation of findings for that period in time. For more information on this and other studies, please visit our website at www.allianzlife.com or www.allianzlife.com/new-york. Page 2 of 20 Rethinking what’s ahead in retirement Rethinking what’s ahead in retirement Americans face an era of transformation with a new emphasis on guaranteed income as they prepare for retirement. Introduction – the new reality Individuals are also coming to terms with the decline of the defined benefit plan, a once-common source of The world of retirement planning is on the guaranteed lifetime income. During the last 30 years, precipice of a new reality. The era of retirees being it appears that most employers have determined that rewarded with a gold watch and lifetime pension a defined benefit plan is too costly and carried too after 35 years of work with a company has virtually much long-term financial risk for the company. They Many people have disappeared. A combination of unpredictable moved instead to tax-advantaged savings plans (e.g., no idea where to find markets, the erosion of defined benefit plans, the 401(k) plans) for their workers, thereby shifting the GUARANTEES uncertainty about Social Security, and longer life responsibility for retirement security and longevity risk in the financial expectancies means a new paradigm is emerging from corporations to their employees. Unfortunately, marketplace. in retirement planning, challenging long-held most Americans have not yet truly comprehended beliefs in financial planning. This shift creates an this new risk that they now own. opportunity to help Americans redefine how they plan for retirement and generate guaranteed As millions of baby boomers enter or are near income for life, a benefit unique to annuities. retirement, they are coming to realize more than ever that they must learn how to convert assets into The market turmoil of 2008 and early 2009 guaranteed retirement income. Many people have cemented a deep-seated crisis of confidence about no idea where to find guarantees in the financial how to truly create retirement security. If one polled marketplace. Options do exist, so boomers will need Americans in 2007 about whether large investment to learn as much as they can about new forms of firms – the pillars of American finance – could be retirement solutions offered in the private sector, brought to their knees in a matter of weeks, few and begin taking action. would have answered yes. The “shock and awe” of the financial crisis contributed greatly to this rapid The depth of fear about Social Security and retirement shift in how Americans view retirement. funding should startle both financial leaders and policymakers. But this should not be considered a The financial crisis is not the only driver of this polarizing political issue. It’s a math problem that shift. The sense of insecurity also comes from the will only get worse if left unanswered. When more worrisome state of the government retirement than half of Americans who are just 15-20 years system in the United States, which reached an from retirement believe they are more likely to be hit unsettling milestone in 2010. For the first time by lightning than to receive their full due from the since 1983, Social Security payouts exceeded the government, the need to act and educate is irrefutable.2 amount paid in by workers.1 1 “The 2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” 2014. 2 Allianz Life Insurance Company of North America, The Allianz Reclaiming the Future Study, 2010. 1 Page 3 of 20 Rethinking what’s ahead in retirement The evolution of retirement The mindsets and buzzwords that characterize in their late 50s and early 60s are now reaching the how a generation views saving and investing for retirement income planning phase when they now retirement have evolved from one generation to must rely on their investment assets for income. 1the next. These mindsets are built on the personal experiences of that generation, imprinted deeply Looking back at attitudes about retirement during on their psyches, with each generation typically the past 70 years, three broad shifts in mindset emphasizing one aspect of the retirement question have occurred. over another. The first wave – “guarantees” A confluence of As we look back in time, we see that all and “safety” factors is forcing approaches and beliefs about retirement are boomers to not equal. Today’s generation of baby boomers READJUST Shaped by lifetime events such as the Great is experiencing a confluence of factors that are their financial Depression and World War II, the so-called beliefs. forcing them to readjust their financial beliefs “greatest generation” generally took a cautious and expectations, including: approach to financial planning, investing, and • A realization that they will soon need to replace preparing for retirement. The buzzwords for this their paycheck with other sources of income. generation were “guarantees” and “safety.” • The severity of the financial crisis and Great Recession – and the significant hit on their This sense of caution and concern is not surprising, retirement nest eggs – that undermined their given that attitudes toward investing were greatly once-steady faith in the equity markets as a informed by a series of momentous events: solution to their retirement problems. • The 1929 stock market crash that led to the • A series of challenges – e.g., a lack of savings creation of the Securities and Exchange and guaranteed income – that are forcing Commission and new securities laws to regulate the next generation of retirees to look for investment markets. solutions different from those that worked • The financial collapse and insolvency of banks for their parents. (where people lost their savings) that led to the creation of the Federal Deposit Insurance Financial professionals have helped their clients Corporation in 1935 to protect bank savings. accumulate wealth in preparation for retirement, • The inception of Social Security in 1935 to something still important for younger baby provide a base level of financial support boomers and subsequent generations. The fact in retirement. remains, however, that a vast group of people 2 Page 4 of 20 Rethinking what’s ahead in retirement These government interventions and the Their generally cautious attitude and the guarantees insecurity about markets in general led many underlying two-thirds of their retirement income of this generation to want rock-solid guarantees (Social Security and defined benefit plans) led The greatest and safety in both their financial planning and members of the greatest generation to stay generation stayed career choices. The high unemployment of the away from equity markets. In 1952, long after away from Great Depression led many to value a job for the great stock market crash of 1929, stockholders EQUITY markets. a lifetime, and be attracted to companies that represented only 4% of the American population, offered a defined benefit (DB) plan in the form a number that increased to just 13% by 1980, of an employer-sponsored pension to provide in the midst of the era when baby boomers their retirement security. entered the workforce.1 This is the generation that may have stayed at a By avoiding the stock market and mutual fund company for 35 years and received the gold watch investing, this generation was less interested at retirement. Whether they knew it or not, the in having control of their retirement assets and result of their choices was a formula for retirement instead was comfortable allowing the government income known as the “three-legged stool.” (in the form of Social Security) and their employer One-third was derived from Social Security, (in the form of pension plans) to provide the another third from employer plans, and one-third guarantees and security that they preferred. from personal savings. This model worked fairly In addition, the third leg of the stool (i.e., personal well for 30-40 years. savings) often took the form of bank savings and certificates of deposit, which provided FDIC insurance on savings or fixed annuities that Percentage of families with provided a guaranteed rate of return. Guarantees stock holdings and safety oriented their decision-making, and banks and life insurers provided the bulk of their 52.2 retirement planning products. 51.1 50.2 2001 2004 2007 U.S. Census Bureau, Statistical Abstract of the United States: 2012. 1 T. Caplow, L. Hicks, and B. Wattenberg, The First Measured Century: An Illustrated Guide to Trends in America, 1900-2000, American Enterprise Institute for Public Policy Research, 2001. 3 Page 5 of 20 Rethinking what’s ahead in retirement The second wave – “rate of return” Significant advances in information technology and “control” enabled this sense of control. Technology provided new ways to track investments virtually Like many things they touched in society, the baby instantaneously and execute personal financial boomers approached the management of their transactions at amazing speed and low cost. With assets in a decidedly different way from their parents. the cost of commissions down, day trading became Growing up in primarily favorable economic times prevalent. Many boomers felt empowered that they Boomers focused and energized by solid economic growth for most of could create long-term financial security better than on increasing their their early working years, baby boomers were mostly the government or those managing pension assets.