How to Embrace the New Era of “DIY” Retirement Funding

Jul 13, 2018 8:53:00 AM / by Darwin Bayston, CFA

In previous generations, it was common for an American to land a job at a stable company, work for that same employer for decades, then retire one day with the proverbial gold watch and a nice pension to supplement their monthly Social Security checks.

Those days are over for all but a small percentage of fortunate workers today.

There are four major trends that have changed the paradigm for the future of retirement funding in America:

  • Disappearing Pensions

    Private employer-sponsored pension plans have been on the decline for years. At one time, 88 percent of private sector workers with an employer retirement plan had a pension; that number is now closer to 30 percent, according to the National Public Pension Coalition. Companies no longer need to offer pension plans to compete for workers and they appear to be on their way out as a fixture of the American economic landscape.

  • Unstable Social Security Fund

    We’ve known for some time that a flood of baby boomers entering retirement was going to place a strain on the Social Security trust fund, but compounding the unfavorable arithmetic in recent years has been shrinking interest income on the funds. The Social Security Trustees reported recently that the Social Security trust fund could become depleted in 2034 — forcing as much as a 21 percent cut in benefits — if lawmakers don’t make necessary reforms to the program.

  • Prolonged Low Interest Rates

    Although interest rates are slowly starting to creep up, we are just now emerging from one of the longest “near-zero” interest rate environments in American history. The fallout from this period, which began in late-2008 and continued until early-2016, was depressed fixed income returns for retirees and annual Cost of Living Adjustments on retiree benefits that fell to as low as zero.

  • Savings Shortfall

With traditional pensions disappearing, individual retirement savings accounts are increasingly crucial. Unfortunately, a 2017 report from the U.S. Government Accountability Office found that “many households are ill-equipped for this task and have little or no retirement savings.” Another study found recently that retirement savings “are dangerously low” and placed the median retirement account balance for near-retirement households at just $12,000.

But as challenging as these times may be for retirees, there is a way to flip the script and view this as a time of individual empowerment in America. Welcome to the new era of “Do It Yourself” (DIY) retirement funding.

 “With the decline of traditional pensions, many older workers and retirees face a ‘do it yourself’ retirement: You’re on your own to figure out how to make your retirement savings last for the rest of your life,” according to CBS News. “To address this challenge, different thinking and new language is needed to transition from a mindset concerned with accumulating assets for retirement to a mindset concerned with generating income in retirement.”

              For example, the Stanford Center on Longevity talks about the importance of retirement income generators that can produce liquidity in the senior years. These might include maximizing Social Security benefits by delaying claims for as long as possible, buying a guaranteed lifetime annuity that can function as a personal pension, converting your life savings into an investment portfolio that produces higher interest returns and/or dividend income, or perhaps getting a reverse mortgage that functions as a long-term line of credit you can use for paying retirement expenses.

              By embracing DIY retirement funding, you can take charge of your personal financial future, rather than remain vulnerable to the unreliable behavior of Congressional lawmakers or corporate balance sheets.

One DIY retirement funding strategy that many seniors are discovering has potential to free up tens of thousands of dollars in cash is to sell a life insurance policy they no longer need or can afford. The sale of a life insurance policy to a third party is known as a life settlement. Candidates for life settlements are typically aged 70 or older, with a life insurance policy that has a death benefit of at least $100,000. The senior gets a cash payment for transferring the ownership of the policy and the purchaser assumes all future premium payments in exchange for the benefit when the insured passes away. Life settlement transactions grew by 19 percent in 2017, according to a report in The Deal.

It’s important for seniors to face reality and understand that we are in a new era when it comes to retirement funding. By embracing DIY retirement planning, you can free your mind and get creative about all available assets that can be put to work in order to finance your future. To learn more about whether a life settlement might be a good option for you, please search this website to get connected to a qualified life settlement professional or simply call the LISA office at 407.894.3797.

Darwin Bayston, CFA

Written by Darwin Bayston, CFA

Darwin Bayston is President and CEO of the Life Insurance Settlement Association (LISA). His charge is to extend the outreach of the Association to all participants of the life settlement industry from consumers to capital providers, including producers, brokers, providers and service providers who are part of the life settlement market. He was previously Managing Director of Life Settlement Consulting & Management (LSCM), founded in 2004 and specialized in life settlement policy and portfolio valuations, and life expectancy analysis. He has published several articles and participated as speaker at a number of life settlement conferences. Previous to that he operated an investment advisory firm. From 1980 to 1993, he served in several capacities, including President and CEO the CFA Institute (and its predecessor organizations). While at CFA, he founded the continuing education program, was editor of the CFA Digest and supervised research projects funded by the Research Foundation of the ICFA. He began his career as an investment analyst with a Midwest life insurance company. Mr. Bayston has been Chairman of the Martha Jefferson Hospital Foundation ($100 million), a member of the Hospital’s Finance Committee and a past member of the Board of the Institute for Quantitative Research and Finance (Q Group).