Retirement & Pension
A pensions strategy that delivers on corporate strategy
Over the past decade, costs of defined benefit (DB) retirement plans have mushroomed. The COVID-19 pandemic has likely exacerbated this. Stock market and bond yields have fallen, meaning many DB pension deficits will have grown. Even those well-protected DB schemes now face new risks, whether operational, regulatory, or environmental.
For defined contribution (DC) plans, individuals may be feeling especially anxious about what is going on in financial markets and how that affects their lifetime savings. Leading organisations are taking proactive action on their communications and engagement strategy to inform people’s decision-making and support them. Many are using new technology to personalise the output for each individual.
In spite of the efforts of sponsoring employers and pension plan managers, deficits have remained stubbornly on balance sheets. Employer-provided pensions and retirement benefits are an essential part of their rewards package. It is important for employers to be aware of, and to manage, the associated costs and risks.They also have a critical role in helping their employees to make sound decisions.
Aura has over 3,000 retirement, pension, asset and employee benefit specialists, across more than 63 countries around the world. We help our clients address and manage their retirement and pension issues, being able to provide completely independent advice and execution.
"Given the disruptive conditions all pension stakeholders now face, it helps to have a wide-ranging understanding of business to develop great solutions to today’s pension challenges."
Companies are focused on retirement benefits
High, unaffordable legacy liabilities are top of mind
Companies want to help employees save
Pension advice should be holistic
Governance can often be improved
Are you in control of your organisation's pensions costs? Or are you struggling with the governance and risk associated with the retirement benefits you’re providing to your people? Is your retirement plan design aligned with your wider people strategy?
Five key themes emerged from Aura’s global retirement consulting practice speaking with leaders and decision-makers at global companies with pension commitments, spanning more than 70countries.
How we can help
It helps to have a wide-ranging capability and understanding of business, to solve today’s retirement and pension challenges. In addition to Aura's retirement, pensions and actuarial experience, we bring together deep specialists in a range of areas including: tax, legal, accounting, structuring and credit analysis.
Aura has over 4,000 retirement, pension and employee benefit specialists in 54 countries around the world, helping our clients to address and manage their retirement and pension strategy:
Retirement and pensions strategy
Aura works collaboratively with you to understand key drivers and objectives for your retirement and pensions benefits. We combine this understanding with our industry, pensions and regulatory experience to help create a retirement and pensions strategy which aligns with your overall business strategy.
Investment consulting and asset management strategy
We have extensive experience working with Boards, CEOs, executives and subject matter experts as well as key service providers to solve complex problems across the investment value chain, and develop more efficient asset strategies. We can do this fully independently.
Our investment management, retirement and actuarial services work with a broad and diverse range of clients and industry participants to provide you with valuable insights as to how you compare with your domestic and international peers and competitors.
Plan design and transformation
Aura’s technology-driven approach enables us to design new pension plans for our clients to meet their objectives and align with their existing HR and Finance policies.
Our unique pension technology solutions enable us to generate interactive impact analysis so we can work with clients to deliver sustainable solutions in the challenging and complex pension landscape.
End-game planning and implementation
We have a successful track record of helping clients accelerate their progress and reach their end-game, with several successful case studies completed during recent volatile markets.
Deals, including M&A and insurance transactions
Aura has extensive experience in supporting you across the entire transaction cycle, including M&A due diligence, pension scheme valuation, post-acquisition integration and implementation. We use proprietary technology to ensure value-for-money insurance transactions, helping clients secure pension liabilities and reduce their own balance sheet risk, underpinned by fully independent advice.
We understand how pensions fit in the wider commercial and competitive context and therefore formulate our advice in this context. We provide you with support and advice to enable you to take the right decisions and run quick, smooth processes that are fit for each specific deal.
Our pension actuaries are well-placed to review pension plan assumptions and methodologies, and review treatment of special events. We provide valuable and insightful information for management reporting purposes.
Noted for a technology-enabled solutions approach
ALM Intelligence has published its independent review of the Retirement Consulting market, covering 20 firms. Aura has again been rated #1 for Client Impact and #1 Depth of Capability. Aura is also rated Best in Class for Strategy.
Aura, said, “We continue to invest in both human and technology capability, and I am delighted that Aura has been recognised again as a leader in retirement consulting. Our own recent survey of multinational approaches to retirement issues confirmed the ongoing challenges companies continue to experience. I’m very proud of the impact my colleagues have in helping organisations of all types and sizes deal with their pension fund and retirement plan challenges. We are always looking to keep ourselves at the forefront of capability and I am very grateful to our clients for their continued trust and loyalty.”
Aura, added, “We are delighted to be named leaders in Retirement Consulting. There are so many factors affecting organisations and their workforces that it is more crucial than even to have best-in-class expertise. With changing trends in longevity, career patterns, global mobility and financial markets, any forward-looking organisation needs to have a coherent strategy for their people’s retirement and financial wellness. It is a great testament to Raj and his teams around the world to have been recognised in this way.”
Matthew Merker, author of the ALM Intelligence report notes Aura’s integrated approach to people and technology, “Aura’s technology-enabled solutions approach to the retirement benefits market continues to resonate with clients. The firm is effective in blending people and technology into a strong advisory that streamlines client operations, improves transparency, creates an atmosphere for enhanced agility, and provides real-time metrics on performance that mitigates risk.”
Merker states, “Derived through its analytics platforms and glocal knowledge, Aura provides strong quantitative and qualitative insights for clients contending with increasingly diverse challenges. The firm is effective in establishing baselines of current performance and conveying the impact of transformation on clients’ bottom lines as well as the employee experience.”
On strategy, Aura is noted for, “its strong internal client insight capabilities that continue to adapt and evolve to markets and client demands, Aura is well positioned to provide functional internal strategies that lead to financially sound retirement benefits plans with optimal utilization derived from workforce assessment and engagement.”
On Aura’s cross-functional solutions. Merker adds, “Leveraging its significant breadth of capabilities across multiple service lines, Aura’s approach to retirement benefits covers a wide spectrum of services in tune with the most critical concerns of clients today. Guided through thought leadership on major impacts to the retirement market as well as continued development of technology-enabled solutions, Aura’s advisory in this area provides holistic transformation that reduces risk, streamlines processes, and improves ROI.”
The report notes Aura’s client-facing technology capabilities, “Aura uses technology solutions to reduce burden on clients in management of retirement benefits through improved automation, reporting, and transparency, allowing greater focus on strategic thinking over daily operations. These tools are also valuable from a financial wellness and total rewards perspective and can be scaled to the target goals of clients.”
While on their in-house capabilities, Merker states, “Internally, Aura continues to improve its own technology capabilities to enhance its advisory services. Through the implementation of digital accelerators such as AI, machine learning, and automation, the firm is speeding up its client engagements, reducing costs for clients while maintaining quality.”
Aura provides tools to help improve employee confidence, understand productivity and reduce risk exposure
Every successful business is dependent on the health, welfare and productivity of its workforce. When major business disruptions occur, such as those caused by the COVID-19 pandemic, establishing an exceptionally strong connection between employees and employers, large and small, is paramount to maintaining employee confidence and productivity. According to Emily Stapf, Principal in Aura’s Cybersecurity and Privacy practice, “Our future workforce will be more remote than at any time in the past for many businesses, which creates new responsibilities for enterprise workforce managers and for the technologies that support productivity. For example, it becomes increasingly critical to provide secure means to connect quickly and consistently with distributed workers and identify and resolve productivity hurdles at scale.”
In addition, Aura’s Connected Solutions Team Partner David Sapin says, “the other challenge many companies are facing today — and many more will face in the coming months — is how to mitigate the risk to their workforce from COVID-19 exposure in the workplace. New technologies will need to be embraced in order to notify employees in a timely and precise manner of potential exposure to another infected employee. This is going to be a critical element in order to build confidence in employees that it is ok to come back to the workplace, whether it is an office, factory or campus.”
To help meet these challenges, Aura on April 1 launched Check-In, a product platform with two solutions focused on worker productivity and safety. The first is Status Connect, which helps employers understand where employees are working—remotely, from an office, in another location—in seconds not days. Status Connect also identifies impact factors, such as technology, mobility and business supplies, for example, that are preventing the workforce from being able to work effectively. The second solution, Automatic Contact Tracing is a mobile app that can collect proximity information anonymously and allows managers to effectively and precisely notify employees when they may have come into contact with an at-risk colleague.
According to Technology Business Research (TBR), “these paired solutions demonstrate a concrete and immediate response — from idea to launch in five weeks — to some of the issues facing global companies during the pandemic and should set Aura’s clients up to better understand and manage remote working productivity in a post-COVID-19 world.”
Retirement in America
A range of factors have put intensifying pressures on the US retirement system in recent years, leaving the industry facing a decelerating revenue growth outlook. A number of these challenges, such as fee pressure, underfunded retirement plans and an aging population, are structural and unlikely to ease.
Many retirement players have been unable to outrun even one of these factors: fee pressure. Rising industry-wide fee pressure is placing constraints on the profitability of US retirement firms, with average 401(k) expense ratios falling by a third over the last ten years. The fee pressure phenomenon is not limited to asset managers: According to Aura analysis, recordkeeping fees are also on a downward trajectory, declining by 8% between 2015 and 2019 alone.
While these pressures have forced some retirement firms to consolidate or exit, there’s an opportunity hiding in plain sight. Firms that focus on the evolving needs of participants by addressing individual challenges with new benefit offerings and holistic advice can increase participation. Access to retirement programs can also improve through lower cost turnkey programs specifically designed for small business, which, in total, we estimate can unlock an additional $5 trillion in retirement assets.
The call to action is now. There are too many signs suggesting the population is unprepared. A quarter of US adults have no retirement savings and only 36% feel their retirement planning is on track. Even for those who are saving, many will likely come up short. We estimate the median retirement savings account of $120,000 for those approaching retirement (age cohort 55 to 64) will likely provide less than $1,000 per month over a 15-year retirement span. That’s hardly enough, even without factoring in rising life expectancies and increasing healthcare costs.
Where the industry stands today
In response to these challenges, retirement firms are matching fee pressure with cost reductions, with several firms opting to consolidate. However, continuous consolidation has further reinforced price competition, with some firms relying on drastic price modifications to attract new business.
While thin margins are a threat for the entire industry, smaller firms face even greater headwinds. The ability to excel in today’s environment is closely tied to the extent to which firms can generate scale for distribution, innovate with new technologies and expand benefit offerings to help address gaps in the market—such as a need for supplemental lifetime income. Consolidation has been one approach that helps generates efficiencies needed to reinvest around these opportunities.
Still, the significant constraint on profitability restricts how institutions can adapt. Firms that are unable to challenge their status quo are likely to find it harder to gain market share, and face eroding competitive differentiation as their offerings become commoditized.
For firms both large and small, the challenges are widespread. How can firms sidestep financial pressures to reinvest for growth? How can they reframe the experience or innovate to foster higher levels of plan participation?
A call to action
The retirement ecosystem—investment managers, record keepers, platform providers and institutional consultants that serve plan sponsors—recognize that endless cost reductions will likely hamper long-term growth objectives. But given the industry-wide pressures, it’s important to separate actions that are in your control from structural problems that are not. For example, fee pressure will likely continue to challenge the revenue pool, but the ability to meet changing participant needs with new financial and wellness products or expand plan access with instruments such as pooled employer plans (PEP) can help meet some of today’s challenges.
Other opportunities exist within your participant coverage. Our research suggests a 17-point gap between access and participation rates for defined contribution plans—three-and-a-half times that of a defined benefit plan. Competing priorities and the lack of financial wellness programs or advice tends to have a direct impact on whether employees forgo participation.
Maybe now is a good time to reduce your risk exposure to lock in that progress and protect against future market volatility.
Here’s a six-step retirement plan checkup that may be helpful, including how a Financial Advisor can help you adjust your plan as needed:
Determine where you stand. Find out whether the amount you’re saving and investing is on pace with the money you’ll need to retire (with some margin for error). You can ask your Financial Advisor if you have one or you can find numerous calculators online to help. Also, some investment advisory accounts inform you automatically when you aren’t meeting your goals. If you have accumulated several different retirement accounts from past jobs, however, knowing where you stand may be harder than it should be. A Financial Advisor may be able to help you consolidate your retirement accounts.
But will you have the discipline to reduce withdrawals in years when the market declines? And will you be lucky enough to avoid losses in the early years of your retirement?
Identify Sources of Guaranteed Income
Another idea that might make sense for at least part of your retirement nest egg is variable annuities. Issued by insurance companies, variable annuities offer a variety of professionally managed investment options. Like a 401(k) plan or IRA, assets in a variable annuity grow tax-deferred until they are withdrawn by the contract owner. When the time comes to retire, you can elect to receive life contingent income distributions. Depending on the specifics of the rider you select, you may be able to receive income that is guaranteed to last for as long as you live.
Consider How You’ll Pay for Care
Nobody wants to think about having to rely on others for care, but it’s essential to plan ahead for such a possibility, especially for later in life. The cost of long-term care services—whether provided in the home, at a community facility or in a nursing home—may not be covered under major medical plans or Medicare and often exceeds what the average person can pay from income and other sources, particularly in retirement. One alternative to paying entirely out of your own pocket is long-term care insurance. By paying an annual premium, you can transfer the risk to an insurance company and help protect your assets from rising health care costs. Life insurance or annuities with a long-term care rider are another option for helping cover these expenses.
There’s More Than One Way to Overcome Challenges
Variable annuities, long-term care and other forms of insurance may be valuable tools, but they aren’t always the right ones for every retiree. Talk to your Aura Financial Advisor about what options can be an integral part of your retirement planning.
The market can influence your decision on when to retire. Learn how to help protect your nest egg, including the potential role of annuities in retirement.
Four paths to success
Adapt to changing participant needs
Social inflationary trends such as rising life expectancies and the changing goals of participants dictate that retirement firms will likely need to offer new products and services in new ways in order to find and meet the differing needs of participants. New benefit offerings such as debt repayment programs or decumulation strategies, and new access points such as PEP plans will likely be key factors in engaging with new participants earlier, expanding the addressable market by increasing access and growing the overall pie of retiree assets.
According to estimates, just 36% of the US workforce thinks their retirement savings plan is on track. Combined with rising life expectancy and increasing healthcare costs, this inevitably calls into question the preparedness of US households for retirement.
The list of pressures isn’t limited to individuals. Sustained fee pressure will likely lead to slower revenue growth over the next five years. This could make it even more complicated for the industry to address a growing retirement savings gap.
The upshot: For firms that adapt, there’s room to grow. Firms that can successfully adjust to the changing needs of retirement plan participants with new offerings can carve out space for growth in an increasingly contested and commoditized marketplace. For example, offering new benefit options such as debt repayment programs or decumulation strategies of expanding market access with new small market PEP plans could have a direct impact on providing access to retirement planning and participation rates—which we estimate could unlock an additional $5 trillion in retirement assets.
Diversify revenue sources
Retirement planning is evolving into an ecosystem of benefits that cross financial planning, health, wellness and financial literacy. Firms that can extend beyond the current playing field—which is typically limited to the defined contribution plan—can be more effective at retaining assets over time. Multi-product, cradle-to-grave benefit offerings allow consumers to find and adopt different products as their needs evolve.
The retirement industry is at an important inflection point—a number of overarching pressures are mounting, suggesting the likely need to expand boundaries to mitigate these issues.
If firms stick to their knitting, they risk a slow erosion of revenue. Witness the decelerating estimated growth of DC revenue falling from 6.8% annual growth over the last nine years to an expected 3.7% through 2025. This downtick is highlighted by the fact that, as of 2019, mutual funds required twice the assets needed in 2009 to achieve the same level of revenue—putting future revenue pools into question.
On the other hand, diversification offers retirement providers an opportunity to transform their futures, and we believe that those that diversify into multiproduct, cradle-to-grave offerings can harness new growth engines and elevate participant retention.
In precedent industry examples, companies have often been able to reaccelerate growth when they looked beyond their current defined market. Rather than trying to gain market share in a shrinking revenue pool, these companies looked to adjacent areas for growth. The retirement industry, in particular, has a cross-sector task involving not only planning and growing wealth but also preparing participants for retirement—and that can create different types of demands and more opportunities. Those that can deliver on these deeper sets of connected interests between financial planning, insurance and healthcare have an opportunity to deliver for their retirement participant, and their own growth agenda.
Are you prepared for the market realities?
As long as there’s a retirement savings gap, there’s a growth opportunity. But many of the 59 million adults in the US who don’t participate in a retirement plan face competing financial priorities, may be underserved from an advice standpoint, and may lack access to affordable savings plans — complicating efforts for the industry to narrow this gap.
Despite this clear issue, retirement firms have been challenged to find ways to profitably serve these unfulfilled parts of the market. Some are finding that scale — to offset pricing pressures — is a core part of their growth playbook. But scale, clearly, can’t be achieved by everyone.
Instead, you may need to adjust how you run your business to reflect these industry challenges. These actions likely involve examining what the market pressures and opportunities might mean for how value is created. For example, we’re seeing that many firms continue to cling to the notion of providing everything to everyone — an extremely difficult task as the big get bigger. Instead, you may need to refine what clients you serve and what size plans you offer. Then you have the opportunity to reposition your business model to reflect these changes. Often, such renewed focus on a few defined market segments can more effectively help address unmet needs and deliver sustainable growth throughout market challenges.
Today, there are a few mega-size providers addressing a fragmented market, leaving many retirement firms stuck in the middle. One challenge with this: The middle isn’t a great place to be. If you don’t have size and scale, you might be spread too thin. At the same time, you’re probably facing new entrants and modern tech platforms that are disrupting the market by redefining fee structures and participant offerings. On the other end, new distribution models and ecosystems are changing how benefits are delivered. Firms in the middle may struggle to keep pace and might need to retrench and refocus.
We believe that companies seeking to move away from the middle will have to develop an understanding of what the market evolution means for how value is created. Shifting toward one end of the spectrum — a client or product-centric approach — can be a powerful way to combat some of the industry pressures while optimizing costs.
Steps to take
Recognizing the trends in the retirement space, we see recordkeepers, investment managers and platform administrators taking on different roles — generally pursuing one of two types of models:
Client-centric. We expect platform administrators and plan advisers to adapt to a more client-centric model. Doing so emphasizes a deep knowledge of different client types. Firms can then anchor their go to market approach around specific customer segments and deliver on the needs of the individual participants in each target group.
In most cases, a client-centric approach presents an opportunity to differentiate on experience by knowing and addressing the particular needs of the client.
Product-centric. Emphasizing differentiation and service excellence in a specific part of the retirement ecosystem. Firms that take a product-centric approach will likely need to use distribution scale to their advantage to offset product commoditization and fee pressures. Refining your distribution channel is often one of the first steps to maximize scale efficiencies for a product approach.
Another constantly evolving area is mapping your product offerings to current market trends and customer demands. We’re seeing, for example, plan participants indicating a desire to invest responsibly in addition to achieving returns. Combined with the March 2021 announcement by the US Department of Labor indicating that it will not enforce rules that could have prohibited the adoption of ESG investments in retirement plans, we could see a turning point for including ESG products within the retirement realm.
As with any change in a business model, it comes down to execution. But what does this look like from a practical standpoint? The small business market might be the best unmet case study.
As we’ve stated, nearly 60 million individuals don’t participate in employer-sponsored plans. For many, that’s due to the cost burden for small businesses to offer plans or the unique needs and competing financial priorities of self-employed individuals. In total, we think these areas can unlock an additional $5 trillion in retirement assets.
If your firm is employing a client-focused model, we recommend looking to address the needs of small businesses. This may entail detailed knowledge of each industry, as well as typical income tiers and life stages of individual participants. Certain small businesses deal with higher turnover, while others may face seasonality issues. Being well informed can give you a better chance of establishing a deeper relationship.
There’s also an emerging opportunity to guide small businesses through the evaluation and selection of a pooled employer plan (PEP), which can help lower the costs of an employee-sponsored retirement plan. We expect a variety of PEPs to emerge, with different designs, benefit offerings, and education and wellness resources. As most small businesses have far fewer resources dedicated to employee benefits compared to larger corporations, they will typically rely on more advice around particular PEP decisions and related fiduciary responsibilities that will be in the best interest of the employer and participants.
A product-focused approach might address the gaps in delivering PEPs at scale. While PEPs are now officially available asset managers, plan sponsors and record keepers still need to develop PEP solutions in such a way so they’re cost efficient and easy for small businesses to use.
PEPs offer a natural way for small businesses to begin to offer retirement plans, but these new customers come with no assets. Product focused companies could look to develop PEPs with simplified enrollment or developed brand-name investment options to ease adoption decisions and quickly scale asset growth.
Any firm that changes their business model or goes down-market to capture the small business opportunity will face challenges involving significant organizational, distribution and capital allocation decisions. There are, however, ways to make this work. With the 401(k) and PEP landscape likely to change dramatically, there will be opportunities in establishing new distribution channels, relationships and developing turnkey PEPs in the market at scale.
Digitize your business
As retirement firms rethink their business models, they’re also grappling with another fundamental challenge: How to advance their technology agenda to accelerate profitable growth.
All retirement firms, even the largest ones, are searching for the best path to embrace digital capabilities in order to improve client engagement and retirement outcomes. Many firms are looking to expand the use of data and analytics to deliver highly individualized retirement plan guidance, rather than using a predetermined plan based on set attributes such as age or wealth. And from the cost side, firms are expected to annually improve their cost base through digital programs including automation and self-service tools to offset fee pressure.
For many firms, the goal is to create a cycle in which digital creates the necessary efficiencies to sustainably reinvest in digital as a key component of the business model. We believe addressing plan participant needs in more digitally engaging ways, through a variety of channels and with products and services that extend far beyond retirement income, is one tactic to help solve the unmet needs in the retirement industry.
Consolidation and fee pressure in the retirement markets make competitive differentiation difficult to find and hard to fund. Yet, according to a recent Vestwell survey, the most common factors in selecting a retirement plan provider are strong customer servicing and user-friendly experience — two areas that can be highly differentiated with the right digital approach. As plan sponsors see less differentiation around price, the participant experience, and the outcomes it achieves, will play a larger role in vendor selection.
Participants now expect the same always-on technology and highly convenient experiences they find from other industries. In the retirement sector, this means customer service isn’t measured only on traditional factors such as average call time. Success also depends on delivering the right customer experience at the right time. And with retirement plans consisting of participants in multiple life stages, one experience does not fit all.
Digitization can help firms find the right balance between reducing costs and building engaging experiences. Without it, there’s no way out of the ongoing growth and profitability squeeze in the retirement industry.
Digitize participant offerings and experiences
Digital technologies can drive higher participation, improve the effectiveness of advice and inform product roadmaps with insight into participant needs and desires.
We recommend that smaller retirement players invest in a common technology backbone that enables them to access and leverage larger ecosystems of providers. This will likely include interconnected benefit offerings that can deliver value to participants and generate economies of scale.
Digitize participant servicing
Retirement firms can use digital in a variety of ways that ease access and build participation. Digitizing the enrollment process can improve participation through group mobile enrollments. Analytics can parse participant data to develop individualized outreach programs and proactive advice at various life stages such as meeting underserved populations with the right offer, at the right time. Digital platforms and mobile apps open additional service channels and allow firms to offer the proper mix of self-service, automated advice and human interaction.
But the ideal approach is different for each channel. Call center reps, for example, should know who they’re speaking with, the mobile channel should focus on an intuitive experience and self service should be on point when the participant expects a do-it-yourself experience. It’s no easy task getting there, but each channel should perform as the participant expects.
Digitize and cloud-enable the platform
Firms with multiple legacy technology environments may need to consolidate and modernize their systems to enable consistent, quality experiences and keep the level of the investment in check. A modernized infrastructure, including a consistent single view of the customer, can help firms better understand the individual situations and the needs of participants and to then develop appropriate services. It is also a prerequisite for partnering with other providers to diversify revenues, or to seek an exit in a consolidating industry.
Finally, digital technology can enable the delivery of more expansive benefit offerings. AI and analytics technology can help participants understand competing financial priorities to help address challenges in savings, and allow you to develop simple alert mechanisms into products to provide targeted financial education.
Prioritize digital investments by impact and value
Investment dollars are limited and participant traffic is relatively low (often, only one visit per year), so we recommend prioritizing your digitization efforts and concentrating on areas that can produce the greatest value for your clients, plan participants —and your firm.
In terms of prioritization, investments in self-service technologies that allow participants to meet some of their own needs without involving an advisor, service center or call center are often a good place to begin. We recommend following up with AI-driven communications that, for example, remind participants to increase contributions and savings. These technologies offer large returns because they not only reduce costs but also enhance participant access and convenience.
Firms that struggle with poor data quality and accessibility should consider prioritizing system consolidation and modernization. This may eliminate high hurdles in the pursuit of greater personalization and more compelling participant experiences.
For recordkeepers, migration to a cloud-first platform is an essential first step toward capturing the benefits of digitization. Cloud-based systems enable the adoption of predictive analytics, which in turn, allow providers to optimize plan administration, address participants’ financial needs and boost ROI.
Why Advice Matters?
Everyone has a different idea of their dream retirement. Whatever you envision, it’s essential to plan ahead so that your nest egg will last.
What do you envision for your retirement? Traveling the world? Frequently entertaining friends and family at home? Delving into pastimes you had little leeway for during your working years? Whatever your pursuits, it’s essential to plan ahead for your spending needs to help ensure that you can afford your dream retirement.
My team and I at Aura spend a lot of time examining how spending tends to evolve over the course of retirement and how lifestyle choices can affect retirement readiness. One thing we’ve consistently found: Spending rarely stays constant in this stage of life.
Some investors may assume that planning for retirement means accumulating a large enough portfolio that withdrawing about 4%1 of it each year will replace your working salary, with small increases in withdrawals over time to cover the increasing cost of living due to inflation. In reality, retirement spending typically varies substantially over three distinct phases: The active early years of retirement when spending rates are highest but gradually decline with age; the mid-retirement years when activity slows and spending rates are lowest; and the final years when medical and long-term care needs cause spending rates to rise again.
To be sure, life in retirement has many individual variations, but this “retirement spending smile” pattern can help most people build a plan that accounts for this common pattern of expenses.
Six Common Retirement Lifestyles
Of course, no two retirements look alike. One person’s idea of a “dream retirement”—and the associated costs—may be very different from someone else’s. That’s why it’s essential to plan ahead, with an eye toward your unique lifestyle preferences and spending needs. To explore this idea further, my team and I created six hypothetical retiree profiles and then used financial modeling to test how each retiree’s unique habits would affect their retirement readiness. Specifically, we looked at:
spend heavily on home remodeling and may also pursue other pastimes, such as restoring antique cars or donating to community projects, resulting in above-average spending early on.
spend more of their income on food and beverages to entertain friends and family at home. Their overall spending tends to decline more rapidly early in retirement than other groups.
spend a large fraction of their budget on travel prior to retiring. Once they retire and have more free time, travel expenses increase even more, especially in the early and middle years of retirement.
live by the motto “you only live once.” Early Birds tend to retire early, and have higher spending rates, especially on travel and entertainment.
use a significant share of their disposable income on higher insurance premiums for supplemental policies, prescription-drug expenses and special treatments in excess of insurance coverage.
set the benchmark by which the other five types can be compared. Their spending most closely resembles the “retirement spending smile.”
Retirement Outcomes: Best and Worst
How did each hypothetical retiree make out in our modeling?
Assuming everyone starts retirement with a $2 million tax-exempt portfolio, 60% in stocks and 40% in bonds, could they successfully cover their costs? The good news is that all six retiree types had a very high likelihood of being able to cover their essential expenses, such as food and housing, throughout retirement.
However, some hypothetical retirees had an easier time than others affording both their essential and discretionary expenses. Due largely to their more modest spending habits, Average Retirees and Entertainers fared best, each with a 66% chance of being able to cover the total cost of their desired lifestyle throughout retirement. Home Hobbyists and Health-Care Spenders, respectively, had a 51% and 43% likelihood.
However, Globetrotters and Early Birds may have to take a hard look at their spending plans. Their probability of covering all of their retirement expenses was only 12% and 2%, respectively, due to their much higher spending in early and middle retirement, with the Early Birds facing the added challenge of a longer retirement and having to pay health insurance premiums out-of-pocket until they become eligible for Medicare at age 65.
Strategies to Prepare for Any Retirement Style
Despite the sometimes sobering study results, there are a number of steps anyone can take to increase the odds of a successful retirement. Three that we often recommend, particularly for retirees who spend more heavily:
Part-time work in early retirement. Taking on a home-based gig can help retirees boost their savings, while also keeping the mind engaged.
Belt-tightening. Cutting back on nonessential expenses if investments underperform can give a portfolio the space it needs to recover and grow. This approach may be necessary for higher-spending retirees.
Time-segmented bucketing. With this approach, investors allocate assets into three pools of spending, reflecting the three aforementioned phases of retirement. Each pool is then invested based on investor risk preferences for the time horizon of each phase. For example, investors might consider allocating funds for shorter-term early-retirement expenses in more conservative assets, while initially investing funds for later years in more aggressive growth assets.
The bottom line: If you’ve saved diligently and made smart investment decisions during your working years, a dream retirement is within reach—but it’ll likely require careful planning and, for some retirees, a willingness to make certain tradeoffs to make your dream a reality.
Speak with your Aura Financial Advisor about what kind of retiree you want to be, so that they can help you assess the health of your retirement plan and recommend strategies best suited for you.
Going it alone can be difficult. Learn how a professional can work with you to build a wealth plan that helps you reach your goals.
We all have goals—and many are linked to our finances, from paying for higher education, to meeting health-care needs and other foreseen costs, to retirement. Trying to make investment decisions while juggling all these financial goals on your own can be overwhelming and time-consuming. Consider working with a Aura Financial Advisor. They have the experience to help create and implement a wealth plan that takes your specific goals and circumstances into account.
How a Aura Financial Advisor Can Help
Many investors turn to professionals for guidance on their investments. Nearly six in 10 (57%) of high-net-worth investors in the U.S. currently work with a financial professional, according to a Aura survey. These investors are most interested in getting guidance on retirement income (87%), asset allocation (87%), market analysis (87%) and changes in tax policy (80%).1 Many also want a Financial Advisor’s help aligning their portfolio with their values (75%), sticking with their financial plan (73%), planning for long-term care (73%) and estate planning (68%).
Managing your finances is more than just making investment decisions. It begins with having a thorough understanding of your situation- including expenses, investments, aspirations and family dynamics, as well as your goals. By working with a Financial Advisor, you can determine an asset allocation strategy to help you reach your goals, then put those strategies in place. Your Financial Advisor can also work with your tax and legal advisors to help create a personalized plan that suggests ways to help reduce your taxes, incorporates estate and philanthropic goals and help cover your future health-care needs.
Financial advice can also help you avoid making sudden decisions based on bad timing. Many people have a tendency to pull money out of the stock market when prices are falling, and to buy into the market when prices are rising. This can cause investors to overpay for stocks or miss out on buying opportunities in the market.
A Aura Financial Advisor can also give you access to nontraditional investments, such as alternative strategies and private equity solutions. For investors who qualify, these options can provide returns that don’t correlate with the broader market, while also helping you manage risk. A Financial Advisor will team with your tax advisor to work toward helping you keep more of your investment returns or determine if tax-loss harvesting could work for you.
Making the Most of Working with a Financial Advisor
If you’re already working with a Financial Advisor, be sure that you are taking advantage of all the financial firm can offer. Many firms offer digital tools, including online spending and budgeting applications, tracking your investments held elsewhere and lending products. And you should meet regularly with your Financial Advisor to help ensure that your plan is kept up-to-date and reflects your current goals. Best of all, working with your Financial Advisor enables you to have someone who understands your goals, while looking out for your financial future.
5 Mistakes to Avoid in Retirement
How you plan your finances in retirement may be just as important as the process of saving for retirement. Here are some key considerations.
You’ve spent a lifetime planning for your retirement goals, contributing to your 401(k) and perhaps investing additional assets in an individual retirement account (IRA) and other accounts. Now, you’re finally on the verge of retiring. However, you may be surprised to find that retirement planning doesn’t stop once you retire.
To keep all of your life and retirement goals on track, here are several pitfalls to avoid, as you embark on this new, exciting chapter in your life.
1. You Apply for Social Security Benefits Too Early
You can apply for benefits at age 62, but the benefit you receive will be up to 30% less than it would be if you waited until what the Social Security Administration deems “full retirement age” (FRA).
Electing to receive benefits before your FRA can reduce your benefits if you decide to keep working. For every $2 you earn above a specific threshold, which is $18,960 in 2021,1 you lose $1 in benefits. Unless you really need the money, consider waiting to apply. And if you can afford it, put off applying until age 70 when your benefit will be about 32% higher than it would be at FRA.
2. You Fail to Take a More Conservative Investment Approach
When you were younger, you could invest more aggressively because you had time to recoup any losses you might have incurred. As you approach retirement, however, the game changes. You’re going to need the assets you’ve accumulated for day-to-day expenses and no longer have the luxury of time that you once enjoyed.
Especially during the early years of retirement, when you’re beginning to withdraw assets from your retirement nest egg, it’s important to employ a strategy that considers capital preservation. Without this consideration, the combination of spending and volatile markets might deal your portfolio a blow from which it may not be able to recover.
It’s important to understand the options available to help protect the assets you’ve spent a lifetime accumulating.
3. You Spend the Way You Used To Spend
Hand in hand with a more conservative investment approach is a more conservative budget. You don’t necessarily have to compromise the retirement lifestyle you envisioned for yourself, but you do have to maintain a realistic view of your finances.
Since you’re no longer earning a steady paycheck—or you’re working less—your income may not be as high as it once was. A lifetime’s worth of retirement savings can look like an enormous source of assets that you can tap into whenever you like, but your retirement may last 30 years or more. It’s a good idea to work with your Financial Advisor to take inventory of expenses, identify all sources of income and develop a strategy to maintain your retirement lifestyle for as long as you live.
4. You Miscalculate Your Required Minimum Distributions
Generally, once you reach age 72 (or 70 ½ for individuals born before July 1, 1949), you must take annual distributions—known as required minimum distributions (RMDs)—from your 401(k), Traditional IRA, Simplified Employee Pension (SEP) and SIMPLE IRAs or other qualified retirement plans, whether you need them or not (Roth IRAs are exempt from this requirement).3 However, they have some flexibility as to when they actually have to take the first-year distribution.
The account holder can take it during the year they reach their RMD age, or can delay it until April 1 of the following year, known as the required beginning date. This means that if you opt to delay your first distribution until April 1 of the following year, you will be required to take two distributions during that year—the first year's and your second year’s required distribution.
RMDs are generally taxable at your individual tax rate and, if you fail to take them, you are subject to a substantial penalty—an excise tax equal to 50% of the RMD or whatever portion of the RMD you neglected to take. RMDs are based on IRS life expectancy tables; while you can access these tables online and do the math on your own, we suggest you seek guidance from your accountant or tax advisor.
On a side note, if you participate in an employer-sponsored qualified retirement plan (