Healthy, happy and very much in love, Marilynne (79) and Art Haws (83) are living the retirement dream. After a lifetime of prudent living and disciplined saving, their retirement mantra is “We’re on the 10-year plan.”
Pragmatics both, they soon realized that if there was something they really wanted – like a flat-screen TV – they better get it now, admitting that time was not on their side. At this time in their lives, there is probably only one risk that could put a blemish on their 10-year plan: inflation.
Inflation is underestimated. According to a study of US investors carried out by Allianz Global Investors from 27 July to 10 August 2009. , only 9% rank inflation as the number one factor threatening their retirement. The study shows that there is an apparent lack of understanding about the impact of inflation or what to do about it. In fact, even though 73% of the investors surveyed reported factoring inflation into their retirement planning, 45% didn’t have a clue as to which inflation rate they should factor in.
Art’s more of a risk taker Marilynne Haws
“Inflation may be the single biggest risk to sustaining a reasonable lifestyle in retirement,” warns Brian Gaffney, CEO of Allianz Global Investors Distributors. “While there is a widespread belief that stocks are an adequate hedge against inflation, that has not always been the case. We believe the best way to protect against unexpected upticks in inflation is by maintaining exposure to real-return assets like Treasury Inflation-Protected Securities (TIPS), real estate or commodities.”
A second marriage for them both, Marilynne uses a financial advisor to help make her investment decisions. Art does not, causing Marilynne to quip, “Art’s more of a risk-taker.” But when comparing portfolios, it becomes clear that they have both been quite conservative in making their investment decisions. Art is invested in ranch property, commercial real estate, stocks and cash, while Marilynne is invested in bonds and strong companies that pay good dividends, and is keeping more cash on hand. Even so, their portfolios experienced strong dips during the financial crisis and are ill prepared for inflation.
To step into the Williams’ house is to get a firsthand look at chaos theory in action. Busy careers, three children, boundless activities; it is a family in continuous motion. John (54), a speechwriter for Baker Botts L.L.P., and Lori (52), executive director of public affairs and media relations at Baylor College of Medicine, met as young reporters at
in Beaumont, Texas. The Beaumont Enterprise
Today, some 27 years later, they have been through enough – including losing almost everything they owned in the Houston flood of 2003 – to be guardedly optimistic about the current financial crisis. John is taking steps to counteract the effects of current losses by putting an additional 2% into retirement savings, and though he feels confident they will be able to accumulate enough money to support a comfortable income, they are focused on the basics of meeting day-to-day costs and health care, pushing back retirement until they are 70 or even older.
At 83, Art Haws is still putting up 8-ft fences alone under the blazing Texas sun, while wife Marilynne (79) is still skipping through her regular 4-mile walk, causing them to renew their 10-year plan
Like almost half of the investors surveyed, John and Lori are holding on to conventional investment and retirement wisdom. Despite the failure of many traditional strategies to withstand the crisis, their approach of putting 60% of their savings into equities and the rest into bonds is the type of 60/40 split long considered the model allocation.
“While it’s highly unusual for all major asset classes to fall at once, severe tail events – improbable events that cause significant adverse portfolio effects – occur more frequently than many people realize,” says Gaffney. “We believe that now is the time, while the downturn is still front-of-mind, for investors to take a closer look at their asset allocation and consider alternatives like commodities and TIPS that, unlike stocks and bonds, positively correlate with inflation and help lower overall portfolio risk.”
THEY ARE A PERFECT FIT
Both entrepreneurs, Ginger Wilchar (53) is a real estate broker and developer, and fiancé John Mitchell (58) is the owner of the largest privately owned reverse-mortgage company in the United States.
Fittingly, Ginger is focusing her retirement strategy on real estate. “It’s a tangible, proven investment. I like being an active investor,” she effuses. Even though real estate can be a good hedge against inflation, her strategy is dependent on market values and bank fluidity. Recent market troubles have affected Ginger’s cash flow and caused her to lower expectations of her standard of living in retirement. John, on the other hand, uses a financial advisor to help him with his portfolio of stocks, bonds, money market accounts and certificates of deposit. Considering himself a conservative investor, John believes it is more important than ever to work with a professional financial advisor.
Upbeat, hip and sensible, Chris Robinette (44) and Jeanne Fleming (37) seem to epitomize California chic. Chris is employed by Regen Inc., a solar-energy-focused start-up, while Jeanne is a producer for fashion photography shootings. They have a 15-month-old son and two grown children from Chris’s first marriage. “We don’t live on the edge,” says Jeanne, “and we plan the large things well, like low rates on our home and cars that are paid off for many years.” Though they are disappointed in the losses following the financial crisis, they feel they have plenty of time to recoup. Like 64% of the investors surveyed, Jeanne and Chris say covering health-care costs is a must-have in retirement.
Like the statistics-defying majority of respondents (77%), they expect to have better-than-average health throughout retirement. “It’s tough to confront the possibility of deteriorating health, let alone how to pay for it,” says Gaffney. “But reform notwithstanding, health-care costs [in the United States] are likely to remain considerable for most retirees, as Americans enjoy ever longer and more active retirements. Ignoring these expenses in a retirement plan is like buying a beach house without storm insurance. Eventually, you’re probably going to take a hit, and the consequences might be devastating.”
Even those faring well financially want to learn more about the many issues related to retirement planning. Of investors surveyed, 72% said they would like assistance in finding out more about the best way to generate income during retirement. “Estimating health-care costs and generating lifetime income are complex issues,” concludes Gaffney. “It’s not surprising that even relatively successful investors are seeking professional guidance.
Perhaps the most surprising result of Allianz Global Investors’ research is the indefatigable optimism of American investors. Despite losing an average of 30% of their retirement savings they remain bullish. Some 80% believe they will have the money they need for retirement and 72% predict a similar crisis in the next five years, while 60% think the market dislocation is a temporary downturn and things will improve long term.
It’s an optimism most advisors don’t share. Tremendous damage has been done, which has set retirement savings further back than most Americans realize. The good news is that investors are open to learning more about retirement planning and are looking to financial advisors for help. Says Eric Sutherland, head of advisory distribution for Allianz Global Investors Distributors, “We believe that there is a historic opportunity now – and for years to come – for advisors to focus their clients on a more realistic retirement vision and a more practical path to achieve it.”