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Retirement today looks and feels very different than it did for previous generations. Concerns about Social Security and the erosion of pensions, along with gut-wrenching daily market volatility, have combined to create confusion and paralysis for the millions of baby boomers currently in the transition phase -- about five to 10 years from the start of their retirement.
This phase is critical. A person may spend 30 or more years accumulating assets for retirement but then have no clue how to convert those assets into a stream of long-term guaranteed income.
And frankly, the financial services industry hasn't been much help. Retirement calculators and tools have typically focused on accumulation and provided no easy way to approach retirement income decision-making. With 4.5 million baby boomers transitioning to retirement each year, consumers would benefit from a simple framework to help them ask questions and -- with the help of a trusted financial professional -- work through the complexities of retirement income planning.
At Allianz Life, we developed the 4 C's of Successful Retirement Income Strategies, a new way of thinking about retirement income planning that was inspired by the diamond industry, which boiled down the infrequent, complex, emotional and significant purchase of a diamond into the 4 C's of "cut, clarity, color and carat.''
For retirement income planning, the 4 C's are "clarity, comfort, cost of living and certainty.'' They isolate different components of this complex and often emotional financial planning process. And like those of the diamond industry, the 4 C's are meant to be product- and company-agnostic, helping any consumer and financial professional to work through these issues.
The first of the 4 C's, clarity is the analytical process of gathering facts to see the big picture and understand how one's savings will come together to fund retirement. Clarity also comes from learning income strategies and how risks, such as inflation, may affect their portfolio.
Americans can start by having an honest discussion about financial objectives. By answering key clarity questions -- How much income do I need? What sources of guaranteed income do I already have? What is my risk tolerance? -- "transition boomers" can better understand their starting point for retirement income planning.
This is emotional and relates to determining needs in retirement. People want their plans to work and do not want their retirement lifestyle crimped due to money concerns. They also want to feel financially secure regardless of market and economic conditions.
To be truly comfortable, people need to feel their money will last. In 2011, a study by Allianz Life, "Reclaiming the Future'', found that when given the choice between two products -- one with an 8 percent return but vulnerable to market risk and possible loss of value, the other with a 4 percent return but guaranteed not to lose value -- 76 percent of baby boomers chose the comfort of the guaranteed option. Given the volatile markets of recent years, consumers need to address how important comfort is in their income planning.
This captures inflation's impact on a consumer in retirement. Regardless of future inflation rates, inflation will erode the purchasing power of every dollar over time for retirees. If inflation isn't accounted for, retirees' purchasing power and perhaps quality of life will slowly diminish.
Many retirement-savings vehicles, including 401(k)s, personal savings and private pensions, offer no inflation protection. Without a cost-of-living adjustment, inflation's burden is put on the shoulders of retirees. For that reason, boomers will want to consider shifting some assets into a retirement vehicle that grows income as their personal protection against inflation.
This is all about managing things we know to be true about the future. Americans face two certainties: People are living longer and there will be market volatility.
Life expectancy in America has increased for both men and women. According to the Retirement Income Reference Book published by the Life Insurance Marketing and Research Association, a 65-year-old couple have a 50 percent chance that at least one of them will live to age 89, or 24 years in retirement. Market volatility is also a certainty, and the extreme volatility of recent years is increasingly the norm rather than the exception.
To achieve a level of certainty, one strategy is to convert a portion of assets that are exposed to volatile markets into a guaranteed-income product such as an annuity that is backed by the claims-paying ability of the issuer. This can help manage so-called sequence-of-return risk, when market declines early in retirement shrink the years that savings will last.
Millions of boomers are fewer than 10 years away from retirement and are underprepared. While it will not provide a perfect road map for everyone, the 4 C's framework should help start the retirement-income planning conversation.
Unlike a diamond, retirement won't last forever. But if you're a boomer who hasn't started planning, retirement may end up feeling like an eternity.
Gary C. Bhojwani is chairman of Allianz Life Insurance Company of North America.