On Wall Street
August 1, 2002

Is This Your Clients' Retirement? Don't be so sure you understand today's retirees let alone the soon-to-retire Boomers. Get ready for a new role.

by Evan Cooper

If you have clients aged 55 and older, Dr. Ken Dychtwald may know more about their retirement thinking than you do.

Dychtwald, head of a San Francisco-based research and consulting firm and author of several books on the aging of America including "Age Power: How the 21st Century Will Be Ruled by the New Old" (Penguin/Tarcher, 2000), recently completed a study for AIG SunAmerica that sheds new light on the 20-plus years most Americans will spend in retirement.

"For those who see the future, boom times are coming," predicts Dychtwald, whose findings can sharpen brokers' prospecting and service efforts. Perhaps the most fundamental insight to draw from "Re-Visioning Retirement" is that modern retirement, in many ways, is a state of mind. Based on interviews with more than 1,000 pre-retirees and retirees over the age of 55, Age Wave found that today's retirement population comprises four psychographic/economic segments, each of which approaches retirement differently (see "And the Retirees Are..."). Except for the poor and chronically ill, however, most current retirees are at peace with themselves and enjoy retirement. In fact, the more they have planned for retirement and the more they have salted away, the more satisfied with retirement they are.

The Boomer Wave

Pre-retirees - the 55-to-64-year-olds who constitute the brokerage world's prime clients - don't see retirement as a withdrawal from active living or from work. In fact, 95 percent of those not yet retired plan to work in some capacity while retired; 81 percent want to continue to learn, and 70 percent want to try new things. But aside from these general desires, most people have given their retirement years very little thought, Dychtwald says.

"Very few people think about what they'll be like when they're 70, and fewer still are thinking about what they should be doing now. It's almost a cultural neurosis," says the psychologist. "In our society there's such a focus on youth that when I ask people what happens when they turn 70, I find they can describe their childhood and teens but not the sixth, seventh and eighth decades of life. Those are a blur. We may have a superficial notion about being older or an anecdotal one from own family, but our actual knowledge of the situation is small."

Long, Long Life

No wonder. The whole concept of retirement is relatively new. For most of history, people simply didn't live long enough to retire. John B. Shoven, the Charles Schwab professor of economics at Stanford University, noted in a recent presentation to the Investment Company Institute, that human life expectancy didn't reach 50 until after 1900. Not only is today's average life expectancy near 80, says Shoven, but actual life expectancy is longer than the tables suggest. In fact, he says a 65-year-old woman today has a 7.35 percent chance of living to be 100 - which is better than 1-in-14 odds!

Shoven, who looks at the broad economic impact of the aging population, sees the following consequences of current demographic trends: Social Security and Medicaid programs will be forced to change, which may mean that currently promised benefits will be cut. Workers will have to save more. And long-term care insurance and annuities will become more popular.

"There must be a joint public/private campaign for financial literacy," Shoven says. "It should emphasize the basic facts, which are that saving creates wealth, retirement is expensive, that diversification can reduce unnecessary risks and that prudent risk taking leads to greater average returns. Other points: Annuities are a form of insurance, and that it is important to keep track of taxes and expenses."

Given the growing older population, Americans will need much more education about retirement. And this is where Dychtwald sees a new role for brokers. AIG SunAmerica, in fact, has retained the consultant to help incorporate his survey's insights into its reps' marketing efforts. Dychtwald says advisors must help clients visualize a future that typically is unfocused and hazy in order to help clients plan financially. Thinking about retirement purely in financial terms, he says, is simplistic. How can an advisor help attain a client's financial goal, he wonders, if the client has no clue about the kind of life he or she will be living? This is particularly true of Boomers.

"Most people assume that when Boomers move into maturity, they will live in the same sort of ways as their parents. But they won't," the 52-year-old Dychtwald says. "We understand our demographic plight and that we'll get shortchanged. Unfortunately, when it comes to financial matters, we are a generation of illiterates. We need a great deal of help and guidance. When you add our desire for new beginnings and continued learning, our longevity, our desire to be treated as individuals and our profoundly low level of financial preparedness, you either have a disaster in the making or a gold rush."

Dychtwald likens the evolving relationship Boomers will have with brokers to the one that has evolved with physicians. Once all-knowing gods, doctors are now seen as professionals with whom patients can have a partnership arrangement.

"Until recently, brokers didn't have to provide much more than results because the results were so good," he says. "Now people don't know who to trust, but they still want financial guidance."

Dychtwald believes the broker of the near future will need at least three talents:

* An understanding of financial products and the ability speak about them with degree of authority and with limited bias.

* An appropriate "bedside" manner. He says it will be much harder to build a relationship in a post-Enron era where there is little trust and market results are poor. Brokers are going to need to develop a new, more caring way of dealing with clients. He says that his own broker did not call him in the aftermath of the corporate scandals, and that damaged their relationship.

* A knowledge of the psychology of aging. When life was less complicated, you didn't need a lot of planning, he says. Today, a 52-year-old may need to work until 74, have a mother-in-law who needs eldercare, stepchildren who need help, a divorce, a new business, or a chronic illness. Instead of sailing across a still lake, Dychtwald says reaching retirement is more like shooting the rapids. Clients need a guide who can prevent them from hitting the rocks life presents and steer them toward calmer waters and toward a vision of the retirement they want.

He says the very best advisors have all three skills. The next tier has the product knowledge, but is not so good at the other two skills. Dychtwald's own experience has not been especially satisfying, and he compares financial advisors to "hammers" and himself to a "nail."

"I want their focus to be on my life, not their products," he says. "Ask me questions before you start selling me your solutions."