When it comes to how individual investors have fared since the financial crisis, it’s still largely a tale of the haves and have-nots.
To see evidence of this, look no further than where individuals are when it comes to the biggest financial goal of all: retirement.
As news of 401(k) plan millionaires hits the headlines, other individuals are still left picking up the pieces after the last decade’s precipitous market drop decimated their nest egg or a job loss led to them to raid their retirement funds.
“People who were doing well before recovered faster and recovered more successfully,” said Teresa Ghilarducci, professor of economics at the New School for Social Research.
Those individuals were less likely to lose their jobs and more likely to get a raise after the recession. And when the market hit bottom, they were more likely to buy shares when they were at their lowest value, Ghilarducci said.
In contrast, those who fared worst were more likely to lose their jobs and subsequently take new positions that paid less. Their access to retirement accounts likely dwindled, particularly with less access to traditional pensions.
“That’s the disappointing legacy of the financial crisis,” she said. “Retirement wealth got more unequal.”
Yet both sets of investors share one challenge going forward: How to turn the savings they do have into a steady source of retirement income.
“The retirement plan industry has done a better job since the financial crisis of putting a better focus on making sure participants have good risk allocations,” said Aaron Pottichen, senior vice president at Alliant Retirement Services. “There’s still a huge gap on making sure people can actually take that chunk of money and convert it to income.”
That challenge — combined with record low interest rates — has changed the way individuals drum up income in their golden years.
“Definitely the low-yield environment made it difficult for retirees who were inclined to subsist on yields alone,” said Christine Benz, director of personal finance at Morningstar.
That has meant a heavy emphasis on dividend-paying stocks, as well as increased risk in their bond portfolios.
The lure of bigger returns has pushed investors into more nontraditional investments like real estate investment trusts or foreign stocks. But that means you need to keep a close eye on the tax consequences of those portfolios, Benz said.
It has also sometimes led investors into products that could not keep their momentum. Master limited partnerships, for example, saw a spike in popularity about five years ago because of their compelling yields and low volatility.
But some of those products subsequently fell precipitously, causing significant losses for investors.
“The last we checked on the dollar-weighted returns into the MLP funds as a group, it wasn’t a pretty picture,” Benz said.
Outside of the markets, experts say there still are several places that have become more reliable sources of steady retirement income streams in the last 10 years.
Social Security
How long you work and when you take Social Security benefits are two of the biggest decisions that retirees face, according to Alicia Munnell, director of the Center for Retirement Research at Boston College.
“If you claim your Social Security benefit at 70 instead of 62, that monthly benefit is 76 percent higher,” Munnell said. “That just gives you a solid base, because it’s inflation indexed.”
But most people do not wait that long to claim their retirement benefits. According to 2016 data from the Social Security Administration, 4.6 percent of women and 2.9 percent of men were 70 or older when they first claimed Social Security benefits.
Waiting until age 70 is challenging for many people because it requires them to continue to work or to draw money from other sources.
One of the other challenges since the financial crisis, Munnell said, is that the age at which you get your full Social Security benefit — also known as full retirement age — has continued up since 2007. That means many of today’s retirees must be older in order to get 100 percent of their benefits.
Annuities
Delaying Social Security ultimately works as an annuity, which means it should be the first place to look for income, according to David Blanchett, head of retirement research at Morningstar.
But beyond that, there are other formal annuity products that can help fill the income gap, Blanchett said.
That can include immediate annuities, deferred income annuities or even more complex products with guaranteed lifetime withdrawal benefits or tax deferred approaches.
“All of these can work,” Blanchett said. “The key is just trying to understand the costs and benefits of the approach.”
One product — the immediate annuity — offers the most simplicity, Blanchett said. True to their name, the payments from those start immediately and are typically bought with a one-time payment.
“You just know what the payout is going to be for life,” Blanchett said. “There’s no bells and whistles, but it’s easier to understand than some of the more complex products.”
A new variety that has emerged in recent years is the qualified longevity annuity contract. These deferred income annuities take money from an IRA or other retirement plan and turn it into regular monthly payments. That money is not subject to required minimum distributions until those payments begin.
Annuities are designed to help prevent the worst-case scenario: outliving your savings.
Admittedly, annuities are not for everyone. But the only way to find out whether they are a fit is for investors and financial advisors to start talking about them more, said Seth D. Harris, educational advisor at the Alliance for Lifetime Income.
“The worst conceivable outcome for most Americans is that in the last five or 10 years of their life, they will fall off of a financial cliff and all they will have is Social Security benefits,” Harris said.
Reverse mortgages
Another source of retirement income that has received the blessing of the academic financial planning community is reverse mortgages.
For some that may seem counterintuitive following a crash that was predicated on a real estate bust and people taking too much risk when it came to homeownership.
But reverse mortgages can be a valid strategy for retirees today, according to Jamie Hopkins, professor of retirement planning at The American College.
“The reverse mortgage space really didn’t play into the crisis at all,” Hopkins said. “[It] continued to, in the sense of the actual loans, perform fine throughout it.”
Reverse mortgages, also called home equity conversion mortgages, do not required you to repay the mortgage while you are living in the house. Meanwhile, interest and fees gets added to your mortgage balance. Once you move or die, the loan balance is repaid.
Reverse mortgages require you to be at least 62. They are typically for about half of your home value and must be the only mortgage on your primary residence.
For example, if someone has just $100,000 saved after focusing on covering their children’s college tuition, but have managed to pay off their $600,000 house, they can tap that equity.
“Pretty much every financial advisor in the country has that client,” Hopkins said.
The other alternative is you can move from a $600,000 house to a $400,000 house, freeing up $200,000 in equity. Then, by using a reverse mortgage to buy the new $400,000 home, you free up another $200,000 in equity.
And you get rid of the ongoing required monthly mortgage payment.
“That puts somebody in a much better cash flow scenario than they were in before,” Hopkins said.
A potential downside with a reverse mortgage is that your loan must be paid off when you die, which may limit how much you pass on to your heirs. They may need to sell the home to repay the reverse mortgage if they do not have the funds to pay the loan balance.
Academic research has found that using home equity is better early or throughout retirement. Those findings from earlier this decade prompted the Financial Industry Regulatory Authority to change its investor alert, which previously just recommended them as a last resort, Hopkins said.
But as the financial industry warms up to reverse mortgages, many individuals still do not take advantage of them.
A research paper published in 2016 by the MIT Center on Finance and Policy found that the current penetration rate for reverse mortgages is less than 2 percent for all retired households. That is “quite small,” the research said, given that a majority of retired households — 80 percent — own a home, while only about half have retirement assets.
Reverse mortgages would make sense for 12 to 14 percent of retired households, the MIT research found.
“A 12 percent rate of penetration would increase the current size of the reverse mortgage market almost seven times over,” the research said. “And the retirement welfare of these elderly households could be significantly improved.”
