Are We “Dissaving” Too Much?
September 27th, 2007
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I came across the news release below and it made me wonder: Just how many people have sufficient assets to buy annuities and why there must be a “shift from accumulating assets to monetizing them.”
After all, is it not possible to do both? If you have an investment that produces a growing return over time, does not the value of the investment increase?
Think about investment real estate. If you have owned single-family homes in my community the rent most likely has doubled in the past decade. Even as income has increased, so has asset value. Homes cost a lot more today then ten years ago in my area.
Rather than worrying about “dissaving” I suspect most people are better served worry about good, old regular “saving.” It’s something we don’t do very much of any more, and that’s a core reason why so many people have trouble retiring and need a reverse mortgage in the first place.
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NEW YORK–(BUSINESS WIRE)–The financial services industry in the U.S. is not keeping up with the changing needs of the 76 million people approaching retirement. According to a report by financial industry consultants Oliver Wyman, providers need to shift their focus from helping Baby Boomers accumulate assets to enabling them to draw down assets and generate income from their assets.
The report, “The New Retirement Landscape: Reaping the Rewards,” outlines how financial services providers need to realign product lines and rethink distribution channels to compete effectively in the market to serve the financial needs of retirees in the U.S.
The primary challenge for the financial industry is developing new products to help retirees shift from accumulating assets to monetizing them, what the firm calls “dissaving.” The most effective solutions, according to Oliver Wyman will transcend the traditional boundaries between banking, insurance, health care and asset management.
“Financial services providers should enable people to leverage their entire personal balance sheets during retirement,” said John Colas, managing director and head of the North American Corporate Strategy Practice at Oliver Wyman. “Retirees will need to tap the equity in their homes, protect against an array of risks, and make a fundamental shift from accumulating assets to generating income. The solutions needed cross traditional financial industry boundaries and will require innovation in both product design and service delivery.”
Priorities for the industry:
Oliver Wyman advises that providers of financial services focus on actively helping retirees meet their needs to: generate cash for basic needs; maintain a desired quality of life; and transfer wealth to heirs or other parties. The firm predicts growing demand for solutions like reverse mortgages that meet both financial and lifestyle needs. Likewise, for innovation in products like single premium immediate annuities and target date funds that can be reformulated to optimize income. Providers also need to help retirees manage a range of risks and opportunity exists to create new hybrid products, like variable annuities with living benefits that address multiple risks faced by retirees (market risk, inflation, longevity risk, the increasing cost of health care, and liquidity risk).
More broadly, the industry needs new distribution models to market and deploy these new solutions. Oliver Wyman identifies the Web, alliances, and affinity relationships as among the ways providers need to alter their distribution channels and corresponding infrastructure.
According to Steven Kauderer, managing director at Oliver Wyman and head of its Insurance Practice, “The Baby Boom generation’s increased longevity, its collective need for income protection, and rising healthcare costs will present unique opportunities. At stake for the financial industry are a host of new revenue streams and the chance for leaders to create distinct competitive advantage.”
Implications for financial sectors:
The complex needs of retirees demands the industry respond in innovative ways, creating opportunities for providers:
Wealth and asset managers need to build expertise in longevity risk and liquidity management and expand their focus beyond high net worth individuals. Acquiring the skills of retail bankers and insurers or by partnering with firms gives them a better understanding of the mass market and mass-affluent market.
Insurers can capitalize on the opportunity to offer guaranteed lifetime income streams to retirees through annuity-like products. Insurers have a long history of being a trusted provider of retirement services and now must consider partnering with banks and other institutions to enhance distribution.
Retail banks can offer liquidity and platforms for wealth management and insurance distribution, but they often struggle to combine these offerings across segments, and lack expertise in risk protection. Retail banks need to evolve from a short-term transactional focus to a broader, advice-based approach to retirement services.
Securities firms can create innovative structured products that provide risk protection similar to insurance. Many have already structured their accounts to provide substitutes for some retail banking services – the challenge is to extend their range of offerings.
About Oliver Wyman
With more than 2,500 professionals in over 40 cities around the globe, Oliver Wyman is the leading management consultancy that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation and leadership development. The firm helps clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennan Companies (NYSE: MMC). For more information, visit www.oliverwyman.com.
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