Needham, MA, April 10, 2006 – Longer life expectancies and the specter of 20-plus years of retirement mean individuals must essentially fund a half year of retirement income out of each of their 40 to 45 years of working income. This prospect is daunting for most consumers, to say the least.
Institutions often provide tools that project the need to accumulate a seemingly unattainable nest egg in the hundreds of thousands of dollars. New research from TowerGroup notes that the dramatic disparity between a mountainous retirement goal, and the meager savings potential of a worker just starting his/her career, is a major psychological barrier to getting an early start on saving. Further, lending discussions for new cars and first homes tend to focus on maximizing spending for these items – rather than achieving a workable balance between housing and transportation today, versus future spending needs in retirement.
TowerGroup asserts that financial planning – particularly relative to accumulating assets for retirement – would be more effective if reframed around the idea of “prepurchasing” individual years of retirement income. Its new research highlights a three layered approach that incorporates a planning orientation into day-to-day spending decisions. These tiers include:
Utilizing online bill payment with a “set-aside” account to separately fund and manage payment for sporadic, budget-busting expenses such as holiday gift giving, summer vacations, summer camps, back-to-school spending, or insurance payments. This approach will help level out monthly spending, reduce credit card debt, and enable customers to identify additional dollars for investment.
Infusing the loan approval process for mortgages and car loans with “lifetime affordability” estimates to better underscore competing demands to fund college education or retirement. In a hypothetical example, TowerGroup estimates a couple could accumulate over $400,000 in additional assets during a working career by buying the basic edition of a car and saving the difference in payments compared to buying the luxury edition. See the related graphic at:
Changing the retirement planning approach from accumulating a significant amount of assets over a lifetime, to an approach of “prepurchasing” a percentage of a future year’s retirement spending each working year. In a hypothetical example, a 25-year-old making $30,000 could spend 4% of his income at age 25 to purchase 18% of his income need for his first year of retirement at age 65.
“Few financial institutions focus time with their customers on discussing spending relative to current and future income,” said Matt Schott, senior analyst in the TowerGroup Brokerage & Wealth Management practice and author of the research. “The concept of ‘prepurchasing’ years of retirement during an individual’s working years helps to sidestep the huge psychological challenge of accumulating a massive nest egg. It offers a way to help make each dollar saved toward retirement feel more immediate and tangible to the customer. It also serves to highlight tradeoffs versus other major spending decisions such as home or car buying.”
Schott noted that if 80 million US households in the lowest wealth tier each accumulated $100,000 in additional assets through this method, the increased asset-based revenue would equate to five new financial services institutions the size of Merrill Lynch. “While approaches like the “prepurchasing’ model or set-aside accounts tied to online bill payment will require change on the part of financial institutions, the potential rewards could equal hundreds of billions of dollars of additional revenue,” he said.
Two new TowerGroup reports related to wealth creation and retirement by Matt Schott are available to qualified members of the press for review.
“Prepurchasing Retirement: Helping Consumers Spend Their Way to Financial Independence” “Online Bill Payment: Converting the Mass Market from Wealth Consumers into Wealth Creators”
To request copies or to arrange an interview with Mr. Schott, please contact Jorge Lavina at +1.212.455.8041 or [email protected]
TowerGroup is the leading advisory research and consulting firm focused on the global financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world’s leading financial institutions, technology companies, and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in North America, Europe, and the Asia-Pacific region, TowerGroup serves a global client base. Visit www.towergroup.com for more information.