FOREWORD

The Challenge of Retirement-Income Planning

The 76-million-strong baby-boom generation is slouching toward retirement. Indeed, the oldest boomers, the flower children of the '60s, are now entering their 60s. Couple this transition from the work-a-day world to retirement with the demise of traditional defined-benefit pensions and concerns about the viability of Social Security, and you would think that almost all who are retired or nearing retirement would be making earnest preparations to turn savings in 401(k)s and other accounts into an income that can support them the rest of their lives.

But they're not.

For example, when Fidelity Investments polled just over 1,500 recent retirees and workers within a year of retiring for its Retirement Transition Study two years ago, it found that 68 percent of the preretirees hadn't done a budget of their anticipated income and expenses in retirement, 74 percent hadn't set an asset allocation strategy for managing their retirement income, and 72 percent had not decided which sources to tap first for income once they retire. How many claimed they had done all these things? Just 12 percent.

I'd like to report that things have dramatically improved since then. Alas, the feedback I get from my Long View column in Money magazine, as well as the Ask the Expert column I write for AOL and the CNN Money website, tells me that's not the case. The process of generating a steady income from savings remains a hazy notion at best to most people.

And that, it seems to me, is what makes retirement-income planning such a formidable challenge. Not only must advisers grapple with the many technical investment and planning issues involved in turning 401(k) balances and other assets into an income that can last the 30 or more years many people will spend in retirement. They must also convince investors to think about this topic in a serious and realistic way, as opposed to falling back on some half-baked notions like living off dividend stocks or moving their entire retirement nest egg into bonds.

I have no doubt that financial-services firms will continue to develop software and tools that can help individuals—alone or with the aid of an adviser—perform key planning tasks such as estimating the amount of retirement income they'll need and settling on a withdrawal rate that can provide that income without depleting their assets too quickly. I'm also confident that advisers will continue to find innovative ways of boosting retirees' income, whether it's arranging a reverse mortgage, selling a life insurance policy to an investor, or trying something more exotic, like using call options on stock indexes to set a minimum income floor while providing potential for bigger gains. If nothing else, I think the range of strategies and ideas offered throughout this book justifies my optimism.

But tools and sophisticated financial strategies won't be enough to motivate people to create a retirement-income plan. Just as consumers had to become more attuned to the need to save and invest for retirement before IRAs and 401(k)s could become staples of backyard barbeque conversation, so too must we make people more aware that their retirement security truly depends on their ability to turn their IRA and 401(k) balances into lifetime income. In short, we've got to show them that creating a retirement-income plan is essential to achieving a happy and comfortable retirement.

Clearly, advisers can play a key role in this education process, as can employers through 401(k) and other company retirement savings plans. After all, work is where most people already do the bulk of their thinking and planning about retirement, or at least get their start. I believe we're beginning to see progress on this front, with more employer plans either offering retirement-income options or at least talking about them. But a lot more must be done.

So, that's the challenge. Daunting, yes, but one that I think the financial-services community can meet. And, for better or worse, journalists like myself are also eager to explain these issues and help people sort through the pros and cons of different options.

—Walter Updegrave

Senior editor, Money magazine Author of We're Not in Kansas Anymore:

Strategies for Retiring Rich in a Totally Changed World