RIIA Retirement Management Journal - Strategic Business Insights

RIIA’s Market Research Insight Issue
VOLUME 2, NUMBER 2
SUMMER 2012
The Retirement Management Journal,
a publication of the Retirement Income Industry Association,
is devoted exclusively to retirement-income planning and
management.
I N S I D E ■
LETTER FROM THE EDITOR
PAPERS:
Introduction to RIIA’s Market
Insight Research Program
PAPERS REGARDING SUPPLY:
Getting From There to Here – A
History of the DTCC/RIIA Relationship
The DTCC Analytic Reporting
for Annuities Service: A Primer
on the Possibilities
Getting Income Annuities Ready
for Primetime – Creating
a Market Value
Income from Assets:
The Promise of the Future
PAPERS REGARDING DEMAND:
How Financial Institutions Can
Help Their Customers to Remain
Healthy, Wealthy and Wise
Defined Contribution Retirement
Plan Participants on Retirement
What Happened to My Retirement?
Can We Predict Long-Run
Economic Growth?
RIIA provides the space, discussions, communications, research, education and
standards that derive from its unique perspective – the View Across the Silos – to help
investors, distributors and manufacturers in the financial industry transition from
Investment Accumulation to Retirement Management and Income Protection.
www.RetirementManagementJournal.org

THE RETIREMENT MANAGEMENT JOURNAL SM VOLUME 2, NUMBER 2
SUMMER 2012
T A B L E O F C O N T E N T S
L E T T E R F R O M T H E E D I T O R
4 Editor’s Comments
by Robert J. Powell, III
P A P E R S
5 Introduction to RIIA’s Market Insight Research Program
by Elvin Turner
This paper introduces the RIIA Market Insight (RMI) research program,
which is designed to help industry leaders grow their businesses in
a changing retirement market through the use of market intelligence
concerning firms’ sales, customers, distributors, competitors and their
own strategies.
P A P E R S R E G A R D I N G S U P P L Y
11 Getting from There to Here – A History of the DTCC/RIIA
Relationship
by François Gadenne and Adam Bryan
This paper details the vision of the two organizations that believe
transaction data, beginning in the annuity industry, could be transformed
into insightful reports for industry executives.
15 The DTCC Analytic Reporting for Annuities Service: A
Primer on the Possibilities
by Elvin Turner and Andrew Blumberg
This paper presents practical ways that the Analytic Reporting for
Annuities program can be used to give users a unique and
unprecedented view of their own business as well as the market for
annuity products, allowing them to discover key trends and identify
opportunities.
23 Getting Income Annuities Ready for Primetime – Creating
a Market Value
by Gary Baker
The Income Annuity Standards and Readiness Working Committee
is defining the infrastructure and methodology that will make
annuitization data and market valuation available across the market.
27 Income from Assets: The Promise of the Future
by Larry Cohen and David Blanchett
To facilitate the conversation among financial manufacturers,
distributors, regulators, associations, financial professionals and all
parties interested in better understanding and serving consumers’
retirement income needs, Morningstar has partnered with RIIA to look
at the balance sheets of pre-retired and retired households to better
understand their retirement income situation.
P A P E R S R E G A R D I N G D E M A N D
33 How Financial Institutions Can Help Their Customers to
Remain Healthy, Wealthy and Wise
by Anand S. Rao, Ph.D, and Ron Mastrogiovanni
Considering that healthcare will be the largest single expense for most
retirees, and in light of the fact that the majority of people inadequately
prepare for retirement, there is a huge need for informed professional
guidance, including on various on-the-shelf investment options that
can cover out-of-pocket healthcare expenses.
39 Defined Contribution Retirement Plan Participants on
Retirement
by Ronald L. Bush
This paper examines the attitudes and behavior of definedcontribution
plan participants regarding retirement, their perceived
retirement readiness, expected sources of retirement income and their
interest in an in-plan guaranteed retirement income option.
45 What Happened to My Retirement?
by Larry Cohen
Retirement is a middle-class problem. The wealthy and the poor have
no problem with retirement: The wealthy will retire, the poor won’t –
no problem! But, for the vast number of those in the middle, the other
79%, retirement is a real problem – and the questions of if, when and how
we retire are huge unknowns.
53 Can We Predict Long-Run Economic Growth?
by Timothy J. Garrett
It can be a challenge to plan now for inflation-adjusted economic growth
over coming decades. This paper argues that there exists an economic
constant that carries through time which can help us to anticipate the
more distant future: global economic wealth has a fixed link to civilization’s
total capacity for power production; the ratio of these two quantities
has not changed over the past 40 years that statistics are available.
Copyright © 2012 Retirement Income Industry Association®. All rights reserved. No part of this publication may be reproduced in any form or by any means without the prior written
permission of the copyright holder. This publication is designed to provide accurate information in regard to the subject matter covered. It is sold and/or distributed with the understanding
that the publisher is not engaged in rendering legal, accounting or other professional services. The publisher is not held liable for any inaccuracies in this journal.
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© 2012 Retirement Income Industry Association

T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
L E T T E R F ROM T H E E D I TO R
Welcome to the Summer 2012 issue of the Retirement Management
Journal. This issue marks a departure from the previous issues in that it
represents the launch of RIIA’s first-ever research/data book. As you will
read, this issue features the work of the RIIA research committee, which is
led by Elvin Turner.
Elvin, in his role as director of research for RIIA, worked tirelessly on soliciting and editing the
papers for this issue, which features ground-breaking reports and updates on initiatives that are
certain to change the retirement-income space for many years to come.
For instance, this issue introduces the RIIA Market Insight (RMI) research program, which is designed
to help industry leaders grow their businesses in a changing retirement market through the use of
market intelligence concerning firms’ sales, customers, distributors, competitors and their own
strategies. Created by leading research and consulting firms in the retirement industry, the RMI
program widens the view of market leaders and gives them actionable data in a number of areas.
This issue also features the vision of two organizations – RIIA and DTCC – that believed that
transaction data could be transformed into insightful reports for annuity industry executives. In
this issue, you’ll read the result of that vision, DTCC’s “Analytic Reporting for Annuities.”
And, you’ll read about a novel initiative in which more than 40 financial service organizations are
working together to solve a long-standing problem – creating a standard for the market valuation
of an income annuity (or any annuitized asset).
Plus, there’s a paper from Timothy Garrett, a professor at the University of Utah, who answers the
question: Can we predict long-term economic growth? We won’t spoil the end; you’ll have to read
the paper to find out.
So, that’s just a taste of what you’ll read in this issue. We hope that you enjoy our latest edition of
the Retirement Management Journal. As always, think of us as a place to advertise your message.
Our publication is now reaching thousands of financial advisers who hold themselves out to be
retirement-income specialists. Plus, it’s read by leading executives from many firms and organizations.
And lastly, let us know if you would like to distribute the pdf version of the Retirement
Management Journal to your constituents. Regular and Associate Members of RIIA are able to
distribute the Retirement Management Journal to all employees and advisers in their system as a
member benefit.
R E T I R E M E N T M A N AG E M E N T J O U R N A L
VO L U M E 2 , N U M B E R 2 – S U M M E R 2 0 1 2
A P U B L I CAT I O N O F R I I A
• www.riia-usa.org
• For reprints, contact: Deborah Burkholder
deborah@riia-usa.org
E D I TO R & P U B L I S H E R
• Robert J. Powell, III
A RT D I R E CTO R & C R E AT I V E T E A M
• Robin Taliesin, Raven Creative, www.raven2.com
G OV E R N A N C E COMMIT T E E
• François Gadenne, CFA®, RMA
Chairman of the Board & Executive Director, RIIA®
• Bruce E. Wolfe, CFA®
Managing Director, Allianz Global Investors
• Robert J. Powell, III
ACA D E M I C P E E R R E V I E W COMMIT T E E
• Chair, Michael Zwecher, Ph.D.
Author, Retirement Portfolios: Theory,
Construction and Management
• Co-Chair, Rick Miller, Ph.D., CFP ©
Founder, Sensible Financial Planning and
Management, LLC
• Co-Chair, Philipp Hensler, Ph.D. cand., CEFA
Executive Vice President, OppenheimerFunds
• Co-Chair, Michael Finke, Ph.D., CFP®
Associate Professor and Coordinator Personal
Financial Planning, Texas Tech University
P R ACTITIONER P E E R R E V I E W
COMMIT T E E
• Chair, Dana Anspach, CFP®, RMA
Principal/Financial Advisor, Sensible Money, LLC
and Writer, About.com: Money Over 55
• Co-Chair, Sean M. Ciemiewicz, CIMC © , AIFA © , RMA
Managing Partner and Financial Consultant,
Retirement Benefits Group
AT- L A RG E P E E R R E V I E W COMMIT T E E
• Co-Chair, Clifford J. Jurdi, MS CFP®, ChFC
Principal, Clifford J. Jurdi, CFP®, CHFC and
Investment Adviser Representative,
Commonwealth Financial Network
• Co-Chair, Janet Maus, Ph.D., CFEd, CSA
President, Branch Financial Strategies
F O U N D I N G S P O N SOR
• Allianz Global Investors
All for now and all the best,
Robert J. Powell, III, Editor & Publisher, editor@RetirementManagementJournal.org
www.RetirementManagementJournal.org
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VOLUME 2 , N U M B E R 2
Introduction to RIIA’s Market Insight
Research Program
BY ELVIN TURNER
ELVIN TURNER
MANAGING DIRECTOR
TURNER CONSULTING LLC
RESEARCH DIRECTOR
RETIREMENT INCOME INDUSTRY
ASSOCIATION
This paper introduces the RIIA Market Insight
(RMI) research program, which is designed to help
industry leaders grow their businesses in a
changing retirement market through the use of
market intelligence concerning firms’ sales,
customers, distributors, competitors and their own
strategies. Created by leading research and
consulting firms in the retirement industry, the RMI
widens the view of market leaders and gives them
actionable data in a number of areas.
The RMI program is an important resource designed
for this unique period of time in the history of the
retirement income industry. This is a time when
senior managers need to focus on traditional
products and services which have been around for
years. The issues related to these mature products
often involve the firm’s ability to honor the
commitments made over the many years around
investment return, benefits and professional
services; these are the supply issues. Yet managers
also need to focus on meeting the emerging needs
of soon-to-be-retired Boomers. These needs
challenge our industry to design products and
services around still evolving service
requirements and to determine how investments can
best be structured to meet lifestyle needs. The
answers to these questions require a deep
understanding of customer demand.
Participating in the RIIA RMI program allows
sponsoring companies to explore these issues of
supply and demand and to determine how the use
of various distribution channels impacts the
analysis. We seek to enable our sponsors to quickly
see the new opportunities unfolding in the market
before those opportunities become common
knowledge. As we launch our program we have the
ability to analyze certain annuity distribution
channels and product offerings in depth. We plan
over time to include in-depth analysis regarding
other products and services.
RIIA Market Insight Household Analysis
The RMI initiative is a research program that
transcends traditional product and organizational
silos bringing together industry leaders, researchers
and their collective data to create a 360-degree view
of consumer households who buy and rely upon the
financial services industry’s products and services.
At the heart of the RIIA research platform is
household segmentation based on age and
financial assets. We segment the non-retired
households based on where they are in relation to
retirement. As a result, the US household
population is shown in four life-stage cohort
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T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
categories: Starters, Builders, Pre-retired and
Retired. These cohorts are delineated by the age of
the household’s primary head as follows:
■ Starters – Under Age 35
■ Builders – Ages 35 to 49
■ Pre-Retired – Ages 50 to 64
■ Retired – 65 or older
In addition to relevant life stages, the segmentation
looks at the levels of wealth of the various
households. Our ability to look at the assets and
income of households by segment allows us to
evaluate the very different financial situations of the
households. In order to evaluate a resource
component in each of these cohorts the RIIA
segmentation divides each age group into four
levels of wealth based on their total household assets.
This is a form of financial ‘triage’ where many
households in the top “wealth” market segment are
fully able to achieve their goal to retire, most
households in the bottom “marginal” segment will
be unable to even consider retirement, and most
households in the “mass middle” and “affluent”
segments require further focus and major changes
in course. For each segment, we want to add a
delineation to separate those that, with reasonable
guidance and assistance, should be able to achieve
some semblance of their retirement goal from the
remainder who will need radical intervention in order
to even come close to their objectives.
■
■
■
The first level is the top 5% of households in
each cohort. Any household whose mean total
assets places them in the top 5% for that cohort
is assigned to this resource level which we call
“Wealthy”
The next resource level is set at the next
highest 15% of households in each cohort,
which we will call “Affluent”
As the majority of households are reputed to
have inadequate savings the next resource level
is the next 50% of households in each cohort,
F I G U R E 1 : R M I Q U A N T I F I C AT I O N O F VA L U E S I N T H E R I I A C U S T O M E R S E G M E N TAT I O N M AT R I X
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VOLUME 2 , N U M B E R 2
■
which we call the “Mass Market”
The final level is the bottom 30% of households
in each cohort who have the lowest level of
assets, whom we call “Marginal”
This segmentation of households relates to the RIIA
Customer Segmentation Matrix that is presented in
the RIIA Market Analyst (RMA) certification
program. The graphic in Figure 1 (on the previous
page) shows these connections.
Using these connections we identify the average
financial assets of households by segments and
compare the assets to the same households’ mean
annual disposable income (the income remaining
after a household’s fixed expenses are paid). Where
pre-retired and retired households are moving into
the years where a portion of their incomes come from
their assets, this analysis becomes an extremely
useful measure of the households that are
constrained, over-funded or under-funded. Our
ability to make connections like these among
household wealth-age categories increases the
power of this analysis for leaders in financial
services firms. The deeper insights into their
customers help them make wiser strategic decisions.
Further, we can apply these insights to particular
types of firms and markets because we use
multiple research firms, who are each an expert in
their field, and carry them through an over-arching
analysis that uses a series of focused insights to paint
the larger picture. The next section provides the
details of the over-arching research program.
RIIA Market Insight Research Program
The RMI program draws insights from research
firms in four areas of the customer experience: (1)
household financial profile (income, assets, etc.)
now, (2) household financial profile in the future,
(3) household experience with financial products,
distributors and companies, and (4) household
experience with their investments. We present the
F I G U R E 2 : R I I A M A R K E T I N S I G H T P R O G R A M
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T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
multiple insight perspective in Figure 2 (on the
previous page), where the insights surround the
target households in a 360-degree view of the
customer market segments.
The Research Firms and Their Expertise
In the RIIA RMI research platform we divide the
F I G U R E 3 : F O U R A R E A S O F F O C U S
AREA OF
FOCUS FIRM EXPERTISE
Household Strategic SBI has a commercially
financial Business available database that
profile Insights describes the financial
now (SBI) – profiles of U.S. households.
Larry Cohen This data is presented by the
RIIA age and asset segments.
Household Pricewater- PwC has proprietary programs
financial houseCoopers that can project current
profile LLP (PwC) – financial profiles of U.S.
in the Anand Rao households into the future.
future
PwC’s data can help us
describe the future retired
world of households that are
currently pre-retired.
Household Depository DTCC’s database currently
experience Trust tracks flows of annuity
with Clearing contracts, database is
financial Corporation extremely versatile and has
products, (DTCC) – a growing ability to show
distributors Adam Bryan/ views of annuity data not
& companies Andrew currently available in the
Blumberg market.
Households Morningstar, Premier firm presenting data
and their Inc. – on investment offerings in
Investments David the US. With this firm’s
Blanchett involvement in the RMI,
we now have the ability to
look at household investments
from an income provision and
sustainability point of view.
vendors into those that look at household demand
and those that look at the industry supply of
financial products and services. SBI and PwC
present research and insight regarding the issues in
the household experience that influence the demand
of financial products. Morningstar and DTCC
present research and insight regarding the products
and services offered by financial services firms that
impact the supply of such products and services
offered to household segments. Other vendors
provide more focused analysis around their
databases that enhance our ability to understand
demand and supply for most types of industry firms.
The roles of vendors that analyze demand and
supply issues are shown below.
Partner Research Firms with Expertise in Household
Demand
Three research partners provide data and insight that
relate to households’demand for financial products:
Strategic Business Insights (SBI) provides
information on households’ current financial
profiles, including their current ownership of
financial products, average incomes, financial and
non-financial assets and debts. SBI provides this
information for each of the nine household
segments.
In addition, SBI integrates information from the
Bureau of Labor Statistics’Consumer Expenditures
Survey (CEX) which provides information
regarding household spending.
PricewaterhouseCoopers (PwC) takes the
information provided by SBI and projects it into the
future.As a result, their data will provide information
on households’future financial profiles, including their
future ownership of financial products, average
incomes, financial and non-financial assets and
debts. PwC also provides this information for each of
the nine household segments.
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VOLUME 2 , N U M B E R 2
HealthView Services (HVS) is contributing to the
analysis on the demand side. HealthView Services
is a data analysis and technology firm with a
retirement cost analysis software which filled a key
void in the financial planning process by
pioneering the industry`s first income flooring
analysis tools. It is being used by some of the
world`s largest brokerage firms, annuity providers
and life insurance companies. HVS’ modularbased
suite of interactive calculators is customized
and branded for institutions and is designed to
seamlessly integrate into an existing adviserfacing
or customer-facing web-based reporting
system. HVS will partner with PwC to project
pre-retiree health care costs into their retirement
years. A paper by Ron Mastrogiovanni, from
HVS, and Anand Rao, from PwC, is included in this
issue of the RMJ.
Research Partners that Provide Research Regarding
the Supply of Products and Services Offered to
Financial Services Customers
Providing the supply side of the analysis are:
DTCC is an industry-owned clearinghouse that
clears and settles the vast majority of securities
transactions in the United States. In 2011, $1.7
quadrillion of securities transactions passed through
its operations. Also in 2011, its insurance business
unit processed over $156 billion in annuity inflows
and outflows. DTCC launched Analytic
Reporting for Annuities last year – an online
premium flow aggregation and reporting service.
This service is a key offering of the RMI program.
A paper regarding the DTCC service is published
in this issue of the RMJ.
Morningstar, Inc. is a leading provider of
independent investment research with an
international clientele across North America,
Europe, Australia and Asia. The firm provides data
to a variety of customers on more than 380,000
investment offerings, including stocks, mutual
funds and similar vehicles. Morningstar is analyzing
the income producing characteristics of household’s
portfolios for the RMI program. A paper by David
Blanchett, of Morningstar, and Larry Cohen, of SBI,
is published in this issue of the RMJ, as well.
Sagence Group is a consulting firm whose
principals have the unique ability to understand and
analyze challenges and opportunities from
multiple perspectives, ask the right questions and
drive strategic change in the financial services
industry. They bring a cross-functional view with
expertise in operations, finance, sales and marketing.
Sagence is analyzing annuity sales and distribution
trends for the RMI program.
Gallant Distribution Consulting (GDC) is a
research firm with deep expertise in the
distribution trends in the retirement market. The firm
conducts independent and syndicated leadership
research on various research trends impacting the
marketplace. GDC will work together with Sagence
to analyze annuity distribution trends.
CANNEX is a data collection and analysis firm that
compiles data and calculations about a variety of
guaranteed annuity products and makes that
information available to subscribers. Their core
expertise in the U.S. market includes Single
Premium Immediate Annuities (SPIA’s), Deferred
Income Annuities (DIA’s), Fixed Deferred
Annuities (SPDA) and Living Benefit Guarantees
for Deferred Annuities products. CANNEX brings
insight to the RMI program regarding all aspects
of the fixed annuity market.
Brightworks Partners is a research-based consulting
firm focusing on product, service and distribution
issues in retail and institutional financial services. They
have deep expertise in advisory work and the
institutional retirement markets. Brightworks brings
insight to the RMI program regarding all aspects of
the institutional retirement markets.
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T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
Community Senior Capital is a firm that
specializes in providing liquidity solutions for older
Americans. Dan Osterhout, the principal of this
firm, chaired the National Reverse Mortgage
Lenders Association’s Product Development and
Capital Markets Committee. This firm brings
insight to the RMI regarding the use of reverse
mortgages in the retirement market.
Ernst & Young (E&Y) is a global leader in
assurance, tax, transaction and advisory services.
Its worldwide staff of 152,000 people is organized
into a globally-integrated professional services entity
with deep and broad expertise across industries. The
insurance organization within E&Y works with the
RMI program focusing on the ability of the
insurance industry to support the retirement income
needs of current and future generations.
Conclusion
For the leader who has aggressive business plans,
sponsorship of the RMI program will bring new and
different views into the retirement markets. This
powerful research platform will enable an
industry leader to have a broader view of their
strategic opportunities through the structured use
of household and market analysis. The RMI
program does not replace a strategic business
analysis, rather it aligns top research firms with
analysts in a structure that surfaces and then
focuses on opportunities in the retirement market.
Leaders who sponsor the RMI program will have
a wider strategic view than they have ever had
before. They will be able to make the connections
and create value propositions that fulfill their
retiring customers’ unformed desires. ■
Mr. Turner can be contacted at Turnerconsultllc@
comcast.net or by calling 860-242-4878.
Stay on the cutting edge of the Retirement-Income
Industry’s latest thinking, research & innovation.
Single or institutional subscriptions available for non-RIIA members ■ Paper reprints available
For RIIA associate or regular members: Take advantage of a member benefit – you are entitled
to distribute the electronic version of the Retirement Management Journal to your constituents.
Please contact Deborah Burkholder at deborah@riia-usa.org for more information.

VOLUME 2 , N U M B E R 2
Getting From There to Here – A History of the
DTCC/RIIA Relationship
BY FRANÇOIS GADENNE AND ADAM BRYAN
FRANÇOIS GADENNE,
CFA®, RMA SM
CO-FOUNDER, CHAIRMAN AND
EXECUTIVE DIRECTOR
RETIREMENT INCOME INDUSTRY
ASSOCIATION
ADAM BRYAN
MANAGING DIRECTOR
INSURANCE AND RETIREMENT
SERVICES
THE DEPOSITORY TRUST &
CLEARING CORPORATION
The pages that you are about to read unfold the
vision of two organizations that believed that
transaction data could be transformed into
insightful reports for annuity industry executives.
This paper discusses the DTCC organization, its
Analytic Reporting for Annuities Program, the RIIA
views of the DTCC data and your opportunity to
receive additional information.
The DTCC Organization
Through the operating facilities and data centers of
its subsidiary companies around the world, The
Depository Trust & Clearing Corporation (DTCC)
automates, centralizes and standardizes the
post-trade processing of financial transactions for
thousands of institutions worldwide. With close to
40 years of experience, DTCC is the premier
post-trade infrastructure for the global financial
markets, simplifying the complexities of clearance,
settlement, asset servicing, global data management
and information services for equities, corporate and
municipal bonds, government and mortgagebacked
securities, derivatives, money market
instruments, syndicated loans, mutual funds,
alternative investment products and insurance
transactions. In 2011, DTCC processed securities
transactions valued at approximately US$1.7
quadrillion. Its depository provides custody and
asset servicing for securities issues from 122
countries and territories valued at US$39.5 trillion.
DTCC’s global OTC derivatives trade repositories
hold records on more than US$500 trillion in gross
notional value on transactions across multiple
asset classes globally.
DTCC’s Insurance & Retirement Services (I&RS),
launched in 1997, is the division that processes
annuity and insurance transactions for the
industry. I&RS is the central messaging connection
for annuity and life insurance transactions, enabling
insurance companies to provide broker/dealers with
daily financial transaction information. In 2011,
I&RS processed approximately $156 billion in
annuity transactions.
The creation of DTCC’s Analytic Reporting for
Annuities Program was motivated by a corporatewide
initiative to leverage existing data within
DTCC to realize efficiencies for the financial
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T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
industry. Given the industry demand, I&RS
conducted a comprehensive needs analysis with its
users and also worked with RIIA. Based on the
analysis, Adam Bryan, Managing Director of
I&RS, initiated the development of an online
application to transform millions of bits of data into
information that would provide a unique view of
the annuity market to allow users and customers to
see trends, helping them in identifying
opportunities and make decisions for their
businesses.
The Analytic Reporting for Annuities Program
DTCC’s Analytic Reporting for Annuities service
is an online solution that helps insurance
companies and broker/dealers better understand their
business and business relationships. It allows
users to view their market share, rank themselves
within a carrier, understand their relationships with
carriers or broker/dealers, rank partners and
products and use benchmarking information to gain
a new understanding of their market and positioning.
F I G U R E 1 : R I I A V I E W S A N D T H E I R O B J E C T I V E S
POTENTIAL RIIA VIEWS
Inflows, outflows and net
inflows organized by insurers
and annuity products –
the benchmarking view
STRATEGIC QUESTIONS
• What is the production of annuity
business by insurers and specific
annuity products?
• Which annuity products are
infusing inflows into insurers’
businesses?
Inflows, outflows and net • What is the production of insurers
flows by distribution channel by distribution channel?
– the benchmarking view • Which channels are infusing
inflows into insurers’ businesses?
Inflows, outflows and net
flows by type of marketretail,
contributory IRA,
IRA Rollover, 401(k) –
the benchmarking view
• What is the production of insurers
by market?
• Which markets are infusing
inflows into insurers’ businesses?
Unlike other services, DTCC’s Analytic Reporting
for Annuities uses information extracted from
actual transactions processed by National
Securities Clearing Corporation, a DTCC subsidiary.
DTCC offers a free one month trial of Analytic
Reporting to management at insurance companies
and broker/dealers that process transactions through
DTCC’s Insurance & Retirement Services. I&RS
also provides online and on-site demonstrations. A
trial or meeting can be arranged by contacting your
I&RS Relationship Manager. A listing of the
Relationship Managers can be found at
http://www.dtcc.com/products/insurance/team.php.
More information about Analytic Reporting is
available at www.dtcc.com/analytics.
The RIIA Views
Through the relationship with RIIA and DTCC,
RIIA members will have the added benefit of new
benchmarking views of the annuity distribution
market, such as seeing annuity activity by
distribution channel and product type, as well as by
qualified and non-qualified plans. DTCC and RIIA
are working together to develop a series of
benchmarking reports for RIIA member companies
that will be accessible for download from the RIIA
website. The work of developing these views will
be undertaken by a working group of financial
services companies through our newly formed RIIA
Market Insight Advisory Board.
The RIIA Views listed at left are an initial list of
potential views. The group will take this list and test
it with companies and distributors in order to gauge
industry interest and incorporate industry input. The
group will then work with writers, graphic
designers and systems associates to craft
cutting-edge presentations that give senior leaders
within companies and advisory organizations clear
compelling snapshots of their industry that concisely
communicate the important messages that lie
within the data; these views will be insight pieces
www.RetirementManagementJournal.org
12

VOLUME 2 , N U M B E R 2
that can first be read and digested by senior
leaders and then passed on to associates and even
more senior leaders and board directors. Since the
data is so powerful, the presentations do not need
to be complex. The RIIA Views will be designed
so that senior stakeholders who only periodically
review the annuity business can understand the
trends that frame their company’s position and
enable their business opportunities. While these
high-level presentations may not answer every
question, at least one will not feel compelled to
question every answer. These presentations replace
conjecture and opinion with market facts and can
direct your further analysis into the truly important
areas that impact your business.
The starting list of potential RIIAViews is as shown
in Figure 1 (on previous page). ■
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©2012 American Century Proprietary Holdings, Inc. All rights reserved. CO-ADV-76108 1208

VOLUME 2 , N U M B E R 2
The DTCC Analytic Reporting for Annuities Service:
A Primer on the Possibilities
BY ELVIN TURNER AND ANDREW BLUMBERG
ELVIN TURNER
MANAGING DIRECTOR
TURNER CONSULTING LLC
RESEARCH DIRECTOR
RETIREMENT INCOME INDUSTRY
ASSOCIATION
ANDREW BLUMBERG
DIRECTOR, ANALYTIC
REPORTING FOR ANNUITIES
BUSINESS INITIATIVE
DTCC INSURANCE &
RETIREMENT SERVICES
On June 20, 2011, the Depository Trust &
Clearing Corporation (DTCC) Insurance &
Retirement Services (I&RS) division launched
Analytic Reporting for Annuities. Analytic
Reporting is an online information solution
containing aggregated data from transactions
processed by I&RS. Because it is based on
transactions and not surveyed data, Analytic
Reporting gives users a unique and unprecedented
view of their own business as well as the market
for annuity products, allowing them to discover
key trends and identify opportunities. With
updates approximately two to three weeks after
each month-end, Analytic Reporting allows users
to assess their business and access industry
intelligence to understand and improve their place
in the market. The application provides actionable
information and intelligence to support
management decisions about sales, sales
management, marketing and product offerings.
Analytic Reporting provides a turnkey technology
solution through an online interface, available
anywhere, anytime. Users do not have to store or
manage the data, and they don’t have to
develop applications or run SQL queries to obtain
the information and intelligence they need for
decision making. An ID and password are all that
is needed to access the information, putting it at
the fingertips of business intelligence analysts,
marketing and sales managers, product managers
and senior executives.
What differentiates Analytic Reporting from other
offerings is the fact that the information is based
on actual transactions processed for the industry
by National Securities Clearing Corporation
(NSCC), a DTCC subsidiary, anchoring the
reporting in reality. The information covers all
types of annuity transactions across various
channels, products, insurers and consumers, thus
supporting the ability to meaningfully interpret
and compare results across different segments of
the market.
The rest of this article provides examples from
Analytic Reporting for Annuities that highlight
some of the types of information it places at the
fingertips of decision makers. They illustrate
information that is critical to understanding a
company's competitive position. The catalog of
uses presented here is not comprehensive – the
15
© 2012 Retirement Income Industry Association®

T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
F I G U R E 1 : I N F L O W S , O U T F L O W S A N D N E T F L O W S F O R T O P 1 0 I N S U R E R S
J A N U A RY, 2 0 1 1 T H R O U G H D E C E M B E R , 2 0 1 1 – IN B I L L I O N S
Carrier Inflows Outflows Net Flows
Metlife Investors USA Insurance Company 13.1 -1.9 11.2
Jackson National Life Insurance Company 10.6 -2.8 7.8
Pruco Life Insurance Company 9.0 -0.7 8.3
The Lincoln National Life Insurance Company 6.6 -4.4 2.2
Riversource Life Insurance Company 5.3 -0.8 4.5
Nationwide Life Insurance Company 5.2 -3.3 1.9
Western National Life Insurance Company 4.0 -2.9 1.1
Transamerica Life Insurance Company 2.8 -2.9 -0.1
John Hancock Life Insurance Co(Usa)/Group Pension 2.5 -1.2 1.3
Pacific Life Insurance Company 2.4 -3.9 -1.5
"Inflows, outflows and net flows calculated from transactions processed by DTCC Insurance & Retirement Services. Note that not
all industry transactions are processed by DTCC."
data can be used in nearly unlimited ways to meet
the specific needs of different business purposes.
Over time RIIA will create a series of on-going
presentations, called “RIIA Views” that present
information from Analytic Reporting for
Annuities in innovative and useful ways. For
purposes of the presentations in this article, some
fictional industry data was included in order to
complete the presentation without using any
company’s confidential information and to show
the DTCC information in proper context. Where
fictional data is used, its use will be noted. In all
other cases the data used is derived from actual
market transactions.
Top 10 Insurers Annuity Sales by Gross Flows,
Redemptions and Net Flows
The information shown here represents
transactions processed by DTCC that occurred in
the insurers’ non-captive channels. According to
a reliable industry source annuity sales through
non-captive channels account for about 75% of
total annuity industry sales. DTCC does not
currently capture all annuity activity in noncaptive
channels. However, Analytic Reporting
does provide a strong view of non-proprietary
distribution channels. In 2011, DTCC I&RS
processed over $156 billion in annuity
transactions for over 124 carriers and 128
distributors.
Figure 1 (above) presents the top 10 insurers
ranked by inflows processed by DTCC for the full
year of 2011. Inflows for the top insurers range
from $13.1 billion for MetLife to $2.4 billion for
Pacific Life. outflows for eight of the top ten
companies are lower than their inflows, ranging
from a high of $4.4 billion to a low of $700
million.
Net flows (inflows minus outflows) ranged from
$11.2 billion to negative $1.5 billion.
Net flows can vary among companies for a variety
of reasons which will be further analyzed by RIIA
and DTCC, including:
■ Product Type – Sales growth and persistency
may differ based on the mix of fixed vs.
variable annuities. Fixed annuity contracts
often have surrender charges or market value
adjustments that discourage redemptions;
while variable products have surrender charges,
they sometimes do not discourage contract
holders from surrendering their contracts if the
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16

VOLUME 2 , N U M B E R 2
■
■
contract holders believe that they are moving
to a superior investment brand. However, in
extended low interest rate environments such
as we are now experiencing, fixed contracts
may be less attractive and subject to being
surrendered. Variable contracts are sometimes
more difficult to sell during bear markets. RIIA
will look at sales and persistency patterns for
companies with similar fixed and variable
books of business.
Distribution Channel Selection – Carriers
sometimes find that the persistency of their
contracts differ by distribution channel,
regardless of product type. Some carriers
offer different products through different
channels, which likely contribute to different
rates of redemption. But whether the same
contracts or different contracts are offered,
persistency by channel is an important metric
for companies to track. RIIA will measure
redemptions as a percentage of gross sales by
channel.
Market Type – The type of market (qualified
vs. non-qualified) into which the annuity is sold
has a direct impact on the ability of the company
to retain assets and grow sales. For
example, redemptions are typically lower in the
qualified markets since the employers’plan provision
may not allow employees to withdraw
their assets until certain triggering events
occur. This benefit is counterbalanced by the
ability of an entire plan to leave the company
if an employer decides to retain another company
to manage the plan. In some cases the
redemptions of a company experiencing high
sponsor turnover may be higher than those of
a retail-focused annuity company. Redemptions
are redemptions, but entirely different analysis
is required for qualified and non-qualified
sales. RIIA will measure sales and redemption
patterns by type of market.
F I G U R E 2 : N O N - Q U A L I F I E D S A L E S A S A P E R C E N TA G E O F
Q U A L I F I E D S A L E S
in Figure 2 (above, right), the data shows that
qualified plan accounts have much lower outflows
than non-qualified accounts. Qualified plan
accounts made up over 90% of positive net flows
in 2011.
In addition, the data shows a trend of increasing
inflows into qualified plan accounts and
decreasing inflows into non-qualified accounts,
and that gap has been widening. Looking at the
two account types with the greatest inflows, we
can see that qualified accounts are attracting over
60% of inflows, while the share of inflows going
F I G U R E 3 : A N N U I T Y I N F L O W S BY A C C O U N T T Y P E
Looking at information from Analytic Reporting
17
© 2012 Retirement Income Industry Association®

T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
F I G U R E 4 : I N F L O W S , O U T F L O W S A N D N E T F L O W S F O R T O P 1 0 I N S U R E R S
F U L L Y E A R , 2 0 1 1 – IN B I L L I O N S
Market
Market
Carrier Inflows Share Outflows Share
Metlife Investors USA Insurance Company 13.14 15% -1.94 3%
Jackson National Life Insurance Company 10.58 12% -2.80 4%
Pruco Life Insurance Company 9.01 10% -0.69 1%
The Lincoln National Life Insurance Company 6.61 7% -4.44 7%
Riversource Life Insurance Company 5.28 6% -0.80 1%
Nationwide Life Insurance Company 5.18 6% -3.35 5%
Western National Life Insurance Company 4.03 4% -2.91 4%
Transamerica Life Insurance Company 2.83 3% -2.87 4%
John Hancock Life Ins. Co(Usa)/Group Pension 2.52 3% -1.17 2%
Pacific Life Insurance Company 2.40 3% -3.92 6%
All Others 28.69 32% -41.41 62%
90.27 -66.29
"Inflows, outflows and net flows calculated from transactions processed by DTCC Insurance & Retirement Services. Note that not
all industry transactions are processed by DTCC."
into non-qualified accounts has dropped to under
40%. The chart in Figure 3 (on previous page)
shows the trend.
F I G U R E 5 : N E T F L O W S F O R T O P 1 0 I N S U R E R S
T H R O U G H J U N E , 2 0 1 1 – IN B I L L I O N S ( $ B )
Carrier
Net Flows
Metlife Investors USA Insurance Company 11.20
Jackson National Life Insurance Company 7.78
Pruco Life Insurance Company 8.32
The Lincoln National Life Insurance Company 2.17
Riversource Life Insurance Company 4.48
Insurer No. 6 1.84
Insurer No. 7 1.13
Insurer No. 8 (0.05)
Insurer No. 9 1.36
Insurer No. 10 (1.53)
All Others (12.72)
TOTAL 23.97
"Inflows, outflows and net flows calculated from transactions processed by DTCC
Insurance & Retirement Services. Note that not all industry transactions are
processed by DTCC."
From an insurance carrier’s perspective, the
retention of assets under management is very
important. Seeing where the money is going and
where the assets are sticking helps industry
participants organize and manage their efforts.
Top 10 Insurers Annuity Sales by Inflows and
Market Share
Figure 4 (above) presents the top 10 insurers’
inflows and outflows, and their market shares as a
percentage of total inflows and outflows
processed by DTCC in the full year 2011.
Annuity market inflows are highly concentrated,
with the top 10 insurers capturing 68% of inflows.
The top three insurers – MetLife, Jackson
National and Pruco – had higher inflows and
market share than the bottom 101 insurers.
Interestingly, annuity outflows are not as highly
concentrated among the top 10 insurers, with
those companies only accounting for 38% of total
outflows. The top three insurers – MetLife,
Jackson National and Pruco – accounted for 36%
of inflows and 8% of outflows.
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18

VOLUME 2 , N U M B E R 2
Analytic Reporting allows users to drill in to the
data not only by company but also applying other
criteria like product, account type and geography.
That helps insurance companies focus and
target their wholesaling activities for greatest
effectiveness.
Top 10 Insurers Annuity Sales by Net Flows and
Market Share
Figure 5 (on previous page) presents the top ten
insurers ranked by net flows processed by DTCC
in the full year 2011. The results shown in this
chart are the logical extensions of the counter
trends operating between inflows – heavily
concentrated among the top 10 insurers – and
outflows, which are under-represented among the
top insurers. The concentration among top
insurers with inflows becomes even more
concentrated with net flows. The top three
insurers – MetLife, Jackson National and Pruco –
account for the bulk of the total net flows. This is
massive concentration among a relatively few
dominant insurers.
Single Insurer Inflows by Geography
Figure 6 (above, right) presents the inflows
processed by DTCC for a single insurer for the
full year 2011 by the geographic location of the
contract-holders who brought that insurer’s nonqualified
annuity product. The chart lists the top
ten states, ranked by the level of inflows, and then
provides one number for the combined inflows of
the other states. Even looking at geography, the
sales for this insurer are concentrated, with
average gross sales of $231 million per state for
the top ten states vs. average sales of $42 million
per state throughout the rest of the country. While
the absolute amount of inflows in other states
exceeds the inflows in the top ten states, the top
ten states are extremely productive geographic
areas for this insurer.
In Figure 7 (at right), the RIIA geographic overlay
is applied to this fictional insurer’s inflows. Each
of the top ten states is assigned to one of six
F I G U R E 6 : I N F L O W S F O R A S I N G L E I N S U R E R BY G E O G R A P H Y
F U L L Y E A R , 2 0 1 1 – IN M I L L I O N S
Owner State
Inflows
California $ 527
Florida $ 349
Texas $ 283
Pennsylvania $ 253
New Jersey $ 208
Illinois $ 150
Ohio $ 149
Michigan $ 142
Virginia $ 124
Massachusetts $ 120
Rest of states $ 1,703
This data is for illustration purposes only.
F I G U R E 7: I N F L O W S F O R A S I N G L E I N S U R E R BY G E O G R A P H Y
RIIA G E O G R A P H I C OV E R L AY, F U L L Y E A R, 2011 –IN M I L L I O N S
NORTHEAST
MID-WEST
NJ $208 PA $253
MA $120 OH $149
IL $150
MI $142
Total $328 Total $694
Average $164 Average $174
Avg. all Insurers $54 Avg. all Insurers $83
SOUTHEAST
SOUTHWEST
VA $124 TX $283
FL $349
Total $473
Average $237
Avg. all Insurers $100 Avg. all Insurers $91
WEST COAST
NORTHWEST
CA $527
Avg. all Insurers $118 Avg. all Insurers $27
This data is for illustration purposes only.
19
© 2012 Retirement Income Industry Association

T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
F I G U R E 8 : I N F L O W S , G R O S S F L O W S S I N G L E I N S U R E R BY
M A R K E T T Y P E , T H R O U G H F U L L Y E A R , 2 0 1 1 – IN B I L L I O N S
One One
Insurer’s Insurer’s
Account Type Inflows Sales Share
+ IRA $7.8699 60%
+ Non-Qualified $4.8122 37%
+ ROTH IRA $0.1514 1%
+ SEP-IRA $0.1496 1%
+ Money Purchase Plan $0.0871 1%
+ 412I Inherited IRA Plan $0.0549 -
+ Non Qual Stretch Plan $0.0093 0.071%
+ 401(k) $0.0001 0.001%
+ 403(b) $0.0009 0.007%
+ Simple IRA $0.0001 0.001%
15 Others $30 0%
TOTAL $7,769 100%
"Inflows calculated from transactions processed by DTCC Insurance & Retirement
Services. Note that not all industry transactions are processed by DTCC."
geographic segments around the country. Inflows
are summed in every segment and then an
average inflow number is calculated. The analysis
highlights superior results as groups of states and
large geographic regions like California and
Florida are shown on a comparable basis.
While the inflows for this fictional insurer are
interesting, the data that could compel some
action is the comparison of those numbers to the
average inflows for all insurers in the regions.
Therefore the average inflows for each state
divided by the number of states in the region is
included. Benchmarking an individual company’s
inflows against overall trends in each region gives
a true measure of performance, region by region,
and lets company planners know where help is
needed and resources should be allocated.
Single Insurer Annuity Inflows by Market Type
Figure 8 (at left) presents the annuity inflows for
a fictional single insurer processed by DTCC for
the full year 2011 by the type of market – retail,
contributory IRA, IRA Rollover, 401(k), etc. This
chart is, in effect, a profile of this insurer’s DTCC
book of business across the markets. Different
companies can use this profile in different ways.
Some insurers have objectives for specific
markets. They, for example, may want to grow the
Rollover IRA business and may want to see the
available inflows for that market. Other insurers
may just want to measure their current
performance against the competition.
F I G U R E 9 : VA R I A B L E A N N U I T Y C O N T R A C T S
F U L L Y E A R , 2 0 1 1 – IN B I L L I O N S
In Out Net
Company Variable Annuity Flows Flows Flows
Jackson National Perspective II 05/05 $ 5.98 $ (0.75) $ 5.23
Jackson National Perspective L-Series $ 3.53 $ (0.51) $ 3.02
Metlife USA Series VA $ 6.02 $ (0.40) $ 5.62
Metlife USA Primelite IV $ 1.50 $ (0.18) $ 1.32
Nationwide Destination B $ 2.28 $ (0.05) $ 2.23
Prudential Pru Premier Retirement VA B Series $ 4.00 $ (0.10) $ 3.90
Prudential Pru Premier Retirement VA L Series $ 2.73 $ (0.06) $ 2.68
Prudential Pru Premier Retirement VA X Series $ 1.28 $ (0.03) $ 1.25
River Source RAVA 5 Advantage Variable Annuity $ 4.10 $ (0.05) $ 4.05
River Source RAVA 5 Select Variable Annuity $ 1.33 $ (0.01) $ 1.31
"Inflows, outflows and net flows calculated from transactions processed by DTCC Insurance & Retirement Services. Note that not
all industry transactions are processed by DTCC."
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20

VOLUME 2 , N U M B E R 2
Annuity Contracts Inflows, Outflows and Net Flows
The final two charts in this article track insurers
and their leading contracts. Figure 9 (on previous
page, bottom, left) presents the inflows, outflows
and net flows of the top 10 variable contracts
processed by DTCC for the full year 2011. Note
that top contracts are concentrated among topselling
companies, with four insurers, Jackson
National, MetLife, Prudential and River Source
offering at least two contracts in the top 10 sellers.
Also noteworthy among the top selling contracts
are the relatively modest outflows, resulting in net
flows ranging from 86% to 99% of inflows.
Figure 10 (below) presents the inflows, outflows
and net flows of the top ten guaranteed contracts
processed by DTCC for the full year 2011. Note
that top fixed contracts also are concentrated
among top selling companies, with New York Life
and Western National claiming six of the top 10
selling fixed contracts processed by DTCC.
Similar observations can be made about outflows.
The modest outflows result in net flows in many
cases being at least 80% to 90% of inflows. In a
tough interest rate environment for fixed annuities
managing guaranteed product lines to this
low measure of outflows is a noteworthy
accomplishment for these insurers.
Conclusion
Using information from DTCC’s Analytic
Reporting for Annuities Service, executives can
easily access intelligence on their business and the
market that will help them make better decisions
and that will be invaluable to their business
success. Using this service, executives can watch
the competitive landscape unfold before their eyes
and respond strategically. Of course, once this
type of insight is available to some firms, no
company will want to be left behind. Going
forward, firms will want this level of insight in
order to introduce new annuity product designs
and other financial products through different
distribution channels.
Analytic Reporting provides a paradigm shift in
the way firms will be able to analyze their
business. From tracking success of sales seminars,
product design, and wholesaler effectiveness firms
will be able to make more rapid decisions and
modify their strategy while trends occur, not six
or eight months later. Add to this the
F I G U R E 1 0 : I N F L O W S , O U T F L O W S A N D N E T F L O W S O F T O P 1 0 C O N T R A C T S ,
G U A R A N T E E D A N N U I T Y C O N T R A C T S , F U L L Y E A R , 2 0 1 1
Net
Company Fixed Annuity Inflows Outflows Flows
New York Life NYL Secure Term Fixed Annuity II $ 1,180 $ (1) $ 1,179
Symetra Custom 7 $ 1,102 $ (168) $ 934
Western National WNL Chase Stable Growth 5 Yr $ 741 $ (73) $ 668
New York Life New York Life Preferred Fixed Annu $ 442 $ (302) $ 140
Pacific Life Pacific Frontiers II $ 369 $ (13) $ 356
Western National Clnts Prefrd Choice 5/3 Yr Gty $ 321 $ (60) $ 262
Western National WNL Flex 7,3 Yr Gty $ 315 $ (107) $ 208
Genworth Financial SecureLiving Adv Pro NY Fxd Annty $ 227 $ (10) $ 217
Protective Life Prosaver Secure II Fixed Annuity $ 226 $ (8) $ 217
New York Life Select 5 $ 204 $ (27) $ 177
"Inflows, outflows and net flows calculated from transactions processed by DTCC Insurance & Retirement Services. Note that not
all industry transactions are processed by DTCC."
21
© 2012 Retirement Income Industry Association®

T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
segmentation information RIIA provides and you
have a way to analyze the market on a macro and
micro level.
The annuity market is presenting opportunities
great and small for firms that know where to look.
Now, these companies can gain the information
they need to analyze their situations and seize the
opportunities that arise.
For more information about the Analytic
Reporting for Annuities and RIIA’s custom views,
please contact DTCC Insurance & Retirement
Services at 888-382-2721 or via email at
insurance@dtcc.com.
RIIA is offering member companies and others the
opportunity to join or sponsor the working group
whose participants will take the lead on
developing a variety of new views of this
information and expand even further the ways in
which this intelligence can be used in other
product lines such as mutual funds.
For more information about RIIA’s custom views
and sponsoring the working group, please contact
Elvin Turner, RIIA Research Director at 860-212-
7281 or turnerconsultllc@comcast.net. ■
Except where noted, all data presented in this
paper comes from Analytic Reporting for
Annuities from the Insurance & Retirement
Services of National Securities Clearing
Corporation, a DTCC Subsidiary. Visit
www.dtcc.com/analytics for more information or
contact your I&RS Relationship Manager.
About DTCC
DTCC, through its subsidiaries, provides clearing,
settlement and information services for equities,
corporate and municipal bonds, government and
mortgage-backed securities, money market
instruments and over-the-counter derivatives. In
addition, DTCC is a leading processor of mutual
funds and insurance transactions, linking funds
and carriers with their distribution networks.
All names of DTCC and its affiliates, and their
products and services, referenced herein are either
registered trademarks or servicemarks of, or
trademarks or servicemarks of, DTCC or its
affiliates in the U.S. or elsewhere. Other names of
companies, products or services appearing in this
publication are trademarks or servicemarks
of their owners. The Analytic Reporting for
Annuities Service data presented in this article is
copyright and owned by Insurance & Retirement
Services of National Securities Clearing
Corporation, a DTCC Subsidiary. Such data may
not be used as input data in the creation or
calculation of any index, value or other work and
such data may not be used to create any financial
instrument or investment product that is based on,
or seeks to match the performance of, values
included in such data.
DTCC and RIIA are not affiliated.
www.RetirementManagementJournal.org
22

VOLUME 2 , N U M B E R 2
Getting Income Annuities Ready for Primetime –
Creating a Market Value
BY GARY BAKER
GARY BAKER
PRESIDENT
CANNEX USA
There are more retirement planning tools and
concepts available to the financial adviser than ever
before. However, many struggle with which
concepts and products to use as more of their clients
come to them for advice on how to generate cash
flow from the savings they have been
accumulating for decades. When supporting a
growth and accumulation objective, most advisers
have the advantage of relying on planning concepts
that have existed for some time (e.g., modern
portfolio theory) as well as products that are
somewhat easy to evaluate and manage for their
clients (e.g., mutual funds). However, shifting from
savings to cash flow generation can be like
moving from basic math to advanced calculus
considering that you have to account for a number
of additional customer needs and risks beyond
what’s going on with the market.
As retirement-income concepts have evolved, so has
the awareness of certain products and programs that
can be deployed for elderly clients. Depending upon
the type of adviser – and their amount of
experience – they may rely more on packaged
programs or products that provide a range of
options or they will want to take on more
responsibility to manage a broader portfolio of raw
materials themselves. With the introduction of more
product allocation concepts for retirement income,
these raw materials often include both investment
and insurance products. The insured products
within these concepts can range from whole life
insurance to immediate annuities. Interestingly
enough, there has been a growing interest in the
latter by certain financial advisers. Thanks to a
number of factors including training and certification
programs (like RIIA’s RMA), academic white
papers and advances with marketing and education
that help get through some of the behavioral
finance concerns, income annuities have become
a product that is being considered by more
practitioners. Even as insurance carriers shift their
strategies and product mix to coincide with today’s
market realities, many have placed a renewed focus
on immediate annuities as a basic offering that can
compliment a portfolio of products sold to the
market.
So the big question still remains. If income
annuities make logical sense for consumers,
advisers and manufacturers, why isn’t there a
broader adoption? The sale of income annuities has
actually grown over the last year in comparison to
other annuity products, but theoretically this
growth should be larger.
The answer lies with the fact that income annuities
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T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
Where do immediate annuities fit in RIIA’s client segmentation matrix?
So why will advisers’ jobs be more complex for these customers? For one thing, customer needs and
risks vary depending on the overall financial situation of the retiree, not just the financial performance
of a particular product. We look at household need using tools like the RIIA Customer Segmentation
Matrix, which is shown at right.
The Matrix shows three segments
of customers – High Net Worth,
Affluent and Mass Market – in
one of three different financial
situations – Over-funded,
Constrained or Under-funded.
Inside each of the boxes are
strategies for dealing with each
customer, given their financial
situation. RIIA trains advisers on
how to use this chart, but suffice
to say here that every time you see
“Productized Income Planning
and Risk Pooling” in a box, you
should think of these types of
households as potential candidates
for an income annuity product.
2010 Client Segmentation Matrix
RIIA’s Client Segmentation Matrix is based on the Household 360
The situations differ by the comparison of the money that a customer’s needs to fund their retirement
lifestyle to the financial assets that they have at their disposal. Customers who have an abundance of
assets providing more than enough income to fund their retirement lifestyle are considered Over-funded.
Customers who have nowhere near enough assets to provide the retirement income necessary to fund
their retirement lifestyle expenses are considered to be Under-funded. Consumers in the middle who can
have the assets with proper planning of varying intensity are considered “Constrained.” The striking
insight of the chart is that customers at any level of wealth can be Constrained, requiring some level of
retirement-income planning. Advisers who offer income products can profit from understanding how
these insights affect their business and their prospecting opportunities.
In the chart when the Mass Market households are constrained, the analysis will show what incomes,
assets, liabilities and budgets contribute to those constraints. Likely the Mass Market constrained
households have very different numbers than the constrained Affluent and High Net Worth households.
The difference in the financial situations of households that are considered constrained can yield
tremendous insights into the different products and services that should be offered to the different
households.
Some insightful adviser may ask, “How can immediate annuities fit into such an analysis? They have no
market value.” That observation was true…until today.
By Elvin Turner
www.RetirementManagementJournal.org
24

VOLUME 2 , N U M B E R 2
are still a square peg in the round hole of an
adviser’s practice. Even at the consumer level, there
is still an informational void in helping an individual
(and their adviser, if they have one) make a
buying decision – similar to what Morningstar
introduced back in the 80s in the form of star
ratings to assist the evaluation process. But unlike
mutual funds, guaranteed products are often sold
and not bought since it takes a conversation or two
with an adviser to get the consumer comfortable in
making a commitment to a long term position in
return for that guarantee. Fundamentally, an income
annuity (or any insurance product for that matter)
can be a pain to deal with operationally compared
to investments and does not necessarily fit the
revenue and service model around which advisers
have grown their practice. These issues become
more pronounced as product allocation concepts
continue to place income annuities together with
investments in a retirement income portfolio.
Ultimately, this product has every right to be
“mainstream” when managing retirement objectives
for a client, but there are business barriers that still
get in the way.
In December 2010, a number of financial service
organizations came together to discuss ways to
address some of these operational barriers and
concluded that the first one to tackle would be that
of market valuation. As a result, a working
committee was formed to tackle this initiative under
the sponsorship of RIIA with representatives from
over 40 organizations including manufacturers,
distributors and service providers.
Addressing market valuation would cut across many
elements of the operational problem and potentially
have a tangible impact to adoption. One of the
biggest issues relating to valuation (or lack thereof)
is that the assets used to purchase the income
annuity disappear. They disappear from a client’s
consolidated statement, but most importantly, they
disappear from the AUM report for the adviser –
the primary scorecard for how well they are
serving the market. Considering that certain
incentives and recognition revolve around AUM,
you can imagine how sensitive some firms are to
this issue. They know that the adviser should not
be penalized for doing the right thing for their
clients.
Historically, insurance carriers have been able to
calculate certain types of values for annuitized
contracts whether it’s a statutory reserve for
accounting requirements or a commutation value
as defined as part of the product itself. However,
distributors ultimately demand something that
was more reflective of (and changed with) the
market – similar to all the other products and
holdings they support. Previously in cases where
a carrier would provide a market value – or
replacement value – it was always a proprietary
calculation. Moving forward, there was a strong
preference for establishing an industry standard so
the working committee started to work together to
define a common methodology for market
valuation as well as the technical requirements to
make it readily available.
The name Income Value was the identifier agreed
to for this standard and the methodology would
cover any annuitized asset regardless of the source
including assets from deferred annuity contracts as
well as deferred income contracts otherwise known
as longevity insurance. In practice, Income Value
is defined as the actuarial present value of
remaining benefits from an annuitized contract.
Agreeing to this definition was the easy part of the
process. The tougher part was determining the
common discount rate used for the present
valuation as well as the mortality projections.
The working committee evaluated a number of
options relative to a discount rate ranging from the
use of the U.S. Treasury yield curve to the spot rate
yield curve produced by the IRS for pension
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T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
valuations. After considerable analysis, it was felt
that the discount rate(s) used should be reflective
of the pricing and experience of insurance
companies when supporting these types of
guarantees in the market. In other words, the use
of a yield curve that was specific to the insurance
industry segment of the U.S. market. So a process
was identified where an Income Annuity Yield
Curve would be derived on a daily basis and made
available to insurance carriers who would ultimately
manage the valuation calculation for all of their
annuitized contracts. Similar to other processes in
the investment world (e.g., the Lipper Bond
Index), the top income annuity payout rates from
across the market would be compiled and averaged
from which a spot rate curve would be re-engineered
and formatted. CANNEX Financial Exchanges had
agreed to build and manage this process.
On the mortality side, the working committee agreed
on the most common mortality tables (A2000) and
improvement scales used today and to keep any
projections static.
All together, this resulted in a valuation that
would be the same regardless of the carrier that
holds the guarantee. The transmission of this new
standard will be accommodated through the
Positions and Valuations (POV) file format
supported by the DTCC starting in the fall of 2012
at which time the first group of carriers and
distributors will start implementation.
As a result, the industry will have a valuation
standard that can be applied in many ways. From
what we know today, the most immediate use will
be for AUM reporting at some of the distribution
firms. As part of a survey conducted across the
industry about a year ago on valuation, there is
virtually a 50/50 split as to whether or not
distributors will make this value available on a client
statement. Some do not want to give the
impression that income value is a cash value that
can be accessed at any time. For those that would
apply this value to client reports, a common
disclosure statement was also developed by the
working committee from which firms can take and
modify based on their own legal and compliance
requirements.
Related to external reporting, there has also been
some demand by fee-based practices to use such a
value for the billing of their services. This makes
sense since many Certified Financial Planners
(CFPs) prefer the use of non-packaged products and
would actually consider the use of an immediate
annuity over that of a deferred annuity. Some
registered investment advisers have recognized that
the placement and management of an income
annuity within a broader retirement portfolio is a
viable service that aligns with their practice and can
be operationally consistent with how they bill on
alternative assets held away.
Finally, there are also some more advanced uses of
income value that could be incorporated with
financial planning tools as well as certain tax
treatments when these types of contracts are
owned and held by certain entities.
Overall, solving for a standard market valuation is
just one of a number of items that need to be
addressed to help increase the use and adoption of
these types of guarantees in the market. Going
forward, the committee has agreed to convene on
an annual basis to review the adoption of the
standard and identify any modification that would
need to occur from time to time as the environment
warrants. ■
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VOLUME 2 , N U M B E R 2
Income from Assets: The Promise of the Future
BY LARRY COHEN AND DAVID BLANCHETT
LARRY COHEN
VICE PRESIDENT
DIRECTOR, CONSUMER
FINANCIAL DECISIONS (CFD)
STRATEGIC BUSINESS INSIGHTS
(SBI)
DAVID M. BLANCHETT
HEAD OF RETIREMENT
RESEARCH
MORNINGSTAR: INVESTMENT
MANAGEMENT DIVISION
Retirement is becoming increasingly real and
imminent to many Americans. Unlike past
generations, where many households could rely
on pensions to provide most of their retirement
income, many more among today’s (and
tomorrow’s) retirees are facing the prospect of
funding retirement on their own. This creates a
huge burden on retirees who are forced not only to
determine how much they need to save in order to
achieve a successful retirement, but also how to
generate income and deal with the associated
risks. This is a complicated task and
understanding the differences in households and
the solutions they are seeking is perhaps even
more complex.
Many households entering retirement will step
into the asset-based world, deriving a large share
of their incomes from their investment portfolios.
In order to help industry stakeholders better
understand their customers, Morningstar has
partnered with the Retirement Income Industry
Association (RIIA) to look at the balance sheets
of pre-retired and retired households to better
understand their retirement income situation. In
particular we will focus on the average amount of
income that households will receive and the
regularity, predictability and dependability of that
income stream.
Morningstar will use data from RIIA’s Retirement
Typology, a segmentation based on relevant life
stages and meaningful levels of wealth. The
typology divides U.S. households into 16
cohesive, consistent, and mutually exclusive
segments. The analysis looks at nine of the
16 segments that have the most wealth and are
nearest to the retirement years. Figure 1 (below)
shows the number of households in each of the
RIIA segments.
Morningstar’s ability to look at the assets and
income of households by segment allows it to
evaluate the very different financial situations of
FIGURE 1: MARKET SIZE OF THE RETIREMENT TYPOLOGY (MILLIONS)
Starters Builders Pre-retired Retired Total
Under 35 35

T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
FIGURE 2: ASSET RANGES OF THE HOUSEHOLDS IN RIIA AGE-WEALTH SEGMENTS
The Wealthy - The first level is the top 5% of households in each cohort. Any
household whose mean total assets place them in the top 5% for that cohort is
assigned to this resource level which we call Wealthy.
Segment
Starters
Builders
Pre- Retired
Retired
Age
Under age 35
Age 35 to 49
Age 50 to 64
Age 65+
Financial Asset Range
for the Household
$475,000 or more
$1.2 million or more
$1.9 million or more
$2.62 million or more
The Affluent - The next resource level is set at the next highest 15% of households
in each cohort, which we will call Affluent.
Segment
Starters
Builders
Pre- Retired
Retired
Age
Under age 35
Age 35 to 49
Age 50 to 64
Age 65+
Financial Asset Range
for the Household
$230,000 to $475,000
$540,000 to $1.2 million
$730,000 to $1.9 million
$900,000 to $2.62 mil.
The Mass Market Households- The next resource level is the next 50% of
households in each cohort, which we call the Mass Market.
Segment
Starters
Builders
Pre- Retired
Retired
Age
Under age 35
Age 35 to 49
Age 50 to 64
Age 65+
Financial Asset Range
for the Household
$14,000 to $230,000
$75,250 to $540,000
$104,000 to $730,000
$157,000 to $900,000
The Marginal Households - The final level is the bottom 30% of households in
each cohort who have the lowest level of assets, whom we call Marginal.
Segment
Starters
Builders
Pre- Retired
Retired
Age
Under age 35
Age 35 to 49
Age 50 to 64
Age 65+
Source: SBI’s 2010-2011 MacroMonitor
Financial Asset Range
for the Household
Under $14,000
Under $75,250
Under $104,000
Under $157,000
the households. In order to evaluate a resource
component in each of these cohorts the RIIA
segmentation divides each age group into four
levels of wealth based on their total household
assets. See Figure 2 (at left) for a breakout of the
asset levels for each segment.
One goal of the Morningstar analysis is to perform
a sort of financial ‘triage’ where we will likely
determine that many households in the top Wealth
market segment are fully able to achieve their goal
to retire and most households in the bottom
Marginal segment will be unable to even consider
retirement without a considerable change in
course. Further, most households in the Mass
Market and Affluent will require considerable
assistance and careful planning to reach their
objective. For each segment, we want to add a
delineation to separate those that, with reasonable
guidance and assistance, should be able to achieve
some semblance of their retirement goal and the
remainder who will need radical strategies in order
to even come close to achieving their objectives.
Using this analysis we can quantify the
conclusions shown in the RIIA Matrix in Figure 3
(on the following page). For example, the RIIA
Matrix shows that there is a proportion of Mass
Market, Affluent and High Net Worth households
that are under-funded, constrained and overfunded
relative to their retirement income
obligations. The Morningstar analysis will enable
us to quantify the household financial situations
that place them in those segments. In the chart
when the Mass Market households are
constrained, the analysis will show what incomes,
assets, liabilities and budgets contribute to those
constraints. It is likely the Mass Market
constrained households have very different
numbers than the constrained Affluent and High
Net Worth households. The difference in the
financial situations of households that are
considered constrained can yield tremendous
insights into the different products and services
that should be offered to the different households.
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VOLUME 2 , N U M B E R 2
F I G U R E 3 : R I I A’ S 2 0 1 0 C L I E N T S E G M E N TAT I O N M AT R I X I S B A S E D O N T H E H O U S E H O L D 3 6 0
Figure 4 (at right) provides differences between
household segments in assets and net worth across
the three groups. Affluent households typically
have approximately four times more net worth
than the Mass Market while the Wealthy typically
have more than 10 times the net worth of the Mass
Market. Not only are there significant differences
in the total net worth within each segment but also
in the types of assets that combine to create net
worth. Home equity is much closer within each
age range when compared to investible assets. For
example, while the home equity of the Wealthy
65+ segment is only three times as large as the
Mass Market 65+ segment, the investable assets
are approximately 17 times larger. This has
significant implications on potential funding
sources for retirement income and will be a key
point in our analysis.
For each of the nine segments we show three
categories of assets: Financial, Investable and
Total assets. Total assets represent all the holdings
of the households. However, while Financial and
Investable assets are two major components of
Total assets, they are not the only components.
F I G U R E 4: A SSETS A N D N E T WO RT H O F RIIA M A R K E T
S E G M E N TS ( M E A N A M O U N TS I N T H O U S A N DS)
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T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
F I G U R E 5 : T H E C O M P O N E N T S O F T O TA L A S S E T S
Combined
Type of Asset Assets Held by Spouse One Assets Held by Spouse Two Household Assets
Investable Assets •Checking, Savings, Cash •Checking, Savings, Cash Combined retail
•Mutual funds •Mutual funds investments, HSAs and
•Annuities •Annuities trust investments of
•Stocks and bonds •Stocks and bonds both spouses
•Options
•Options
•CDs
•CDs
•Other retail investments
•Other retail investments
•Balances held in health savings accounts •Balances held in health savings accounts
•Assets in trusts, 529’s, UTMA’s,
•Assets in trusts, 529’s, UTMA’s,
Custodial Accts.
Custodial Accts.
+ Financial Assets •Investable assets •Investable assets Combined financial
•401(k), 457 and/or 403(b) assets •401(k), 457 and/or 403(b) assets assets
+ Home Equity Real estate equity, with home equity in many cases is held jointly by both spouses. Combined real estate
May include the primary home, vacation homes, and investment real estate.
equity
+ Non-financial Businesses, furniture, autos, boats, Businesses, furniture, autos, boats, Combined tangible
Assets collectibles, and other tangible assets collectibles, and other tangible assets assets
= Total Assets Investable + DC Plans + real estate equity Investable + DC Plans + real estate equity Combined Total
+ tangible assets in spouse’s name + tangible assets in spouse’s name Assets
Figure 5 (above) shows all the components of
Total Assets for a household with two spouses.
The calculation of Total household assets is fairly
straight forward: retail assets plus defined
contribution assets plus real estate plus hard
assets equal Total assets. The importance of
Figure 5, particularly for a financial adviser, is
profound. First of all, advisers should quickly
realize that the investable assets they are
managing are only part of the total resources that
a household has available to fund retirement. DC
plan assets and all the other tangible assets like
real estate, businesses and collectibles may be
beyond the reach of the adviser right now, but only
for the current moment in time. Over time and
depending on the households needs, and with
some planning, all assets are fungible and
convertible to investments.
In addition, advisers will realize that only looking
at the assets of one spouse may significantly
understate the ability of that household to provide
for itself in retirement. While it is much simpler to
focus on one spouse and the accumulation of his
or her assets, the rewards of reaching both spouses
can be seen when the couple steps into retirement.
Typically, spouses who have accumulated wealth
separately before retirement will spend and save
as one unit in retirement. As new retirees put their
heads together and make consolidation decisions,
advisers can lose retail accounts at the suggestion
of spouses with whom they have had no
relationships to other retail accounts that they did
not know existed. In households with two spouses
who maintain some separation of investments,
there easily could be more than one adviser. The
Morningstar analysis will look across financial
and investable assets and at the assets of both
spouses.
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VOLUME 2 , N U M B E R 2
Assets only tell one part of the story when it
comes to retirement, since some “assets” that are
used to fund retirement are not typically
considered as “assets” when thinking about net
worth, for example Social Security. While each
retiree’s Social Security benefit could be viewed
as the mortality weighted net present value of
future cash flows, these are not included in an
individual’s typical “balance sheet.” There may be
other sources of income and assets as well. As the
concepts underlying RIIA’s RMA program lay
out, in addition to financial assets, an adviser
should consider the household’s human and social
assets as well.
Different segments will have different types of
income that affect the advice advisers may give
concerning the most suitable products to help
households reach their retirement income goals.
Figure 6 (at right) provides information about the
sources and amount of income that Retired
Affluent households receive during retirement.
When considering income it’s important to think
about the “type” of each income source. For
example, there are guaranteed income sources
such as defined benefit, Social Security or private
annuity payments. Households with high levels of
guaranteed income are unlikely to need additional
sources of guaranteed income (i.e., they’re less
likely to purchase an immediate annuity). These
households would be better served with advice on
how to manage their assets to best meet their
retirement income goals (or possibly their legacy
goals).
This analytical framework enables us to map the
behaviors and financial holdings of households in
each segment to the financial products and
services that serve their financial needs. At a basic
level, we can see how well providers have
penetrated various market segments. Also,
attitudinal data about goals, preferences, risk and
retirement will help explain the decisions
households have made and what they may do in
F I G U R E 6: I N COME SOURC ES A N D T Y P E F O R R E T I R E D A F F L U E N T
H O U S E H O L DS
Average
TRADITIONAL INCOME Amount Type
Wages, salaries, commissions, tips $46,000 Periodic
Net self-employment, business $18,000 Periodic or
or farm income
Sporadic
Average
INVESTMENT INCOME Amount Type
Investment income (net) $26,000 Periodic
Interest and dividend income $17,000 Periodic
Net income from investment real estate $44,000 Sporadic
Capital gains from sale of prop. or securities $9,000 Sporadic
Income from royalties and partnerships $13,000 Sporadic
Average
RETIREMENT INCOME Amount Type
Social Security or Suppl. Security Income (SSI) $24,000 Guaranteed
Retirement payments or pensions from
previous employer $35,000 Guaranteed
Private annuity distributions $17,000 Guaranteed
Government payments $19,000 Guaranteed
IRA or Keogh distributions $24,000 Sporadic
401(k), 403(b) or 457 distributions $17,000 Sporadic
Average
“RIGHT PLACE, RIGHT TIME” INCOME Amount Type
Inheritance $19,000 Sporadic
Trust income $14,000 Sporadic
Contrib. from persons not living in household $12,000 Sporadic
Other $31,000 Sporadic
Source: SBI’s 2010-2011 MacroMonitor
the future.
As part of RIIA’s RMI program, Morningstar will
analyze the various investment- and productrelated
sources of income, characterize these
sources of income based on the level of
consistency (e.g., periodic or guaranteed),
compare and match types of incomes with the
various expenses faced by a retiree and evaluate
the sustainability of the assets pools over time for
the households in each of the nine RIIA market
segments. This research will provide financial
services firms with a better understanding of
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specific households’ retirement-income needs and
their decision-making processes. The ability to
understand and then target specific household
groups will enable firms to identify, design, and
offer compelling and effective retirement-income
solutions for specific customer segments.
So what is the promise of the future? We see three
major positive outcomes from our work. First, we
will be able to size the current flow of retirement
income coming from the total assets of retired
American households. Second, we will be able to
compare and contrast the households in the
different RIIA market segments, showing
retirement income potential from the wealthiest
households to those of more modest means.
Finally, we will be able to put our work in the
context of different, multiple sources of income –
investments, Social Security, pensions, etc. All of
these will then be used to inform the potential for
generating retirement income from the pre-retired
market segments. Together these calculations will
help financial institutions and advisers to be
prepared to meet today’s and tomorrow’s retired
households’ income needs. ■
To contact Mr. Cohen: email lcohen@sbi-i.com or
call 609-378-5044.
Mr. Blanchett can be reached at david.blanchett@
morningstar.com and 859-492-5637.
The Retirement Management Journal is presently seeking papers authored
by practitioners and academicians for upcoming issues of the RMJ.
For submission deadlines, please
refer to the Author’s Guidelines link
on the RMJ homepage, at:
www.retirementmanagementjournal.org
All submissions will be eligible for the Thought Leadership Awards. Sponsored by
Allianz Global Investors, the Thought Leadership Award program promotes
advanced research that expands the body of knowledge in retirement-income
planning and management. The winning entry for each Thought Leadership Award
will receive $5,000. Members of the Academic Peer Review Committee serve as the
judges for the academic award and members of the
Practitioner Peer Review Committee serve as the
judges for the practitioner award.
SM
Please contact editor & publisher, Robert Powell,
at editor@RetirementManagementJournal.org
for more information.

VOLUME 2 , N U M B E R 2
How Financial Institutions Can Help Their Customers
to Remain Healthy, Wealthy and Wise
BY ANAND S. RAO, PH.D, AND RON MASTROGIOVANNI
increasing proportion of the population will be
The increasing number of people over 65, and
dependent on a shrinking working population.
rising medical costs – especially during the last year
The number of people aged 65 and over in US
of life – provide life insurers the opportunity to
is set to increase from 37 million in 2005 to 81
educate customers and the general public about
million by 2050. 1 ■ Life Expectancy Changes: Improvements
in child health, sanitation and medical advances
ANAND RAO
have steadily increased the life expectancy of
the population in U.S. and other developed
PRINCIPAL
countries. In the U.S., the average male life
PRICEWATERHOUSECOOPERS
expectancy at age 50 has increased from 23
FINANCIAL SERVICES ADVISORY
years in 1950 to 29 years in 2007. During the
PRACTICE
same time period, the average female life
expectancy at age 50 increased from 27 to 33. 2
.
In other words, the average U.S. life expectancy
is now 79 for men and 83 for women.
RON MASTROGIOVANNI
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
HEALTHVIEW SERVICES
■ Increasing Healthcare Costs: Heart disease
and stroke, the first and third leading causes of
deaths in the U.S., account for more than a third
of all deaths. The total costs for these diseases
was $444 billion or one of every six dollars
spent on healthcare in U.S. 3
For most people, the only greater fear than
outliving their assets during retirement is that the
Outliving one's assets is the greatest fear for most
costs of deteriorating health will drain their
pre-retirees and retirees, and the steady shift in
retirement nest eggs. Last-year-of-life expenses
retirement funding responsibility – from
constituted nearly 22% of all medical and 26% of
government and employers to individuals – has
all Medicare expenditures, and can be as high as
exacerbated this fear in the U.S. and the rest of the
six times the average for the rest. From 1992 to
developed world. This is occurring simultaneously
1996, mean annual medical expenditures (1996
as the number of retirees is set to reach historically
dollars) for persons aged 65 and older were
high levels thanks to:
$37,581 during the last year of life vs. $7,365 for
■ Demographic Changes: As Baby Boomers
non-terminal years.
turn 65 (to the tune of 10,000 per day), an
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T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
medical costs during retirement and help them plan
their retirement income. At the same time, they will
help many pre-retirees and retirees come to the
painful realization that their savings will be
inadequate and they will have to reduce their
standard of living – perhaps significantly – in
response. 5
Here are some sobering realities:
■ Federal entitlement programs face financial
challenges. The Congressional Budget Office
(CBO) currently estimates that, without
structural reform, entitlement spending (Social
Security, Medicare and Medicaid) and
interest payments will absorb 100% of federal
government revenues by 2025.
■ According to the 2011 Annual Report of the
Boards of Trustees of the Federal Hospital
Insurance and Federal Supplemental Medical
Insurance Trust Fund, Medicare is expected to
jump from $522.8 billion in 2010 to $932
billion in 2020 – a 78% increase in only 10
years!
■ People are living longer than they used to. The
current mortality rate for the United States is
78.7 and will rise to 81.3 by 2032. The longer
people live, the greater the strain on Medicare.
■ A recent report from Credit Suisse estimates that
healthcare comprises 33% of expenditures
for people over 60, dwarfing food and housing
(23%).
■ Since the passing of the Affordable Care Act
and the Modernization of the Medicare Act,
Parts B and D are now means-tested. For
subscribers, this means that higher incomes
equal higher premiums.
■ Premiums also vary by state of residency.
Where one retires may increase out-of-pocket
expenses by as much as 30%.
Challenges Facing Medicare
The birth of Medicare in 1965 brought, as Winston
Churchill once described, "the magic of averages
to the rescue of millions." While providing
affordable healthcare to the elderly was certainly
a noble endeavor, and has worked well for the most
part over the past five decades, the program
simply cannot continue to cover the recent
astronomical rise in healthcare costs or the 78
million Baby Boomers turning 65 (approximately
10,000 per day) who will be entering the system
over the next 20 years. Accordingly, in the not-toodistant
future, Medicare subscribers are likely to see
reduced benefits and/or increased premiums (most
likely, both); the vast majority of Boomers are
simply unprepared for the increasing out-of-pocket
expenses that await them in retirement.
Public Concerns
Survey after survey indicates retiring Americans are
deeply troubled by what lies ahead. According to
the most recent “Affluent Insights Survey”
conducted by Merrill Lynch, for the third year in
a row, Americans cite rising healthcare costs as their
greatest concern in retirement, and many are
embracing the concept that budgeting for
healthcare expenses must become the foundation
of the planning process; unfortunately, most
financial plans never address what healthcare in
retirement will actually cost. Medicare payments
end up being an afterthought – a line item in the
expense column during the planning process. This
may be why the vast majority of Americans are
under the assumption that Medicare is actually free
(or at least extremely affordable). Ultimately,
additional out-of-pocket expenses, including copayments,
uncovered medications, eye exams,
dental care, podiatry and so on, can consume the
savings of unprepared retirees.
Moreover, healthcare expenses increase
exponentially in the final two years of life, mainly
because of the cost of assisted living facilities and
nursing homes. It is estimated that 70% of
individuals over 65 will need some level of longterm
care, 6 and average expenditures can range from
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34

VOLUME 2 , N U M B E R 2
Crunching the Numbers: A Case Study
John and Mary live in Ohio, are both 55, and have been married for 25 years. They have two children out of college and are
meeting with an adviser to consider their future retirement options. Both of them are still working and receive healthcare
benefits through their respective employers. Their combined yearly income is approximately $160,000, and they plan to retire at
age 65. Mary is healthy, but John has high cholesterol, a poor diet, and no regular exercise regimen. Based on John’s lifestyle
choices, he is likely to live to age 85, five fewer years than Mary.
The financial services industry has traditionally relied on an arbitrary planning number, usually 95 or 100, when projecting
future costs. Generating a more precise planning number – one that is tailored to an individual’s disease-state and lifestyle choices
– will help create plans that focus on specific
client needs. However, we advocate using
calculations that are more directly applicable
to individual client circumstances. When
armed with a fairly accurate picture of life
expectancy, advisers can begin to assess
healthcare costs; this is especially important
because Medicare is now means tested, and
both income level and state of residency will
affect projections.
If John and Mary want to sign up for the
absolute basic Medicare coverage (Parts A, B
and D) and remain in Ohio, whose Medicare
costs are at the U.S. median, then they will
still be responsible for up to $415,840 of outof-pocket
healthcare costs throughout
retirement. However, notice how costs
increase as the income and residency
valuables are inserted.*
MAGI State Medicare Parts + MediGap + Dental,
Level A, B, and D Plan Vision, Hearing
Under
$170,000 OH $415,840 $750,400 $857,080
Under
170,000 NJ $417,170 $804,920 $946,710
$170,000 -
$214,000 OH $576,095 $910,655 $1,017,355
$170,000 -
$214,000 NJ $577,897 $964,647 $1,107,437
* Data provided by HVS Financial.
MAGI State Medicare Parts + MediGap + Dental,
Level A, B, and D Plan Vision, Hearing
Above
$428,000 FL $1,312,809 $1,700,599 $1,842,349
* Data provided by HVS Financial.
There would be a substantial increase if the
couple is in the highest income bracket in
Florida, one of the most expensive states to
retire. These figures may seem extraordinary,
but they are very real. If this evidence does
not compel advisers to discuss healthcare
with their clients, then long-term care should.
The earlier that people begin the discussion,
the less the initial investment needs to be.
Accordingly, if we return to John and Mary’s
original number of $415,840, which will
afford this middle-class couple basic
Medicare coverage, an initial outlay of
$120,000 invested in a stable product yielding
6% will cover those expenses.
MAGI State Medicare Parts A + One Year Total
Level B, D, MediGap of Long-
Dental, Vision, Term Care
Hearing (Each)
Under
$170,000 OH $857,080 $797,371 $1,654,451
Under
170,000 NJ $946,710 $1,210,750 $2,157,460
$170,000 -
$214,000 OH $1,017,355 $797,371 $1,814,706
$170,000 -
$214,000 NJ $1,107,437 $1,210,750 $2,318,187
Above
$428,000 FL $1,842,349 $882,776 $2,632,762
* Data provided by HVS Financial.
35
© 2012 Retirement Income Industry Association®

T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
$20,000 to $150,000 per year in out-of-pocket
expenses in today’s dollars.
How Life Insurers Can Help
Considering that healthcare will be the largest
single expense for most retirees, and in light of the
fact the majority of people inadequately prepare
for retirement, there is a huge need for informed
professional guidance, including on various onthe-shelf
investment options that can cover
out-of-pocket healthcare expenses.
While some firms are beginning to forge ahead in
this domain, their estimates for what is necessary
to fund healthcare – in some cases – are not backed
by medical or actuarial data and sometimes
project figures far below the experience of the
customers of financial advisers. In order for
consumers to have some idea of how much
money retirees need for health-related expenses,
a more accurate computation – one based on
clients’individual health histories – would help all
concerned.
Industry professionals can adapt by learning the
basics of Medicare and utilizing actuarial-backed
data to accurately project longevity, healthcare
costs throughout retirement and long-term care.
By doing so, advisers will be able not only to fully
serve retirees by addressing their number one
concern, but also to increase business by
motivating clients to invest in stable off-the-shelf
products that finance their healthcare throughout
retirement. This long-term solution to healthcare
costs will inevitably increase wallet share,
aggregate accounts and improve investor
confidence.
There is some hesitation among individual
advisers to accept this new role, because
navigating the Medicare bureaucracy to inform
clients about healthcare expenses in retirement can
be daunting. However, advisers can more
effectively meet client needs by simply becoming
familiar with basic features of the program and
remaining up-to-date on legislative changes
related to healthcare. Advisers can demonstrate
their concern for clients by asking about their
health history and medicines they currently take.
Such an inquiry would reveal if a client’s
prescription costs are reaching the
doughnut hole, in which expenses are fully out of
pocket.
Conclusion: Helping Clients, Benefitting Advisers
These numbers are not meant to scare clients, but
to help insurers engage them in the very
important conversation of saving for healthcare
costs. By providing them with this information,
advisers will help clients answer vital lifestyle
questions, such as “Should I wait to retire?” and
“Will retiring to a certain state be too expensive?”
This proactive approach will help retirees make
informed decisions about embarking on their
golden years confidently and securely.
Good health is the foundation of a successful
retirement. Without it, the size of homes, worth of
luxury items and length of vacations become
irrelevant. Thus, institutions and advisers that place
healthcare costs first will ultimately win the
battle to aggregate Baby Boomers’ assets. The
insurance industry has the products, ranging
from mutual funds to annuities to life insurance,
which can effectively address an issue that will
affect almost all Americans. If advisers integrate
healthcare cost planning into their business
practices, practically all clients will have a good
idea of the financial outlay required to cover
insurance premiums related to medications, tests
and doctor visits. ■
www.RetirementManagementJournal.org
36

VOLUME 2 , N U M B E R 2
Footnotes:
1 US Population Projections 2005-2050, Pew Research Center, February 11, 2008
2 Today's Research on Aging; National Institute of Aging, Issue 22, August 2011
3 Heart Disease and Stroke Prevention - At a Glance 2011, Center for Disease Control and Prevention, 2011
4 Medical Expenditures During the Last Year of Life: Findings from 1992 to 1996. Health Services Research, 2002.
5 Insurance 2020:Turning Change into Opportunity, PwC, December 2011
6 "Long-Term Care Insurance: A Piece of the Retirement & Estate Planning Puzzle." The Prudential Insurance Company of America, 2011
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October 4-5, 2012
Boston, Massachusetts
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VOLUME 2 , N U M B E R 2
Defined Contribution Retirement Plan
Participants on Retirement
BY RONALD L. BUSH
RONALD L. BUSH
FOUNDER AND PRINCIPAL
BRIGHTWORK PARTNERS
Only 33% of employed individuals age 21
through 64 participate in a defined contribution
(DC) plan. 1 Those that do have household income
(HHI) nearly double that of the general
population ($90,000 median HHI compared to
$50,000); they are much more highly educated
(49% with a four-year college degree or better
compared to 28% of the population at large). 2
Altogether, DC plan participants are a favored
group, in a relatively good position to plan for and
achieve a comfortable retirement. This paper looks
at their attitudes and behavior regarding
retirement, their perceived retirement readiness,
expected sources of retirement income and their
interest in an in-plan guaranteed retirement
income option. Except as noted, cited data was
captured in our late 2010 survey of more than
1,100 DC plan participants, structured so that
findings are projectable to the universe of all such
participants.
Without question there is an overriding degree of
anxiety and pessimism that is unprecedented
over the period we have been measuring it in
comparable surveys since 2000. And that almost
certainly is a legacy of the 2008-2009 economic
and financial markets meltdown, the ensuing
anemic and “jobless” recovery to date and a
generalized lowering of expectations that seems
to have set in like a cold fog. Job vulnerability
feeds the anxiety with 36% of all participants very
or somewhat concerned about losing their job
within the next 12 months. Among the
pre-retiree group, those age 50+, this rises to 43%
(see Figure 1, below).
Economic and employment anxiety leads in turn
to deferred retirement dates with 33% of all
F I G U R E 1 : Q . - H O W C O N C E R N E D A R E YO U T H AT YO U M AY L O S E
YO U R J O B I N T H E N E X T 1 2 M O N T H S ?
< 50 28% 38% 27% 7%
50+ 17% 40% 30% 13%
Not concerned at all
Somewhat concerned
Not very concerned
Very concerned
F I G U R E 2 : Q . - I N T H E PA S T 1 2 M O N T H S H AV E YO U
C O N S I D E R E D D E L AY I N G YO U R R E T I R E M E N T B E YO N D YO U R
O R I G I N A L TA R G E T A G E , O R H AV E N ' T YO U ?
< 50 25%
50+ 55%
39
© 2012 Retirement Income Industry Association®

T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
F I G U R E 3 : Q . - G I V E N T H E R E T I R E M E N T S AV I N G S YO U H AV E I N P L A C E R I G H T N O W A N D T H E R AT E AT W H I C H YO U
A R E A D D I N G T O T H O S E S AV I N G S , W H I C H O F T H E S TAT E M E N T S B E L O W D O YO U E X P E C T W I L L B E T R U E F O R YO U I N
R E T I R E M E N T ?
You will work at least part time in retirement
53%
You will have to reduce your standard of living
45%
You will have enough money to pay for health care
You will live as well or better as you did when you were working
You will run out of money
25%
30%
33%
You will be able to help out younger family members with tuition or housing expenses
You will be able to leave money to family members or charities
You will be in a position to travel extensively
17%
16%
14%
F I G U R E 4 : Q . -W H AT ' S YO U R B I G G E S T F I N A N C I A L W O R RY R I G H T N O W-T H E P R O B L E M T H AT K E E P S YO U AWA K E AT
N I G H T ?
Just keeping up with your monthly expenses
Saving enough for your retirement
Credit card debt
15%
17%
19%
13%
16%
24%
Long-term care for yourself or your spouse when you need it
7%
13%
Paying college tuition for your kids
2%
7%
Your health care expenses apart from catastrophic illness
The expense of catastrophic illness
Paying the mortgage and taxes on your home
7%
5%
6%
4%
5%
15%
Saving to buy a home
Long-term care for your parents when they need it
0%
4%
3%
3%
Total
50-64
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40

VOLUME 2 , N U M B E R 2
F I G U R E 5 : Q . - P E O P L E S AV E F O R D I F F E R E N T R E A S O N S .
I N D I C AT E T O W H AT E X T E N T I T I S A S AV I N G S O B J E C T I V E F O R YO U .
F O R E A C H O F T H E S AV I N G S O B J E C T I V E S B E L O W, P L E A S E
Retirement
40%
62%
Paying down debt
26%
40%
Saving for unexpected expenses apart from health care
31%
29%
Saving for health care expenses
25%
63%
A major purchase or expenditure at some point in the future
A child’s education
12%
15%
24%
22%
Total
65+
F I G U R E 6: Q.-HOW M U C H AT T E N T I O N D O YO U PAY TO E AC H O F THE FOLLOWING ASPECTS OF YOUR
(401(K)/403(B)/457) PLAN?
Your balance
41%
56%
How well each of your funds is performing
28%
40%
How your account is allocated among different types of investments
25%
31%
How much income your account might generate for you in retirement
Information on the investment and administrative fees you pay
21%
19%
24%
35%
Total
50-64
participants saying they have considered within
the past 12 months delaying their retirement
date beyond the original target age, increasing to
55% among participants age 50+ (see Figure 2, on
page 39). Of course, the definition of “retirement”
is in a state of flux – 53% of participants expect
to work at least part-time in retirement.
Among the most troublesome findings, 45% of
participants expect a reduced standard of living in
retirement while only 30% expect to live as well
or better as when working (see Figure 3, top, on
previous page).
There is widespread concern about health care
costs and the potential burden of long-term care
– people know they are expensive, potentially
crushingly so, and there is great uncertainty as to
how high is high, what to prepare for and how to
do it. These concerns naturally are magnified
among the 50+ pre-retiree group of participants
(see Figure 4, bottom, on previous page).
41
© 2012 Retirement Income Industry Association®

T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
FIGURE 7: Q.-APPROXIMATELY WHAT PERCENTAGE OF YOUR
HOUSEHOLD INCOME IN THE FIRST FIVE YEARS YOU ARE RETIRED DO
YOU EXPECT THIS SOURCE TO PROVIDE?
Total 401(k) 403(b) 457
% % % %
401(k)/403(b)/457 plan or other type
of tax deferred defined contribution
retirement savings plan provided
through your workplace 35 36 31 29
Social Security 22 23 17 13
Income from personal savings, inc.
Individual Retirement Accounts (IRAs) 14 15 9 7
Earnings from employment, inc.
self-employment 10 9 12 15
Defined benefit pension plan, inc.
cash balance plans 6 4 16 19
Fixed or variable annuities you
purchased yourself 4 4 3 2
Income from an inheritance 3 3 3 1
Other retirement plans provided
through your workplace 3 2 7 11
Income from the sale of your
primary residence 2 2 1 1
FIGURE 8: Q.-THINKING REALISTICALLY, IN TODAY’S DOLLARS, WHAT
WOULD YOU LIKE YOUR HOUSEHOLD INCOME TO BE IN RETIREMENT?
Total 18-34 35-49 50-64 65+
Average Target
Retirement Income
($ in thousands) $84 $85 $88 $75 $82
Average Household
Income
($ in thousands) $105 $93 $110 $108 $137
Replacement Ratio 80% 91% 80% 69% 60%
More encouraging, commitment to the
importance of saving for retirement remains
remarkably strong, even among younger
participants – 62% of all participants say it is a
major savings objective, rising to 87% among
those ages 50-64. Of note, among those age
65+, still in the workforce and contributing to a
DC plan, there is a dramatic shift in savings
objectives, with funding health care expenses
replacing retirement as the single most important
objective (see Figure 5, top, on previous page).
In monitoring various aspects of their DC plan,
participants pay the greatest attention to their
account balances and fund performance while
paying least attention to the fees they pay. We
imagine that attention paid to fees will increase
in 2012 after implementation of new
participant-level fee disclosure regulations.
Unsurprisingly, those ages 50-64 pay more
attention to everything with the biggest bump
coming to the retirement income potential of their
plan balances (see Figure 6, bottom, on previous
page).
Across the board, participants expect their DC plan
to represent the most important source of
anticipated retirement income – that is highest
among 401(k) participants, characterized by
limited defined benefit (DB) plan coverage, and
lowest among 457 participants with more
extensive DB coverage from their public sector
employers (but even 457 participants expect a
greater share of retirement income from their DC
plan(s) than DB plans (see Figure 7, top, left).
On average, participants are expecting to replace
80% of their working income in retirement, in line
with the replacement ratio often used as a rule of
thumb guideline by financial advisers (see Figure
8, bottom, left). Ominously, only 17% are “very
confident” that they will achieve that ratio.
Some 20% of participants would be very interested
in directing at least part of their DC plan
contributions toward generating future guaranteed
income. There is greater interest among 401(k)
participants, i.e., those without a DB plan (see
Figure 9, top, next page).
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42

VOLUME 2 , N U M B E R 2
Interest in an in-plan guaranteed income feature
is not much affected when told that there is a
significant extra cost, in this case 1% of account
value. Interest is greatest among lower income
participants and declines with rising household
income. Curiously, interest is greatest among
mid-career participants and declines with age (and
proximity to retirement). Several observers have
hypothesized that this phenomenon might be
due to the greater availability with increasing age
of a meaningful DB plan benefit, be that an active
plan with a current employer, a frozen plan or a
legacy plan with a former employer, however, the
data do not bear this out, suggesting an
alternative hypothesis: that the closer one gets to
retirement the harder and more clear-headed one
thinks about these things, leading to the
conclusion that the appeal of purchasing
guaranteed income within the DC plan holds up
less well under a more critical look (see Figure
10, bottom, right). ■
For more information visit our website at
www.brightworkpartners.com or contact Ronald
Bush, rbush@brightworkpartners.com, or
203-487-2000.
FIGURE 9: Q.-HOW INTERESTED WOULD YOU BE IN CONTRIBUTING TO
AN INVESTMENT OPTION WITHIN YOUR (401(K)/403(B)/457) PLAN
THAT INSTEAD OF ACCUMULATING AN ASSET BALANCE FOCUSES MAINLY
ON GENERATING A GUARANTEED MONTHLY INCOME IN RETIREMENT?
Total
401(k)
403(b
457
7% 21% 52% 20%
7% 21% 51% 22%
8% 24% 51% 17%
11% 15% 63% 11%
Not interested at all
Somewhat interested
Not very interested
Very interested
FIGURE 10: Q.-HOW INTERESTED WOULD YOU BE IN CONTRIBUTING TO
AN INVESTMENT OPTION WITHIN YOUR (401(K)/403(B)/457) PLAN
THAT INSTEAD OF ACCUMULATING AN ASSET BALANCE FOCUSES MAINLY
ON GENERATING A GUARANTEED MONTHLY INCOME IN RETIREMENT?
Total
18-34
7% 21% 52% 20%
4% 24% 53% 19%
Endnote:
1 EBRI, 2009 data
2 Current Population Survey, 2009
35-49
50-64
65+
8% 16% 52% 24%
5% 27% 53% 15%
57% 17% 16% 10%
< 50
50+
6% 20% 52% 22%
10% 26% 49% 15%
Not interested at all
Somewhat interested
Not very interested
Very interested
43
© 2012 Retirement Income Industry Association®

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VOLUME 2 , N U M B E R 2
What Happened to My Retirement?
BY LARRY COHEN
LARRY COHEN
VICE PRESIDENT
DIRECTOR, CONSUMER
FINANCIAL DECISIONS (CFD)
STRATEGIC BUSINESS INSIGHTS
(SBI)
It wasn’t supposed to happen this way.
Growing up in the 1950s, I never thought about
retirement. By the time I got through school, the
1960s were over and it was enough to just find a
decent job. It took me most of the ‘70s to get a
real job with benefits, two weeks paid vacation,
health care (not that I cared in my 20s),
retirement savings and an annual salary of $6,900.
Is it any wonder that when I changed jobs during
most of the early ‘80s I just took the money out
of my retirement plan and didn’t roll it over into
an IRA? I mean, the penalties and taxes
really didn’t amount to anything.
But by the middle of the ’80s, I got serious. My
father passed away at the ripe old age of 62 and in
my 30s I began to realize that I had to grow up. I
met a girl, got married, had kids and bought my
first house. I opened an IRA and started to save
enough in my 401(k) to match my employer’s
contribution. That’s also when I first started to
think seriously about retirement. But my first
thoughts weren’t that positive. I mean, I was 44
when I had my second child, and it wasn’t too
difficult to add 22 years until she got through
college and I would be 66, just four years older
than the age at which my father died. The most
likely scenario was that I would pass away just
when I finished paying for her college. What I
really needed was life insurance, not retirement
savings!
During the 1990s I saw real increases in my
retirement savings because I had put everything
into an S&P 500 index fund. Since I wasn’t
planning on making it past my 60s, I figured I
could take plenty of risk. My term life insurance
meant that if something happened to me, my wife
and kids would be OK. I even shifted into
emerging markets in the mid-1990s, just in time to
lose a little to the Long-Term Capital debacle. I
managed to shift it back into an S&P index by the
end of the decade, just in time to watch it shrink in
the early 2000’s. It was around 2006 when the
equity I had in my house had gone up so much I
took out a home equity line of credit (HELOC) to
fix up the house. My wife and I figured we would
be staying there while we put the kids through
college.
The home repairs cost almost twice the original
estimate and it took nearly a year to finish the
work, but by 2007 the place looked great and its
assessed value had gone up more than what we
paid. Sure the taxes were higher, but the way
things were going, by the time the kids were done
with college our house would be worth so much
more than we owed that we could sell it, pay off
all the debt and actually have a decent chunk
leftover for jumpstarting our retirement. I began
to imagine what it would be like to retire,
assuming I lived that long. I mean, if I could just
keep working four or five years after the kids were
gone, I might have a decent retirement. I would
put it into the market and when it was time to
retire, maybe I would buy an annuity or
something.
45
© 2012 Retirement Income Industry Association®

T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
FIGURE 1: TOTAL AGGREGATE ASSETS –COHORT TREND
Source: The MacroMonitor. All asset values are adjusted to 2010 dollars.
That was the last time I actually thought I might
retire.
You can guess what happened. My house lost over
30% of its value – the payments for the mortgage
and the HELOC are a huge burden. We can’t seem
to qualify for refinancing since my wife lost her
job. That’s not as bad as it sounds because it gives
her more time to look after her mother who’s
started to go downhill. The good news is that my
son got into one of the best schools in the country;
the bad news is that it’s the second most
expensive school in the country. Don’t ask about
my retirement accounts. They had barely made it
into six figures before the market crashed. Now
they’re stuck in the high five figures and I moved
everything into bond funds and money markets.
My employer is no longer matching any
contributions and I’ve cut back my contributions
to less than 4%. Oh, and now I have to pay for my
health insurance. My employer says it’s only 40%
of the total cost, but my out-of-pocket goes up
every year. I guess I’m still in the middle class as
my income is over $100,000, but we’re eating
more chicken than steak, more beans than
chicken, and we rarely eat out.
Retirement once seemed almost within reach, but
now it is a distant dream. I don’t have enough for
anyone to even be interested in helping me
manage my retirement. My plan now is to keep
working until I die. I guess there will be some
Social Security, although the way the politicians
are talking it sounds like I can’t rely on that. My
wife is going to have to keep working – she’s still
looking for a job. Of course, if I don’t die, it isn’t
much better. I just get to work longer. The thought
that I might have a retirement as a life-of-leisure
is long gone.
Does this sound familiar? The fact is that
retirement is a middle-class problem. The wealthy
and the poor have no problem with retirement:
The wealthy will retire, the poor won’t – no
problem! But, for the vast number of those in the
middle, the other 79%, retirement is a real
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FIGURE 2: INVESTABLE ASSETS, REAL ESTATE EQUITY & RETIREMENT ASSETS –BOOMERS TREND
Source: The MacroMonitor. All asset values are adjusted to 2010 dollars.
problem – and the questions of if, when and how
we retire are huge unknowns. To make matters
worse, most of the examples of retirement –
our parents, media portrayals and financial
institutions’ marketing – don’t seem realistic given
our resources and responsibilities. We need help
to lay out the real choices, trade-offs,
challenges and opportunities that face us (see
Figure 1, on previous page).
Unlike 20 years ago, Boomers have more of the
total (financial, investable, retirement and liquid)
assets now. Once you eliminate the top 1% and
the bottom 20%, the 79% that remain (37 million
households) have $20 trillion in assets with an
average of $545,000 each. These are the people
who really need help, and lots of it, right now. But
the help they need, and the way they feel about
financial institutions and professionals, is very
different from the prior generation and even from
10 years ago. Although trust in institutions and/or
intermediaries goes up with age, the trend for both
is down over the past two decades. The gap is
larger for the Boomers than their elders. (The gap
for Gen X/Y is even greater, but that’s a story for
another day.)
Real estate may not be the first concern of a
financial adviser (or even the second or third!),
but for most households, especially Boomer
households, it remains foremost. On both the asset
and debt sides, the home remains the largest part
of the balance sheet, despite depressed values. The
weak and degenerating state of the real estate
market is the primary reason for the current
economic malaise and why households have
changed how they look at their retirement. It used
to be that households thought of their home as the
nest egg. As you can see from the chart above, the
average amount of equity that Boomers have in
their real estate peaked in 2006 and has been
declining ever since. Economists believe that we
haven’t seen the bottom yet. And nearly 60% of
all Boomer homeowners still have debt
outstanding on their homes (see Figure 2, above)!
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FIGURE 3: OTHER BOOMERS’ TRENDS
Source: The MacroMonitor.
Although their retail investable assets have
stagnated since 2006, Boomer households can
take some solace in the fact that their average
retirement assets continue to grow. And, a third of
all Boomer households have a fully vested
pension plan. However, these numbers distort the
diversity of desperate situations that Boomers find
themselves in right now. With a small group of the
leading edge Boomers either in or rapidly
approaching retirement, many if not most of the
other Boomers are feeling increasingly depressed
as their chance at retirement is slowly
disappearing farther and farther into their rapidly
aging futures (see Figure 3, above).
As the oldest Boomers reach 65 years old, the
(more successful) leading edge is working less.
Since 2006, significantly fewer Boomer
households are working each year with more than
five million Boomer households already retired.
The number of Boomer households that say they
are retired will continue to grow in spite of the
economy, although the number of these retired
households that are continuing to work, or are
seriously thinking about returning to work, is
increasing.
Another demographic shift among Boomers,
starting in 2006, is that the number of Boomer
households with dependent children (the type you
can deduct on your income taxes) has dropped
significantly. Unfortunately, many of these
‘children’ are NOT moving out of the home. And
even among those that have moved out, some are
moving back in while others remain on the
monthly ‘pay-rent-al payroll,’ even when it means
the parents are putting their own retirement in
jeopardy.
There are other responsibilities, as the chart above
shows, where Boomer households are becoming
financially responsible for other adults. It is
surprising to learn that less than a third (30%) of
these dependents are from an older generation.
The vast majority (61%) are of the same
generation as the Boomer household! What’s
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FIGURE 4: TRUST IN FINANCIAL INSTITUTIONS & INTERMEDIARIES, COHORT TREND
Source: The MacroMonitor.
more, one out of six of these dependant adults is
from a younger generation. Many of these
dependents will outlive the responsible household.
In addition, over a quarter (27%) of all Boomer
households have been separated or divorced (more
than Gen X/Y 14% or the Silent/Greatest 19%)
creating complex family structures with additional
responsibilities that might complicate retirement
plans.
Any discussion of how the demographic trends
are different from prior cohorts would not be
complete without acknowledgement that most of
Boomer households have two heads who have
worked or are working – which means two
incomes, two sets of retirement accounts and two
different timelines. Of the 55% of Boomer
households with two heads, 65% of the women
and 75% of the men are still working. Men tend to
marry younger women, women tend to live longer
than men and women tend to have more career
interruptions. All of which suggests that the
chances of both heads retiring at the same time is
significantly less than among prior generations. In
addition, since retirement tends to happen TO
people more often than people actually retiring on
a planned date, many static retirement plans will
need to be adjusted. What can a pre-retiree or an
adviser do when so much of the traditional
retirement planning and products were built
during an era of greater demographic simplicity?
Even if there were an accurate understanding of
current retirement needs, with well-designed
products and services coupled with readily
available expertise, it wouldn’t do much good as
Boomers’ trust in financial institutions and
professionals continues to erode. At the critical
time when Boomers need even more help, their
trust in the very places and people from whom
they would get this help has diminished
significantly (see Figure 4, above).
All of these trends, some in place for decades,
others more recently, have come together at this
moment to necessitate a total redefinition of
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FIGURE 5: REDEFINED RETIREMENT LIFESTAGES, SILENT/GREATEST VS. BOOMER COHORT TREND COMPARISON
Source: The MacroMonitor. Base=Household head 55 or older with no dependent children at home
retirement. Changing demographics, economic
necessities and increasing life expectancies will
force the majority of Boomers to alter the very
nature of retirement. We tend to forget that
retirement was only ‘invented’ in the 1930s as a
way to encourage older workers to leave the work
force so younger men could find a job. We have an
almost identical situation today where the
Boomers are doing everything they can to hold on
to their jobs while the youngest generation, the
Millenials, are having a hard time finding any
decent paying jobs, much less starting a career.
We need to ‘Reinvent Retirement’ to make it
possible for the other 79% of us to retire. The key
for doing this requires that we answer a familiar
question, “What do we want to ‘be’ when we grow
up?” Although they may not have enough saved
up to live the retirement life of luxury they
envisioned, many Boomers do have some assets.
Many are physically fitter than their parents were
at this age, affording them the choice of
continuing to work or engage in other activities.
And we know that the chances of not outliving
those assets go up the longer one continues to
work and delays drawing them down. Boomers
are the most educated cohort (so far) and have
spent their lifetime developing various skills and
expertise, so why not try and keep working doing
what you want, like, enjoy, whatever, as long as it
provides enough income to live on?
There is some urgency to start redefining
retirement now and not wait until things get
better. First, it is unclear when things are going to
get better and time is wasting – every 12 months
we get one year older. Second, unlike earlier life
stages where one could go into them unprepared
and make it up as they go (and Boomers are
notorious for not preparing for their futures),
Boomers’ ability to make decisions is only going
to get worse, until they may not be able to make
them at all (one’s mental abilities tend to decline
once one passes 60-years old). If they don’t have
their financial lives setup and running smoothly, it
is going to be their children’s or the state’s
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problem. But the most urgent reason for starting to
redefine retirement now is that there is a
tremendous opportunity to continue to accumulate
Boomer assets and generate fees by helping them
to navigate the uncharted territory of how
retirement is changing (see Figure 5, on previous
page).
The first step on this journey is revolving
retirement. In the new world the vast majority of
Boomers will not go straight to retirement. They
will transition first into a ‘revolving retirement’
phase. The easiest way to think about this life
stage is to imagine the line between pre-retirement
and retirement expanded into its own life stage.
Households may cross back and forth between
working and not working, transition from full time
to part time, downscale their life style, wait for
their spouse to finish working, pursue other
endeavors, volunteer, hobbies for profit, etc. –
whatever enables them to delay having to draw
down their limited resources in full retirement.
Revolving retired households have one foot in
retirement and one remaining vocationally active,
with their financial needs reflecting aspects of
both and neither. The fact that this life stage is not
static but constantly changing creates more
challenges. For example, sometimes these
Boomers may live off their assets and at other
times they may want to add to their retirement
accounts. Also, many of these revolving retired
may start their own businesses, so they will need
plenty of new and different financial services and
advice. Regardless of what they decide to do,
these revolving retired Boomers are going to need
help and lots of it to solve their problems, combine
existing products and services and bend them
to their needs.
The revolving retired segment will grow and
eventually dominate the majority of Boomer
households as they travel the economic
uncertainties of the next decade and eventually
achieve a more traditional retirement. The answer
to the question, “What Happened to My
Retirement?” is that it grew up. Retirement, as we
have come to know it, was designed for people
from the 20th century, with its shorter life
expectancies, structured households, well defined
gender roles and well funded pensions.
Retirement in the 21st century will have to be
different for most of us. Unfortunately, there are
no easy answers or pre-established ‘rules of
thumb’ for meeting the revolving retired’s
financial needs. Those financial institutions and
professionals who identify, recognize and satisfy
the financial needs associated with this new life
stage will find a receptive marketplace and
significant success. ■
To contact Mr. Cohen: email lcohen@sbi-i.com or
call 609-378-5044.
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Can we predict long-run economic growth?
BY TIMOTHY J. GARRETT
TIMOTHY J. GARRETT, PH.D.
ASSOCIATE PROFESSOR
DEPARTMENT OF ATMOSPHERIC
SCIENCES, UNIVERSITY OF UTAH
PRESIDENT
FALLGATTER TECHNOLOGIES
Abstract
For those concerned with the long-term value of
their accounts, it can be a challenge to plan in the
present for inflation-adjusted economic growth
over coming decades. Here, I argue that there
exists an economic constant that carries through
time, and that this can help us to anticipate the
more distant future: global economic wealth has a
fixed link to civilization’s total capacity for power
production; the ratio of these two quantities has
not changed over the past 40 years that statistics
are available. Power and wealth rise equally
quickly because civilization, like any other
system in the universe, must consume and
dissipate its energy reserves in order to sustain its
current size. One perspective might be that
financial wealth must ultimately collapse as we
deplete our energy reserves. However, we can also
expect that highly aggregated quantities like
global wealth have inertia, and that growth rates
must persist. Exceptionally rapid innovation in the
two decades following 1950 allowed for
unprecedented acceleration of inflation-adjusted
rates of return. But today, real innovation rates are
more stagnant. This means that, over the coming
decade or so, global GDP and wealth should rise
fairly steadily at an inflation-adjusted rate of about
2.2% per year.
Introduction
Our financial accounts seem to change
unpredictably according to the actions of
individuals, organizations and governments.
Because the range of human behavior can be so
diverse and out of our control, it seems that there
is an exceptionally broad range of future societal
outcomes. Anticipating long-term economic
conditions anything more than a year away seems
daunting at best.
For atmospheric scientists like myself,
forecasting future human behavior becomes
relevant where the goal is to provide society with
forecasts of climate change. Through the
combustion of fossil fuels, our economic
activities have been slowly increasing
atmospheric greenhouse gas concentrations 1 .
Consequent changes in climate patterns remain
modest. But, perhaps several decades from now,
global warming will become an important drag on
economic growth 2 .
For current and future retirees, the issue is more
about anticipating inflation-adjusted rates of
return for their accounts, sometimes as much as a
decade or more ahead. While, diversification can
help financial portfolios to weather short-term
fluctuations in market valuations, the optimal
strategy for the longer term is less clear. For
example, regardless of investment strategy, Baby
Boomers have generally prospered from a rising
economic tide that has lifted most boats over the
past half-century. Yet many worry that such
extraordinary overall gains cannot persist
indefinitely. All tides subside. Broad economic
gains can be lost.
Are we confined to hoping for the best but
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T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
FIGURE 1: THE RATIO OF POWER TO WEALTH
Since 1970, global wealth as defined by Eq. 2 (blue), global power consumption
(red), and the ratio of power to wealth (black). Wealth is referenced to 100
in 1970.
preparing for the worst? Or can we at least plan
ahead for the future by making constrained
predictions for where our net worth is headed? In
a recent paper, I proposed that we can, provided
that we are willing to take a broader view by
considering slow changes in the economy as a
global whole 3,4 .
A Link Between Economics and Physics
By applying physical reasoning I developed an
argument that civilization’s fiscal wealth has a
fixed link to its overall rate of primary energy
consumption, independent of time. Observations
seem to support this hypothesis to a remarkable
degree (see Figure 1, above). For retirees, the
implication is that global wealth will continue to
rise for as long as power consumption can
continue to grow. Otherwise, if resources ever
become so constrained that consumption falls,
global wealth must enter a phase of collapse.
Before elaborating further on this economic
growth model, it is worth comparing it to
traditional macro-economic models that focus on
human labor and creativity as the motive
economic forces. Almost all economists treat
“human” capital, or labor, and “physical” capital
as two totally distinct quantities. Labor and
capital combine in a complex way to enable
economic production. A small part of economic
production is a savings that can be carried into the
future as added physical capital. But most
production is siphoned away by people through
their consumption of such things as food and
entertainment. Once something is consumed, it
has no potential to influence future economic
activities.
While this model is certainly logical, from the
standpoint of physics, it seems strange because it
appears to both ignore and violate the most
universal of laws: the Second Law of
Thermodynamics. The Second Law is familiar to
many for its statements about entropy production.
Perhaps the best known is that the universe, taken
as a whole, inescapably slides towards increasing
disorder.
But the Second Law also demands that nothing
can do anything without consuming concentrated
energy, or fuel, and then dissipating it as unusable
waste heat. For example, the Earth “consumes”
concentrated sunlight to power weather and the
water cycle, and then radiates unusable thermal
energy to the cold of space.
Like the weather in our atmosphere, all economic
actions and motions, even our thoughts, must also
be propelled by a progression from concentrated
fuel to useless waste heat. The economy would
grind to a halt absent continued energetic input.
Buildings crumble; people die; technology
becomes obsolete; we forget. Civilization must
constantly consume in order to sustain itself
against this constant loss of energy and matter.
So, for example, we as individuals consume the
energy in food at an average rate of about 100
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watts. This sustains and builds the joint
activities of our brain, heart, lungs and other body
functions. We must keep eating to regenerate dead
cells and offset the constant loss of heat through
our skin.
As a whole, civilization is no different, except that
after centuries of growth, it is rather large and
wealthy. Today, sustaining all of our activities
requires continuous consumption and dissipation
of about 17 trillion Watts of power, or the
equivalent of 17,000 one Gigawatt power plants.
We burn fossil fuels, split uranium nuclei and tap
the potential energy in rivers, sunlight and wind.
About 4% of this energy sustains our 7 billion
bodies. The rest powers our agriculture, buildings
and machines. Once consumed, all energy is
ultimately dissipated as waste heat. If energy
consumption ever ceased, our machines would
stop, and we would all die. Certainly, economic
wealth would be zero.
Treating the Economy as a Global Whole
The idea that the economy is sustained by power
consumption has certainly been discussed by
others 5 . However, there is a particularly
beautiful corollary of the Second Law whose
implications have largely been missed. This is the
statement that nothing can be isolated: all of space
and time are linked. Nothing can happen
spontaneously, and all actions from the past have
some influence on the present and future. Equally,
no sub-component of the universe can be
completely isolated from interactions with any
part of the rest. However, remote or slow the
interactions may be, all parts are connected to and
interact with all others.
The implication for society is perhaps best
expressed by the Elizabethan poet John Donne,
“No man is an island, entire of itself. Each is a
piece of the continent, a part of the main.”
Through international communications and trade,
ourselves, our ideas, education and relationships
all form a vibrantly interacting and changing
whole that is completely integrated with our
transportation routes, communication networks,
factories, buildings and databases.
In other words, all elements of civilization work
together. No matter how distant, no element of
economic production can be isolated from any
other. We are all part of a vibrant organism we call
the global economy. A portion of real production
cannot simply disappear due to "consumption" by
humans, because humans are inextricably linked
to the rest of the organism’s overall structure.
Neither can consumption vanish to history. Rather,
power consumption that sustained us against
dissipation and decay in the past, nurtured us
forward so that we continue to consume in the
present. Feeding Ancient Greece sustained an
architectural tradition that has been carried
forward to the designs of today. Entertainment
consumed a hundred years ago sustained a cultural
tradition that influences our choices today.
A New Model for Economic Growth
In an economic growth model, the above
arguments are simply expressed by a hypothesis
that “Wealth is Power”. We are sustained by a
consumption of energy. All inflation-adjusted
economic output must be returned to wealth
defined as human and physical capital combined.
Unlike traditional economic treatments, real
production can neither be siphoned off to humans
alone, nor to the past. It has nowhere else to go
but to “produce”, thereby adding to combined
wealth.
This means that we can consider the current global
GDP as being the “rate of return” on global
wealth. Or, equally, current wealth is the
accumulation of past inflation-adjusted global
GDP. The tie to physics is that wealth is directly
proportional to power consumption. Only when
power consumption exceeds dissipation can a
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FIGURE 2: GLOBAL POWER, WEALTH, GDP AND RATES OF RETURN
1970 1975 1980 1985 1990 1995 2000 2005 2009
Power Consumption (TW) 7.2 8.3 9.6 10.2 11.6 12.1 13.1 15.2 16.1
Wealth (Trillion $) 1118 1202 1303 1418 1554 1710 1889 2097 2290
Power/Wealth 6.4 6.9 7.3 7.2 7.5 7.1 6.9 7.2 7.0
GDP (Trilllion $/year) 15.3 18.4 22.2 25.3 30.2 33.5 39.7 45.7 49.1
Rate of Return 1.37 1.53 1.70 1.78 1.94 1.96 2.10 2.18 2.14
For select years since 1970, measured values for the global power consumption (trillion watts), global real wealth (trillion 2005 MER
USD), the ratio of power consumption to wealth (watts per thousand 2005 MER USD), global real GDP (trillion 2005 MER USD per
year) and the rate of return on wealth defined by GDP/Wealth (% per year).
convergence of flows allow for civilization
expansion and a positive inflation-adjusted
economic output or GDP (see Appendix for the
mathematical details).
Crucially, this hypothesis is falsifiable. In other
words, it is sufficiently simple, transparent and
easy to test, that it could potentially be discarded
based on observational evidence. I tested this
hypothesis using statistics for world GDP and
energy consumption that are available for each
year from 1970 onward, together with more sparse
estimates for world GDP that extend back to
1 AD 3 .
What these data show is that, for each year
between 1970 and 2009, the ratio of power
consumption to wealth has barely deviated from a
constant 7.1 watts per thousand inflation-adjusted
2005 US dollars (Figures 1 and 2). The standard
deviation has been only 3% during a
period when global power consumption and
wealth have increased by 120% and world GDP
has risen 230%. Wealth and power consumption
are not merely correlated, any more than mass and
energy are correlated in the formula E = mc 2 .
Rather, like mass and energy, the ratio of the two
appears to be fixed.
It seems extraordinary, but the implication is that
we can begin to think of seemingly complex
human systems as simple physical systems. Our
collective fiscal wealth is an alternative and very
human measure of our capacity to power our
society through the consumption of fuel. Our
total assets, including ourselves, our relationships
and our knowledge, are inseparable from our
collective capacity to consume our primary
reserves of coal, oil, natural gas, nuclear fuels and
renewables. Both will rise and fall together.
Precision vs. Predictability in Economic Forecasts
For current and future retirees concerned with the
long-term value of their accounts, a link between
economics and physics has some important
implications. Perhaps most encouraging is that we
can anticipate inertia in global consumption and
economic growth. Our current consumption and
wealth are inextricably tied to past production, but
the past is unchangeable. Absent some sort of
severe external shock, near-term reductions in
energy consumption and wealth are implausible
because they would somehow require civilization
to “forget” its past.
Assuming that economic consumption and growth
will persist in the near term may seem rather
obvious to some. But what may be less well
recognized is that there are mathematical and
physical constraints to growth. For those who study
the evolution of physical systems, a term that is
often used here is “reddening”. This is a convenient
way of expressing that it is the most slowly varying,
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VOLUME 2 , N U M B E R 2
low frequency and “red” (rather than blue)
components of past variability in a system that most
strongly influence its present behavior.
For example, seasonal temperature trends
normally have a stronger influence on daily
high temperatures than shorter term weather
variability. Or, 20 years of growth through
childhood and adolescence tends to have a greater
influence on our daily food consumption than how
much we ate yesterday. Surprises can happen, of
course. For us, there is always the potential for
accident or a disease. Still, the natural tendency
for growth is for it to be slow and steady.
Equally, the global economy’s current capacity to
consume and grow has evolved from thousands of
years of human development, through the creation
of subsequent generations, as well as the
construction of farms, towns, communication
networks and machines. While everything does
slowly decay or die, the past can never be entirely
erased. Even our most distant ancestors have
played a role in our current economic and social
well-being. By now, civilization has enjoyed a
rather lengthy past, and we can count on this
accumulated inertia to carry us into the future.
Certainly, it is still possible that countries will rise
and fall, but globally aggregated economic wealth
should continue to enjoy recent inflation-adjusted
rates of return. Even in 2009, during the depths of
the Great Recession, 2.14% was added to total real
global wealth (see Figure 2, on previous page),
only slightly down from the historical high of
2.26% in 2007. And we continue to grow our
power consumption at similar rates. It is probably
a safe bet to assume that similarly high rates of
return will persist over the coming decade.
The main point is that persistence in trends is an
effective tool for forecasting, but most especially
when applied to highly ”reddened” variables that
are aggregated over time and space. When
predicting the evolution of any system, there is
always a trade-off. It is always easier to make
forecasts provided that we are willing to sacrifice
temporal and spatial resolution.
Predicting the weather next week can be almost
impossible. But forecasting northern hemisphere
average temperatures this coming winter is
actually quite easy: history is an excellent guide.
Similarly, it is very difficult to predict a small
company’s stock value next week; but
extrapolating trends in globally-aggregated wealth
can plausibly be done for as much as a decade
hence.
Innovation and Increasing Rates of Return
To reiterate, available statistics show that wealth,
when it is integrated over the entire global
economy, and integrated over the entire history of
economic production, has been related to the
current rate of global primary energy
consumption through a factor that has been
effectively constant over nearly four decades of
civilization growth. Aggregated civilization
wealth and consumption has inertia, and therefore
its current growth rate is unlikely to cease in a
hurry.
Yet the fact remains that the global rate of return
does change. Historical statistics (shown in
Figures 2 and 3) indicate that, over the past
century or so, there has been a long term tendency
for wealth to double over ever shorter intervals.
In the late 1800s, doubling global wealth would
have taken about 200 years based on then-current
rates of return. Today this takes just 30 years. As
a whole, the world is getting richer faster.
I use the word innovation to describe this
acceleration of inflation-adjusted rates of return
because it represents the capacity of civilization
as whole to beat mere inertia. Adjusting for
inflation is important here, because it is not always
evident that any investment in innovation will pay
off. If investing in human creativity does not lead
to true innovation, then it is a waste of effort that
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FIGURE 3: A HISTORY OF GROWING WEALTH
Why has the passage of history been characterized
by economic “fronts” on global scales, with rapid
innovation and accelerating rates of return
ultimately giving way to stagnation?
Here again, physical principles can provide
guidance. Given that inflation-adjusted wealth and
energy consumption appear to be linked through a
constant, the identical question is asking what
enables energy consumption to accelerate.
Adjusting for inflation, the time for global wealth’s rate of return to double
(calculated as a decadal running mean), vs. the doubling time for wealth itself.
Select years are shown for reference.
could have otherwise contributed to previously
attained rates of growth. But, real innovations
provide a jump in rates of return that civilization
can carry forward into the foreseeable future.
Globally, innovation has come in fits and starts.
Figure 3 (above) shows that innovation has had
two golden periods over the past two centuries.
The first was during the Gilded Age or “Belle
Epoque” of the late 1800s and early 1900s, when
resource expansion and technological discoveries
allowed the rate of return to double in just 40
years. Then again, in the baby boom period
between 1950 and 1970, the rate of return doubled
in the remarkably short timespan of just 20 years.
By contrast, both the 1930s and the past decade
have been characterized by much more gradual
inflation-adjusted innovation rates. Even though
globally aggregated wealth is now doubling more
quickly than ever before in history, for the first
time since the Great Depression, the rate of return
is no longer increasing.
Conservation laws from thermodynamics tell us
that rates of innovation and growth should be
largely controlled by the balance between how
fast civilization discovers new energy reserves
and how fast it depletes them 6 . For example, it is
easy to imagine that access to important new coal
or oil reserves in the late 1800s and around 1950
allowed civilization to capitalize on human creativity
in ways that were previously
impossible.
Today, we continue to discover new energy
reserves, but perhaps not sufficiently quickly. We
are now very large and we are depleting our
reserves at the most rapid rate yet. Increased
competition for resources may be constraining our
capacity to turn our creativity and knowledge into
real innovation and accelerated global economic
growth.
Conclusions
I have described here a constant that links a very
general representation of the world’s total
economic wealth to civilization’s power
production capacity. Because this constant does
not change with time, physical principles can be
applied to estimate future global-scale economic
growth over the long-term without having to
explicitly model the exceptionally complex
internal details of people and their lifestyles.
There have been criticisms of this approach,
which have stated that “economic systems are not
the same as physical systems, and we shouldn’t
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VOLUME 2 , N U M B E R 2
model them as if they are” 7 . Yet, civilization is
undeniably part of the physical universe. It is
difficult to imagine how we aren’t fundamentally
constrained by physical laws. At the very least,
appealing to physics appears to make the job of
economic forecasting more transparent, simple
and scientifically robust.
Here, I have made the argument that recent rates
of return are most likely to persist in such highly
aggregated quantities as the global economy. We
can make quite distant estimates of future growth,
but only if we are willing to sacrifice resolution.
While this does not specifically help us to predict
trajectories for individual countries or economic
sectors, we might anticipate that slower than
average rates of return in one nation or sector
should be balanced by faster growth elsewhere.
It must be kept in mind that exponential growth
trends cannot continue unabated. Wealth is tied to
power production and therefore to resource
consumption. Sooner or later, civilization must
face up to reserve depletion or environmental
degradation.
But, for as long as these impacts remain
manageable, we can anticipate that global
economic wealth, GDP and energy consumption
will continue to grow at recently observed rates.
The qualification is that rates of return are unlikely
to rise as fast as they did in the decades following
the 1950s. Rather, for time scales significantly less
than the current wealth doubling time of 30 years
– perhaps a decade – the forecasted inflationadjusted
global rate of return should average a
fairly steady 2.2% per year.
For current and future retirees thinking even
further ahead, inflation-adjusted rates of return
should be guided by whether there is net
depletion or expansion of our primary energy
reserves. It might help to think of our energy
reserves as the retirement account for civilization
as a whole. Discovering new energy reserves
today expands our collective accounts. But
having sufficient reserves for the long-term
requires that we not “spend down” what we have
discovered too quickly. What we consume today
must be balanced against what we have left to
consume in the future. ■
Acknowledgments
This work was supported by the Kauffman
Foundation, whose views it does not claim to
represent.
Appendix
A physical model for economic growth
The model for long-term economic growth used here
is based on a core hypothesis, motivated by the
Second Law of Thermodynamics, that energy
consumption is required to power economic
activities, and that all elements of civilization must
be considered as part of a larger whole. No portion
of production can disappear to the past as human
consumption, with no influence on the future 3,4 .
Expressed mathematically, all economic
production, once adjusted for inflation, contributes
to global wealth or capital, so that:
or, in integral form:
(1)
(2)
where C, the inflation-adjusted economic value
(or civilization wealth) C is calculated from the
59
© 2012 Retirement Income Industry Association®

T H E R E T I R E M E N T M A N AG E M E N T J O U R N A L S M
Appendix, continued
time-integral of global economic production (or
GDP) Y, adjusted for inflation at 2005 market
exchange rates (MER), and aggregated over the
entirety of civilization history. While not described
here, under this approach, the GDPdeflator is related
to capital decay in traditional approaches 4 .
Global economic wealth C is sustained by the
instantaneous rate of primary energy consumption
by civilization a through a constant λ
(3)
Taking a to be in units of watts (Joules per
second), and Y in units of 2005 MER US dollars per
second, available statistics indicate that λ is indeed
constant, with a measured value of 7.1 watts per 1000
dollars. The standard deviation over the past 40 years
has been just 3%.
So, at least over the long-run, sustaining a fiscally
measurable inflation-adjusted world GDP requires a
growing power consumption. From Equations 1 and
3, the production function for the growth model is
(4)
Also, from Equation 3, global wealth C and energy
consumption a must rise at the same rate. This can be
expressed in a variety of ways, all of which follow
from Eqs. 1 to 4:
(5)
While the rate of return η is tied to growth in
power production, it is also an expression of the
ratio current economic output to the time integral
of past economic output, adjusted for inflation.
Productivity and GDP Growth
Very often in economic studies, one sees the ratio
f =Y/a, which is termed the “energy productivity”
or “energy efficiency” of the economy since it
represents how well economies turn energy
consumption a into economic production Y. Since
a =λC and η =Y/C, it follows that:
(6)
So, since λ is a constant, the rate of return on
wealth is proportional to the economy’s energy
productivity, and only by increasing energy
productivity can the rate of return increase.
When the rate of return increases, this can be
interpreted as a consequence of “real innovation”
since, from Eq. 6 it corresponds to greater energy
productivity f . The innovation rate is:
(7)
If innovations improve energy productivity f , then
they accelerate growth and lead to higher rates of
return on wealth. Curiously, from Eq. 3, they also
lead to increasing power consumption a.
The possibility that energy efficiency gains might
“backfire” has been hotly disputed, and it is
contrary to what is normally assumed 8,9,10 . Indeed, it
does seem quite counter-intuitive that improving energy
efficiency leads to more rather than less power
consumption. But, the system must be considered as
a whole. Innovation allows civilization to collectively
expand at a more rapid pace into the energy resources
that sustain it, and this allows it to produce more
power.
Perhaps the most commonly quoted macroeconomic
statistic is the real GDP growth rate. In the
framework here, this can be expressed very simply
as the sum of the current rate of return, and the
innovation rate or acceleration of the rate of return.
(8)
In fact, since the current productivity arises from
past innovations (i.e, f = ʃ 0t df/dt′dt′), the history
o
f
innovation is the sole motivating force driving
current GDP growth.
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60

VOLUME 2 , N U M B E R 2
Appendix, continued
To illustrate, the mean energy productivity f =Y/a
between 1970 and 2009 was 83 dollars per
megajoule, where dollars are expressed in
inflation-adjusted 2005 MER units. The mean value
for the rate of return for energy consumption and
wealth, η = λ f , over this period was 1.87% per year.
On top of this mean was the trend in η, which
increased from 1.37% per year in 1970 to 2.14% per
year in 2009. So, the fitted innovation rate for this
time period was d lnη/dt = 0.93% yr −1 . This implies an
average real GDP growth rate for the period of d
lnY/dt = 1.87 + 0.93= 2.80% per year. The actual
observed mean was 2.93% per year, a difference of
just 0.13% per year. Thus, accurate forecasts of global
GDP growth can be inferred knowing only how fast
energy productivity is improving, and without
having to explicitly represent nations, sectors, people
or their lifestyles.
Long-term Forecasting of Wealth
If real innovation is positive, then from Eq. 5 and 6,
the deterministic solution for the growth of wealth C is
(9)
C 0 is today's wealth, and ґ η represents the
characteristic innovation time
(10)
Note that the solution for C(t) condenses to the
simple exponential growth form of C = C 0 expηt
in the limit that the innovation rate slows to zero
and ґ η → ∞. If there is positive innovation,
however, then ґ η is positive and finite, and wealth
growth is explosive or super-exponential (i.e. the
exponent of an exponent).
While more mathematically cumbersome, a
familiar way of expressing growth is in terms of
doubling-times. The doubling times δ for wealth
C, and the rate of return η, are given respectively
by δ C = ln2/η and δ η = ґ η ln2.
Effectively δ C represents the time it takes for
civilization to double its wealth, assuming current
rates of return hold. Similarly, δ η is the time required
for the rate of return to double (or δ C to
halve), assuming current innovation rates stay
fixed. The recent history for these quantities is
shown in Figure 2. From Eq. 9, a deterministic
solution for the evolution of wealth is
(11)
Footnotes:
1 Raupach, M.R., Marland, G., Ciais, P., Le Quéré, C., Canadell, J.G., Klepper, G., Field, C.: Global and regional drivers of accelerating
CO2 emissions. Proc. Nat. Acad. Sci. 104, 10,288–10,293 (2007). DOI 10.1073/pnas.0700609104
2 IPCC: Climate Change 2007 - Impacts, Adaption and Vulnerability. Cambridge University Press (2007)
3 Garrett, T.J.: Are there basic physical constraints on future anthropogenic emissions of carbon dioxide? Clim. Change 3, 437–455 (2011).
DOI 10.1007/s10584-009-9717-9
4 Garrett, T.J.: No way out? The double-bind in seeking global prosperity alongside mitigated climate change. Earth Sys. Dynam. 3,
1–17 (2011). DOI 10.5194/esd-3-1-2012
5 Ayres, R.U., Warr, B.: The economic growth engine. Edward Elgar, Cheltenham, UK (2009)
6 Garrett, T.J.: Modes of growth in dynamic systems. Proc. Roy. Soc. A (2012). DOI 10.1098/rspa.2012.0039
7 Scher, I., Koomey, J.: Is accurate forecasting of economic systems possible? An editorial comment. Clim. Change 3, 473–479 (2011).
DOI 0.1007/s10584-010-9945-z
8 Saunders, H.D.: A view from the macro side: rebound, backfire, and Khazzoom-Brookes. Energy Policy 28, 439–449 (2000)
9 Polimeni, J.M., Giampietro, M., Alcott, B.: The Jevons Paradox and the Myth of Resource Efficiency Improvement. Routledge (2007)
10 Owen, D.: The efficiency dilemma. The New Yorker pp. 78–85 (2010)
61
© 2012 Retirement Income Industry Association®

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