Boomers' Education, Wealth and Marital Status Are The Major Factors in Retirement Asset Management
Even thought they still request products such as loans, more sophisticated asset management services are being demanded by baby boomers that are poised to retire over the next decade.
"Many credits unions-not all-struggle to do asset management, investment advisory and financial planning," said Ben Rogers, research director at the Filene Research Institute. "Baby boomers and retirees are still a constituency at credit unions. But some retirees may move their money not thinking that their credit unions offer these types of services."
Filene looked to the RAND Corp.'s health and retirement study to track the asset-selling trends of previous generations. In a report published in June, the institute researched the financial asset portfolios for a nationally representative sample of U.S. adults at least 50 years of age for more than two decades. It was able to describe the changes in asset portfolios and trends in direct stock holding and to explore what influences direct stock holding.
For credit unions, there may be a void to fill for millions of baby boomers who need to sell stock holding to fund retirement. More than half of households did not hold stock before or after retirement. However, one in 10 acquired stock while one in 10 divested of stock. A quarter simply continued to hold stock, Filene discovered.
Looking within their own memberships, credit unions may also learn even more about the shift in asset holdings. For instance, Filene found that households with less than $50,000 in total financial assets hold about 11% of those assets in stock. Households with total financial assets of more than $150,000 have a lower stock-holding rate after retirement than before, indicating that they may sell assets to pay for retirement.
Tapping even further by looking into certain demographics, Filene revealed other ways credit union investment programs may find opportunities to manage the portfolios of baby boomers in the pre- and post-retirement stage. Those with less than a high school education are less likely than those with a high school education to own stocks after retirement. Households with higher mathematical ability and more wealth tend to hold rather than sell stocks after retirement.
Those with traditional pensions are more likely to directly hold stock than those with defined contribution plans, probably because annuitized retirement plans allow their holders to take more risks elsewhere, according to Filene. People with defined benefit plans are likely to hold stocks in retirement. People with alternative sources of income like pensions have less of a need to sell off stocks, Rogers pointed out.
"As credit union membership continues to age, it will be increasingly important to cater to members' actual behavior," Rogers said. "And while this research suggests that the baby boomer retirement surge will not depress the stock market in a significant way, it's essential to ferret out the individual needs of retiring members."
In 2020, about 14% of Americans will be at least 65 years of age and by 2040, 20% will be, according to the report. In assessing the implications of such a shift for the financial market, a number of financial market analysts have suggested that security prices will decrease as the population of retirement age increases and more households try to sell their security assets. Financial advisers often suggest that investors reduce their equity exposures as they approach retirement. Credit union investment programs could cater to this recommendation by offering life cycle funds, which are designed for an investor with a target retirement date. The research showed that the funds have become a default option for many retirement funds.
Even households where a person may own a defined benefit or defined contribution plan can offer credit unions an entry to asset management. Filene and RAND said that households with DB plans may typically have more risky assets in other parts of their portfolios while those with DC plans may be more conservative in other parts of their portfolios. Upon an individual's retirement, a DB plan typically takes the form of annuity payments, while a DC plan can be cashed to obtain a lump sum, which can be invested in stocks, annuities, or other assets. The data showed sometimes, DC plans are not immediately cashed after retirement. As a result, current pension plan enrollment is likely to affect stock holding, both before and after retirement.
According to RAND's 2006 health and retirement study, among respondents 50 to 54 years of age, only 25% directly held stock, compared with 30% of those at least 80 years of age, Filene noted. Among those directly holding stocks, stocks composed a mean 20% share and a median 11% share of portfolio value for those 50 to 54 years of age. The figures were much higher for those at least 80 years of age at a mean of 36% and a median of 29%.
"Credit unions that offer investment services should pay attention to the research findings that show consumers-especially higher-wealth consumers-maintaining direct stock holdings long after retirement," the report read. "Although it's tempting to think that members will unload direct stock holdings at retirement, it's also far too simplistic a view."
Certain demographics continued to be key indicators of how credit unions might set up asset management programs. Filene and RAND found a greater proportion of couples than singles holds stock both before and after retirement. The proportion of couples holding stock is nearly the same before and after retirement. Among singles before retirement, nearly equal proportions of males and females hold stock, but after retirement the proportion of males holding stock increases while that for females decreases.
Before retirement, stock holding is highest among college graduates, at 58%, and lowest among those who did not graduate from high school, at 11%. This pattern persists after retirement, although stock holding drops more for those with at least some college education than those without.
Rogers used the real estate bubble in states such as California, Nevada and Florida as an analogy of what may come. Many bought homes in a frenzy "but when the music stops, nobody is left to buy. Real estate values that once seemed normal appear in retrospect garishly inflated," he said.
"Consider, then, the prospect of a similar collapse in the equities market. Such a collapse might not be driven so much by speculation as by a quirk of demography: millions of baby boomers needing to sell stock holdings to fund retirement," Rogers said.
Rogers said the big takeaway from credit unions is meeting the needs of baby boomer members, who tend to have long-term and loyal relationships with their cooperatives.
"Credit unions have to do a better job of telling members they do investment advice. There is a lot of marketing dollars flowing to affluent households," Rogers offered. "It really has a lot to do with branding. For a long time, credit unions built their brand around loans and savings."