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> Welcome to Sound Insight from Prudential.
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Where you'll hear from thought leaders
and industry experts discussing the life
insurance industries most relevant topics
and trends.
Today, you'll hear from Jim Mahaney, Vice
President of Strategic Initiatives and Mark Hug,
Executive Vice President
of Product and Marketing
for Prudential's Individual
Life Insurance business.
Moderated by Michelle Fry,
Vice President for Product
and Solutions Marketing for Individual Life.
> Welcome and thank you for joining us
on Prudential's Sound Insights podcast.
I'm Michelle Fry and I'm here
with Mark Hug and Jim Mahaney.
They're going to talk to us about the
relationship between retirement readiness
and inheritance and how when planning
for retirement, it's crucial to think
about the impact to the next generation.
Welcome Mark and Jim and thanks for joining.
> It's my pleasure to be
here, thank you Michelle.
> Thanks for having us Michelle.
> So both of my guests today have developed a
recent white paper in which they shared research
on the National Retirement Risk Index,
or NRRI, which is published by the Center
for Retirement Research at Boston College.
Prudential serves as the
exclusive sponsor of this research.
So, for some background, the
NRRI is an important tool
to gauge nationally retirement
readiness as it measures the percentage
of working age households at risk of being
unable to maintain their preretirement standard
of living during retirement years.
A household, for these purposes,
is deemed to be at risk
if their projected retirement income
falls short of their appropriate target
and the latest NRRI research explores the roles
that inheritance can play
in retirement preparedness.
So let's go ahead and get started.
Jim, can you tell us what the
National Retirement Risk Index is
and specifically what it looks at?
> Sure Michelle, so the National
Retirement Risk Index measures the percentage
of working age households that
are at risk of being unable
to maintain their preretirement standard
of living during their retirement years.
So, it really addresses one of the most
compelling challenges facing the nation today,
insuring retirement security
for an aging population.
So twice a year the researchers at
Boston College use the Index to look
at different retirement related topics
to see how the Index might be impacted.
> So, working age is a pretty
broad category too Jim.
Are all generations facing the same issues
as it relates to their retirement security?
> Actually no.
The National Retirement Risk Index
actually indicates that households headed
by younger people are at much greater
risk of not having the ability
to maintain their standard
of living in retirement.
Latest data show that 45% of households
headed by those in their fifties are at risk,
but 59% of those in their thirties
are at risk, so much higher.
And there's a few reasons for this.
Younger households are at greater risk because
they have fewer opportunities to participate
in defined benefit pension plans.
Younger households already face a cut in
social security benefits due to the increase
in the full retirement age,
which will ultimately be age 67.
And they're also projected to live longer
than earlier generations of retirees.
> So several headwinds for these
younger households for sure.
Can you tell me what exactly what
the Center for Retirement Research
at Boston College looked
at with their recent study?
> Sure, so about a year ago, the
Center for Retirement Research looked
at the potential impact of inheritances on
these younger households and the research found
that in aggregate, inheritances, they do
not have a significant impact on the NRRI.
In part because most households
do not receive one.
> I would just add there Michelle,
that in addition to not receiving one,
those that do receive inheritance
often are already well along
in their retirement preparedness and
that helps a lot for them as well.
> So, even though the overall
NRRI wasn't impacted greatly,
they did find that at an individual
household level, for those projected
to receive an inheritance, an inheritance
notably improved retirement preparedness.
And further, even if households that receive
inheritances are still considered at risk
by the Index, these households
are in a much improved position.
So inheritances were shown to close a meaningful
portion of the retirement savings gap.
So, what's evident from the research, since
younger households are at greater risk
of not achieving retirement security.
By leaving a modest inheritance
to these younger generations,
retirement preparedness can
be significantly improved.
> So, what forms of inheritance could
be considered in these situations Jim?
> Well, an inheritance can be made
in many different forms Michelle,
including a house or leaving financial assets.
And life insurance proceeds can function
in a similar manner as an inheritance.
If the death benefit is payable to a child,
or even a grandchild, who's
the insured's beneficiary.
> That's a very important point Michelle
because life insurance offers, I think,
a very unique opportunity
to plan for an inheritance
and I'll share a little bit later
on why that's so critical here.
> So, the transfer of wealth through life
insurance, building on what Mark was saying,
has the added benefit of generally
being received federal income tax free.
> So, Mark, this is your area of
expertise, right the life insurance realm;
and I'm curious what insights the study
provided specifically, in your mind,
for why people should care about this.
> At first Michelle, I thought by
looking at what the NRRI results were,
that inheritance were not going
to play a significant role
in helping the overall population
prepare for retirement.
One might think that it's not a big deal
and as Jim mentioned those modest
impacts for a number of reasons.
One is that the majority of households
aren't going to get an inheritance.
Many inheritances in the scenario that we talked
about already add to people who aren't at risk
and therefore not a big deal for them.
So, I believe that the key focus
is not on the overall population,
but rather those who get the inheritances
and that's the key insight
I believe out of this study.
Because the analysis shows that if you just look
at those households who get the inheritance,
the impact is much more substantial.
In fact, when they did the modeling
within the Index and they looked
at how the inheritance impacts
the shortfall, it was significant.
For example, for a low income household,
the median inheritance is about $42,000.00
which reduces the shortfall by about 44%.
That's a big number for those
low income households.
And for middle income, it's
not all that different.
The median inheritance there was
about $60,000.00 and it resulted
in a shortfall reduction of about 41%.
Both of those are significant reductions
in the retirement readiness shortfall.
Therefore, the implication is to the extent
you can plan on an inheritance in the future
for your children or grandchildren,
you can help them better prepare
in a significant way for retirement.
Inheritances are going to become
more prevalent in the future just
because of unspent 401K balances.
But, I believe that the solutions
that are exciting,
are the ones that I mentioned
which include life insurance.
Life insurance can allow for someone to
leave a legacy for their family and insure
that the choices are made by you
in terms of that inheritance,
and hence retirement preparedness
as opposed to happenstance.
> Yeah, that's a great point you bring up
around keeping things within your control.
Right, and control I know is a
big issue for all of us as we move
through various life events
including into and through retirement.
So on that seam, how can
we reframe the situation
to help people think about
inheritance differently?
> Well, I think first we need to
differentiate between the types of inheritances.
I don't think people for the most part think
of life insurance proceeds as an inheritance.
It's just not something that comes to mind
and many people are not really
sure what that really is.
You know some, they know they
are getting something, generally,
when their parents pass away,
but they're not sure what it is.
I would encourage people to take
control of your family's future,
really to the greatest extent possible and
there's a number of different products available
for that, but I also believe that the education
from a financial advisor goes a long way
to starting that conversation about
the different types of inheritances,
those controlled inheritances that I mentioned.
And what tools should be
part of that conversation
in order to move that planning forward.
Of course, there's a number of
other things that come into play.
There's some family dynamics
that come into play.
Some families believe in that
legacy planning, and others don't.
Our ancestry and our cultural dynamic
influence those financial decisions.
For example, I can tell you from a
multicultural marketing perspective,
African Americans in general,
are really big on legacy planning
and using life insurance for that legacy plan.
That's a natural for them.
That's something that's embedded in their
very culture and their thought process.
Those kinds of decisions and that kind
of knowledge that is really important
for a financial advisor when it
comes to looking at how to care
for those multi generations simultaneously
and how to properly plan for that.
> Yeah, and the different client situations
are important to the advisor dialog for sure.
We talked about low and middle income families,
now let's touch upon the upper income retirees
for a moment, who themselves may
already be enjoying a secure retirement.
What does an inheritance
mean for their children Jim?
> Well, I think that there's many households
that are currently retired or on the cusp
of retiring, that really have
the financial wealth already
to insure their standard
of living in retirement.
But like I mentioned, the younger households
are projected not to be in as good of shape.
Their children may have a harder
time to prepare for their retirement
because they're living longer, the social
security cuts I mentioned, etc. So,
those families that are retired now, or about
to retire, are in good shape themselves,
they might want to leave a life insurance
death benefit to help their children
with their retirement preparedness.
And it just might be something that they
wish to consider instead of maybe just hoping
to leave an inheritance, they can kind
of be a lot more secure, if you will,
and confident if they use life insurance.
> Yes, that's exactly right Jim.
> Yeah, I guess hope is not a
great retirement strategy right?
So, regardless of financial status or
socioeconomic status for various audiences.
What are some ways to improve one's
retirement readiness in general?
Mark, do you have any thoughts on that?
> Yeah, well we mentioned life insurance
quite a bit and I'll repeat that.
I think life insurance can
be a very efficient vehicle.
However, there are a number
of other options available.
There is annuities, investments, just to name a
few and I think what's really important here is
that folks use an advisor to help them
understand all the nuances available today,
whether you use investments, whether
you use certain trusts to help that,
whether you use annuities or life insurance,
all of them come with their own
advantages and disadvantages.
And understanding those nuances
is going to be really important.
> Jim, anything to add?
> Insurance products really can
increase certainty in an uncertain world.
We don't know how long we're going to live,
we don't know what potential inheritance
we might want to leave if we want to.
So, for example, purchasing an annuity, which
is what the NRRI assumes occurs at retirement,
that helps insure that income is
coming in for as long as it's needed.
So, in a similar way I believe, and I think
Mark agrees, life insurance can ensure
that wealth is passed on to the next
generation through the death benefit.
> And so, overall from the two of you,
what's the most surprising thing
you've learned from this study?
> For those that are projected to receive
an inheritance, it will make a difference,
as Mark pointed out and even for
a small amount of inheritance,
it really can have a significant
impact for middle income households.
> And I would add to that.
I think a key surprise for me was this tie
between the generic term of an inheritance
and planning for retirement readiness.
I'd never really thought before reading this
study about how important inheritances were
for those who receive those inheritances
and then making that tie to having
and being prepared through proper
financial planning to make sure
that inheritance actually gets to the person.
Whether it be through investments,
annuities or life insurance.
> Yeah, retirement preparedness
certainly is a comprehensive topic, right,
it doesn't just include one financial plan
or one financial instrument, that's for sure.
What's the most important
takeaway for our listeners?
Start with you Jim.
> Well, I think there's a couple.
I think from a planning perspective inheritances
can help, but it's really best to plan and save
for your retirement rather than hoping
for an inheritance to really help you.
So, save for yourself first.
Make sure your retirement is secure and then
once it is, then maybe focus on how you want
to invest in or help to secure
the financial future
of your loved ones, of the next generation.
> And if I can continue
with what Jim is saying,
I believe the most important takeaway
there is the life insurance tied to it all.
You get a tax free benefit that's going to help
your loved ones secure that financial future.
It's going to help them be more prepared for
retirement after you've done so for yourself.
> Yeah, and this inheritance
discussion really has opened
up life insurance as one of those opportunities.
So, I'd like to close with
thanking both Jim and Mark.
I appreciate you sharing this research
and your insights on what it can mean
for retirement readiness of
individual investors and individuals.
And I'd like to thank our audience
for listening to Sound Insights.
Be sure to check our thought
leadership material on Prudential.com.
We hope you join us again.
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> Join us next time for Sound
Insights from Prudential.