Giving a name to that feeling

If you have clients of a certain age, you may have noticed they realize that something is different about the five years just before and after retirement.

If you have clients of a certain age, you may have noticed they realize that something is different about the five years just before and after retirement. Issues of income adequacy and investment choice suddenly become more important than ever, and their level of anxiety over finances rises.

At Prudential Annuities a few years ago, we had an inkling that the important decade surrounding retirement was distinct, and we kicked off a short-term marketing campaign in October 2005 called the Retirement Red Zone. It was meant to encourage investors to rethink their retirement strategies and consider rolling over some of their defined contribution funds into an annuity with living-benefit guarantees.

As we learned more about investors and their behavior during the critical 10-year period surrounding the date of retirement, however, the short-term promotion evolved into a marketing approach focused on understanding the challenges, opportunities and risks associated with this crucial time.

In a series of early focus groups, investors said that while they knew the period right before and after retirement was different from their 40s and early 50s, having a definition of the period helped them focus on actions they needed to address.

A 2006 research study we conducted confirmed what the focus group members said: Whether the 10-year period was named or not, investors knew that this was a different time than any other in their investment lives, and 72% recognized that its financial risks were unlike those they had faced previously.

Yet investors were uncertain about what course of action to take. Research uncovered that they were split 50/50 on whether investing more conservatively was riskier than investing more aggressively. Those who felt that it was riskier to invest aggressively were concerned with “current risk,” which they defined as exposing their investments to market uncertainty. They wanted to shelter their retirement assets from volatility.

Those who felt that it is riskier to invest conservatively were concerned with “future risk,” or running out of money in retirement. They wanted to pursue higher returns by investing more aggressively.

The study also showed that retirement assets were already in motion during the period, with 71% of investors saying they would consider converting assets in defined contribution plans to other investment accounts. Additionally, 51% said they would consider purchasing products that generated retirement income.

Last year, we did additional research and discovered a third important investment risk — investors’ behavior. Working with researchers from the Storrs-based University of Connecticut, we developed a retirement emotion quotient based on responses to a series of questions; the higher the EQ score, the greater the influence of an investor’s emotions on their behavior.

When we surveyed red-zone investors last year, we found that the influence of emotions on investment decisions was pervasive. Moderate to high EQ scores were found among 72% of men and 80% of women.

We also found that more than 50% of those surveyed were not aware that guarantees existed either to lock in market gains or protect against loss of principal on investments intended to generate retirement income. At the same time, 75% would consider investments that provided such protection.

When findings from the two studies are compared, it appears that red-zone investors may be learning from educational efforts in the marketplace and from their financial professionals.

From 2006 to 2007, investors appeared to be growing more aware of the kinds of annuity guarantees available to help protect their retirement savings. Across the board, they were demonstrating increased awareness of guarantees to lock in market gains, to protect principal and to assure minimum annual growth and lifelong income. In addition, investors indicated that with such guarantees in place, they were likely to keep their money in the market for longer-term results regardless of short-term volatility.

While a two-year change does not necessarily constitute a trend, it may suggest that the red-zone message has broken through. The bottom line is that educating clients about turning lifelong retirement savings into lifelong guaranteed retirement income without giving up control of their money helps both investors and their advisers.

Jacob Herschler is the Shelton, Conn.-based senior vice president and head of marketing at Prudential Annuities, a unit of Prudential Financial Inc. of Newark, N.J.