Retirement Planning For The Non-Affluent:
A New Role For Credit Unions
A New Role For Credit Unions
The credit unions (CUs) that prosper over the next
2 decades will have the following inter-related features:
- They will catch up to banks in digitalizing
- They will enhance their traditional focus on
local presence and in-house service by accessing wider
geographical markets that could be national.
- They will participate in networks containing
firms offering services that complement those of the CU.
- They will distinguish themselves in providing
services to high-priority but underserved consumers.
The last of these features is central, and the
others are requisites for achieving it. The “high-priority
but underserved consumers” are non-affluent retirees, the
ranks of which are growing rapidly. Census data indicate
that about 10,000 people will reach age 65 every day for the
next 10 years, and more than half of them worry about the
prospect of outliving their money. A cost-effective way for
credit unions to meet those needs would generate enormous
benefits to them, and to society.
The Retirement Funds Integrator (RFI), which I
developed with Allan Redstone, provides a mechanism for
doing this. I will describe the challenges that had to be
overcome in developing RFI, how we met them, and how credit
unions could participate.
The First Challenge: Integrating
the Components of Retirement Plans
The three components of a retirement plan are
currently marketed by three industries as stand-alone
products: financial asset management, HECM reverse mortgages
and annuities. Integration means adjusting the terms of one
to the terms of the others, in the process generating
synergies and cost savings that are otherwise unattainable.
RFI integration also provides seamless transitions over time
from one source of funds to another.
Credit union participation would not involve them
in management of financial assets, or in the issuance of
reverse mortgages or annuities. They provide no funding.
Rather, their roles would be to coordinate the integration
process, implement the educational process, and provide or
facilitate the process of advising the retiree. These
responsibilities will become clearer as we proceed.
The Second Challenge: Overcoming
In the markets for both annuities and reverse
mortgages, price shopping is inordinately difficult, with
the result that price spreads on identical transactions can
be obscenely large. To deal with that problem, RFI has
developed access to networks of reverse mortgage lenders and
highly-rated annuity providers, along with a mechanism for
selecting the lowest price available from the firms on the
Participating credit unions would use these
networks in providing the best possible deals for their
retiree clients. The resulting savings to the retiree add to
the synergies derived from integration. Some illustrations
are shown in an appendix note.
The Third Challenge: Coping With
Both annuities and reverse mortgages are very
complicated and not fully understood by most retirees. The
challenge is to educate retirees, many of whom are past
their intellectual prime, in the costs and benefits of a
complicated instrument with multiple components.
To deal with that problem, RFI divides the process
of creating retirement plans into two segments. The first
segment is simple enough for retirees to use in developing a
preliminary retirement plan. The second phase employs a
trained advisor to work with the retiree to convert the
preliminary plan into a final plan. The two phases will be
considered in turn.
Phase 1 of Retiree Education:
Developing a Preliminary Retirement Plan
Phase 1 provides the retiree with a
graphically-displayed preliminary retirement plan that shows
spendable funds and its components every year to age 104.
Such a plan would look something like this.
Our tests indicate that the preliminary plan is
manageable by most retirees without assistance other than
the Help function built into it.
While the phase 1 retirement plan is designed to
educate the retiree, it can also be used by the credit union
as a marketing tool. A chart such as the one above could be
placed in an office lobby, with a notice such as “Develop
Your Own Retirement Plan.” And the program that generates a
retiree-specific chart can be placed on the credit union’s
It is made clear to the retiree that the plan is
preliminary, and that modifications are available to meet
special needs or preferences, in consultation with an
RFI-certified advisor. That advisor can be one or more of
the credit union’s employees.
Phase 2 of Retiree Education:
Developing a Final Plan With Advisor
In phase 2, the retiree in consultation with an
advisor who has access to the more powerful version of RFI,
converts the preliminary plan into a final plan. That plan
takes account of features and options that reflect the
retiree’s preferences but had been left out of the
preliminary plan. The credit union offering RFI will want to
provide its own advisor or advisors, for whom RFI will
provide a training program.
Conclusion: Credit Union Benefits
In addition to the social benefits arising from
participation in RFI-based transactions, the credit union
will earn significant revenue. The revenue source is the
commission paid by annuity providers, typically 3-4% of the
amount paid for the annuity. Subject to experience-based
modifications, revenues will be allocated by function, as
Lead Source: 40%
Financial Advisor: 25%
Program Administration and Technology Provision:
Administration of Annuity Contracts: 10%
We seek credit union partners to participate in the
initial rollout of RFI. Those interested can contact
the Mortgage Professor at firstname.lastname@example.org
Appendix Note on Quantifying RFI
Consider a retiree of 64 who has financial assets
of $500,000 and home equity of $400,000. The RFI approach
integrates asset management, a deferred annuity (10 years in
the examples) and a HECM reverse mortgage credit line. This
is compared to a stand-alone approach based on the 4% rule
that is widely used by financial advisors. The 4% rule
involves draws of 4% of the original asset portfolio amount
increasing by 2 percent a year. To make it comparable to
RFI, we add a HECM tenure payment, which is a fixed monthly
amount. In contrast to the annuity which runs for life, the
tenure payment ends if the borrower moves out of the house.
Chart 1 compares the spendable funds available to
the retiree under the two approaches, assuming a 4% rate of
return on assets. The integrated approach provides more
spendable funds over the retiree’s life, and complete
protection against running out as a result of living too
long. At a 4% rate of return, the 4% rule runs out of assets
at age 98, with only the tenure payment remaining. Higher
rates of return will avoid that calamity while increasing
the difference between the two schedules.
To assure that retirees using RFI were getting the
best competitive prices, we developed networks of both
annuity providers and reverse mortgage lenders. The RFI
system automatically selects the best deal from those
offered, unless the retiree wants to use another provider,
in which case RFI will show the cost of indulging the
The importance of this is illustrated in Chart 2,
where the top line is calculated at the best terms in both
markets, as it was in Chart 1, and the lower line uses the
worst terms in both markets. But note that even using the
worst terms, RFI beats the 4% rule.