Retirement Planning For the Non-affluent: A New Role For Banks

September 16, 2021

Until now, retirement planning by banks has been limited to managing the financial assets of the well-heeled. But there is another segment of the retirement planning market that is much larger, and which is growing rapidly, yet is not served. Census data indicate that about 10,000 people will reach age 65 every day for the next 10 years, but only a small fraction of them are potential clients for the banks offering wealth management services.

Yet the less affluent retirees have retirement planning needs that are equally pressing if not more so. If there was a cost-effective way for banks to meet their needs, the benefits to them, and to society, would be enormous.

There is a way, called the Retirement Funds Integrator (RFI), which I developed with Allan Redstone. In developing RFI, we faced three challenges. The first was to integrate the three components of a retirement plan that are currently marketed by three industries as stand-alone products: financial asset management, HECM reverse mortgages and annuities. Integration meant adjusting the terms of one to the terms of the others, in the process generating synergies that are otherwise unattainable. RFI integration also provides seamless transitions over time from one source of funds to another.

The second challenge was the lack of effective competition in the markets for annuities and reverse mortgages. Both are complicated and not fully understood by retirees. To deal with that problem, we developed networks of highly-rated annuity providers and reverse mortgage lenders. The bank offering RFI does not provide any funding. Rather, it acts as the client’s agent, selecting the best terms on both the annuity and reverse mortgage, unless the retiree prefers a particular provider. The resulting savings to the retiree add to the synergies derived from integration. Some illustrations are shown in an appendix note.

The third challenge was the need to educate retirees, many of whom are past their intellectual prime, in the costs and benefits of a very complex instrument. To deal with that, RFI breaks the educational process into two phases. Phase 1 provides the retiree with a graphically-displayed preliminary retirement plan that shows spendable funds and its components every year to age 104. Our tests indicate that the preliminary plan is manageable by most retirees without assistance other than the onine help functions built into it.

The Phase 1 retirement plan, designed to educate the retiree, can be used by the bank as a marketing tool. It can be placed on the bank’s web site, or in an office lobby, with a notice such as “Develop Your Own Retirement Plan.” It is made clear to the user 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 bank’s employees.

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 takes account of features and options that reflect the retiree’s preferences but had been left out of the preliminary plan. The bank offering RFI will want to provide their own advisors, for whom we will provide a training program.

The probability is high that the OCC and FDIC will provide CRA credit on RFI-based transactions. This is because a significant proportion of the clients covered will be low-and-medium income, and the program has a heavy educational component. 

The revenue source in deploying RFI is the commission paid by annuity providers. This is typically 3-4% of the amount paid for the annuity. Subject to experience-based modifications, revenues will be allocated by function, as follows:

  • Lead Source
  • Financial Advisor
  • Program Administration and Technology Provision
  • Administration of Annuity Contracts

We seek bank partners to participate in the initial rollout of RFI.  Interested banks can contact the Mortgage Professor at 

Appendix Note on Quantifying RFI Benefits

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 income 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.

 RFI vs 4 percent rule

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 preference.

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.

Advantages of competitive pricing in RFI


In or near retirement? The Professor’s Retirement Funds Integrator (RFI) might enhance your life during retirement.

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