Francois Gadenne was born in France in 1956 and emigrated to the U.S. in 1978 where he became a naturalized citizen. He currently resides in Boston with his wife and three children. He received his undergraduate degree from Ecole Supérieure de Commerce de Paris and an MBA from Northwestern University’s J. L. Kellogg Graduate School of Management. He has been in the financial industry for 24 years. His personal retirement savings philosophy is, "Save more, stay away from negative realized returns and remember to have a life, too."

Francois Gadenne on Averting the Retirement Security Crisis

By Lynn Novelli

Francois Gadenne is president and CEO of Retirement Engineering, Inc., a financial research and development company dedicated to solving retirement income issues for individuals, and co-founder and chairman of the Retirement Income Industry Association (RIIA). RIIA was founded in 2005 as a think tank to analyze retirement income issues and as an incubator to facilitate the exchange of new ideas, concepts and knowledge among institutions interested in building retirement income businesses. RIIA's founding philosophy is that the current retirement income situation requires new leadership and development of new products and processes to preserve retirement security.

During a recent conversation with Portfolio, Gadenne expressed his views on the future of retirement income security in the United States.

Portfolio: What challenges do you foresee facing the next generation of retirees in the United States?

Gadenne: With the aging of baby boomers, the center of gravity is shifting from accumulation to distribution. The accumulation phase is about asset allocation. You need to invest for total returns to achieve a mountain of cash, and you shouldn't worry about income needs. The game changes at retirement, which is where the leading edge of the boomer generation is now situated. They will soon need to be living off their retirement savings, and their focus must shift from accumulation to distribution.

Portfolio: What is the status of retirement income for this critical mass of boomers approaching the distribution phase?

Gadenne: A crisis exists. With the current situation, people will not have enough money to retire. Boomers approaching retirement cannot count on Social Security. The number of Americans with pension plans has declined from one half to less than one fifth. Most baby boomers will not have a pension to rely on in retirement.

As a result, individuals will face the choice of working longer or relying on their own financial means during retirement. We are living longer now, which means that people will need more money than previous generations to fund more years of retirement.

Portfolio: What is the underlying cause for this crisis?

Gadenne: Demographics. The first wave of the boomer generation turns 60 this year. The retirement income security crisis is self imposed due to society's insistence on Social Security at age 65. The age limit for Social Security was set at a time when 65 was the life expectancy. It was conceived as longevity insurance. Now, with people living longer, it's become a retirement insurance plan.

Portfolio: Are the boomers ready to face the realities of depending on their own financial resources for retirement?

Gadenne: No. Financial products currently available are defined in terms of input—accumulation—not income. During an accumulation period of 30 to 40 years, most of the money is earned in the last eight to 10 years due to exponential accumulation. This creates a danger zone for boomers before they reach retirement. The impact of negative or less than expected actual growth rates during those last eight years dramatically reduces the amount of money that they will have to draw on for retirement income.

Existing asset accumulation products are likely to be inadequate for the purpose of providing income generation, and existing income generation products are probably inadequate to meet the entire needs of the tidal wave of boomers who will be reaching retirement over the next 20 years. Add in the fact that most financial planners and investment advisors are not educated in distribution strategies, and you have a generation unequipped for retirement.

Portfolio: What changes need to be made in how the financial planning industry approaches retirement planning?

Gadenne: The financial planning industry must start thinking in terms of a three-step process that is dictated by the client's lifecycle. The first step is to make a basic asset allocation and security selection. Next, there needs to be a portfolio conversion to generate income. When doing so, it is important to balance income and the cost of living. Finally, there needs to be an income that is combined with risk management, which includes drawdown, inflation, market and longevity. At this stage, assets need to be readily converted into income.

On the third step, there needs to be a new class of products that is based on purchasing retirement income through products that deliver outcomes and limit risk on the downside for retirees. These products could be purchased either during the accumulation phase or during the distribution phase.

This income-purchase approach also means that individuals will have more control over their retirement income, based on the decisions they make now. For example, do you want to go out to dinner with your spouse and spend $67 this weekend, or use that $67 to purchase a dollar of retirement income?

Portfolio: How much of a sea change in thinking does this approach represent?

Gadenne: For years, the financial industry has turned the asset allocation dial to the max and gotten as much out of it as possible. Now, let's turn the dial to savings. This represents a big shift in thinking from "here's my money now and we'll see what I get at retirement" to "here's my money and here's what I expect in income when I retire."

Portfolio: What is the time horizon for resolving some of the issues? Is it too late for those individuals approaching retirement in the next five to 10 years?

Gadenne: New products to meet the needs for income distribution are being developed right now. However, there is not a product currently packaged for the retail market. It is never too late, even for those leading-edge boomers turning 60. Since we have a longer life expectancy than prior generations, 65 is not the end-game that it used to be, and there is time for making progress.