The Ubiquity of “Lost Decades”

thelostdecadesThe financial crisis (circa 2008-2009) brought out discussions about “lost decades” in the investment markets, 10-year periods that suffered negative equity returns. It even prodded PIMCO to argue that the investment universe had fundamentally changed, that an “old normal” had been overtaken by a “new normal” characterized by persistently slow economic growth, high unemployment, significant geopolitical tension with social inequality and strife, high government debt and, of course, lower expected returns in the equity markets.

A Journal of Financial Perspectives paper from last summer considers how unusual it really is for equity markets actually to “lose a decade.” As it turns out, lost decades of this sort are not the exceptional episodes that only very rarely interrupt normal steady economic growth and progress that so many seem to think. Continue reading


Realistic Retirement Planning

BreenSteve Breen is our local editorial cartoonist here in San Diego. He has won the Pulitzer Prize twice (1998 and 2009) and, best of all, he’s terrific. His cartoon yesterday (above) is particularly pertinent for my readers. I wrote about its subject here.

A more realistic approach to retirement planning will not be all that different substantively – in general, people should save more and start saving sooner.  But a better approach will meet the people who need good advice “where they live” without judgment or condescension, while remaining forthright about the challenges that await.

Not everyone with a less than perfect retirement plan gets into that situation on account of foolish decisions.  My wife and I made some difficult choices.  We remain convinced that, for us and for our family, they were the right choices. We are now ready to give retirement planning a much higher priority.  It would have been better for our retirement plan had we done more and done it sooner, but thankfully we are in a position where we can still be cautiously optimistic about our retirement prospects.

Realistic Retirement Planning

What You Don’t Know About Social Security Benefits..but Should

I will be part of a webcast on the financial planning aspects of Social Security provided by ThinkAdvisor on Tuesday, April 1 at 2pm ET (11am PT). It is entitled What You Don’t Know About Social Security Benefits..but Should. You may register and get additional details here. I hope you’ll tune in. SS Webcast

Retirement Planning’s Probability Problem

Probabilities2My latest Research magazine column is now available. Here’s a snippet:

The point here is that the highly improbable happens all the time but is always unexpected. This math explains why we shouldn’t be surprised when the market remains “irrational” far longer than seems possible. But we are. Randomness is difficult for us to deal with. Instead of dealing appropriately with probability, we look for patterns to convince ourselves that the numbers don’t really say what they clearly do. In this regard, we are dumber than rats—literally.

In multiple studies (most prominently those by Edwards and Estes, as reported by Philip Tetlock in his book Expert Political Judgment), subjects were asked to predict which side of a “T-maze” held food for a rat. The maze was rigged such that the food was randomly placed (no pattern), but 60% of the time on one side and 40% on the other. The rat quickly “gets it” and waits at the “60% side” every time and is thus correct 60% of the time. Human observers keep looking for patterns and choose sides in rough proportion to recent results. As a consequence, the humans were right only 52% of the time—they (we!) are much dumber than rats. We routinely misinterpret probabilistic strategies that accept the inevitability of randomness and error.

If we are going to recommend and implement probabilistic retirement planning strategies, we need to prepare for client and advisor difficulty in dealing with such concepts.

Retirement Planning’s Probability Problem

The U.S. Retirement Crisis: Essential Reading and Resources

CFALauren Foster of the CFA Institute asked Wade Pfau, Michael Kitces, David Blanchett and I to suggest some resources for advisors dealing with retirement.  What we suggested and a lot of other good stuff are available here.  I think it’s well worth your reading.

The U.S. Retirement Crisis: Essential Reading and Resources

More on Dave Ramsey

Dave Ramsey 2After I wrote my Dave Ramsey piece yesterday (Math Suckage and Dave Ramsey), my friend Wade Pfau, a Princeton Ph.D., a CFA, and Professor of Retirement Income in the new Ph.D. program for Financial and Retirement Planning at The American College, wrote a piece on Ramsey and his suggested 8 percent retirement withdrawal rate: Dave Ramsey’s 8% Withdrawal Rate. My post noted that an 8 percent retirement withdrawal rate is “crazy,” but I focused on the 12 percent return assumption.  Wade deals with Dave’s withdrawal rate nonsense head-on. He pulls no punches. Continue reading

Retirement Confidence Still Minimal

retirement confidenceAs I noted earlier in another context, the Employee Benefit Research Institute issued its 23rd annual Retirement Confidence Survey yesterday and it shows that despite some economic recovery, many Americans remain terrified of their retirement prospects.  Continue reading

Unreasonable Expectations Highly Desired

Rose Colored GlassesI spend a significant amount of time talking and working with advisors of various sorts and most of them have a decent working knowledge of the retirement income literature and have a good sense of what the advantages and disadvantages of the various approaches are.  In short, they generally know what ought to be done in most situations.  But they struggle with recalcitrant clients and prospects and how to handle them. For example, their clients and prospects resist annuitized floors.  They don’t delay Social Security. Continue reading

Asset Allocation and Retirement Planning

The Center for Retirement Research at Boston College has an important new paper out entitled How Important is Asset Allocation to Financial Security in Retirement?  I encourage you to read it carefully. 

The motivation for this paper is the concern that financial advice tends to focus too much on financial assets, which gives too much emphasis and prominence to asset allocation decisions. Most people have too little financial wealth and typical financial tools are silent on the levers that will have a much larger effect on retirement security for most Americans. As the article points out, these levers include delaying retirement, tapping home equity through a reverse mortgage, and controlling spending.  Accordingly, the paper concludes that given the relative unimportance of asset allocation, financial advisers would be of greater help to their clients if they focused more on a broad array of tools – including working longer, controlling spending, and taking out a reverse mortgage.

I agree with this argument, but would add an additional point along with a caveat.

The additional point is a crucial one:  everyone needs to save more.  It is the single most important thing one can do to enhance his or her retirement prospects.  The ideas that the article focuses on — working longer, controlling spending, and taking out a reverse mortgage — are good ones.  Saving more is even better.

My proposed caveat relates to the (good) idea that people would be well served by working longer.  As the article points out, retiring later is an extremely powerful lever.  Because Social Security benefits are actuarially adjusted, they are over 75 percent higher at age 70 than at age 62. As a result, they replace a much larger share of pre-retirement earnings at later ages – 28.6 percent at 62 and 51.5 percent at 70 in an example offered by the article — reducing the amount required from savings. By postponing retirement people also have additional years to save and allow their balances to grow. Finally, a later retirement age means that people have fewer years to support themselves on their accumulated retirement assets.

But the caveat is an important one. Working longer is an excellent idea, but it is not always viable.  Health can deteriorate.  Jobs can disappear.  Opportunities can vanish. Indeed, a recent Society of Actuaries survey found that half of retirees had retired from their primary occupation before age 60. And, though other studies show an increase in the percentage of people over age 65 who are employed, many who lose jobs in their 50s and early 60s experience more difficulty finding new employment than younger people. As a consequence, a commitment to work longer is a good thing, but it is no substitute for planning and saving so as to be able to retire sooner, because you may not have a choice.