The Crisis in Retirement Planning

I wanted to share a recent article published in the Harvard Business Review written by Dr. Robert C.

Merton. Dr. Merton is a recipient of the 1997 Alfred Nobel Memorial Prize in Economic Sciences, and the School of Management Distinguished Professor of Finance at the MIT Sloan School of Management. He is also the resident scientist at Dimensional Fund Advisors, a Texas-based global asset management firm, and University Professor Emeritus at Harvard University.

In his article, Dr. Merton discusses the shift in retirement income planning since the dot-com crash in 2000. During the crash, interest rates and stock prices fell causing the value of pension liabilities to rise and the value of the assets to fall. The outcome of this crash was America’s shift from defined-benefit (DB) pensions toward defined-contribution (DC) retirement plans (commonly known as the 401(k)), transferring the investment risk from the company to the employee. In the past, the DC retirement plans were used as an add-on to traditional retirement planning, as it was not designed for income in retirement, yet  today it has become the main channel for private retirement saving.

Why is this important to you? Dr. Merton discusses how this shift has increased the likelihood of a major crisis for baby boomers looking to retire and how investment decisions have shifted emphasis from retirement income to return on investment. He argues how the primary concern of the saver still remains, “Will I have sufficient income in retirement to live comfortably?” 
Dr. Merton also shares in this article that risk should be defined from an income perspective and that risk-free assets should be deferred inflation-indexed annuities. This is not to say that an employee should commit to purchasing a deferred annuity, rather the fund manager should manage the risk-free part of the portfolio so upon retirement, the employee would be able to purchase an annuity that would support the target standard of living regardless of what happens to interest rates and inflation over the years.  Dr. Merton suggests that in order to create a more meaningful engagement in pension planning, employees should not be asked about risk, but about their expectations for income needs in retirement.
As you approach retirement, the following is a good framework in which to divide your income needs into three categories:
  • Minimum guaranteed income
  • Conservatively flexible income
  • Desired additional income
Will you have sufficient income in retirement to live comfortably? You can always find the help you may need at Cornerstone Retirement Group by calling our office at (775)853-9033 and speaking to one of our Retirement Planning Specialists.

To read more on Dr. Merton’s article, click here.