An article in The New York Times this August, “How to Enjoy Retirement Without Going Broke,” is a reminder that experts — from Nobel Prize winners to financial advisers — are challenged by planning for retirement income. It also showed that those who provide investment advice are stymied by this almost universal problem for a large part of the retiree market.
On the academic side:
“It’s really nasty. It’s the nastiest, hardest problem I’ve ever looked at,” William Sharpe told the Times. Sharpe, who won the Nobel Prize in economics, reported his progress on the problem of how retirees can manage their financial assets without running out of money: “I can’t say I’ve found some magic solution, because I haven’t.”
On the adviser side:
One advisory firm mentioned in the article appeared more confident than the academics, with brochures touting “7 innovative ways to generate income from your nest egg.” On the other hand, they also “hate annuities” and their firm’s reward system — “we make money when you do” — is based on having clients take market risk, rather than providing secure income.
The Challenges Under Consideration
From academic to practicing adviser, why do people find it so challenging to figure out a smarter way to create a plan for retirement income? Here are a few reasons why the experts don’t get it:
- Instead of planning using an Income Allocation method, most of the traditional research or practice for savers has been about asset allocation and the techniques to improve or manage the returns on investing.
- Our nation’s financial regulatory structure permits an adviser to be a fiduciary even though the adviser is not required at least to consider other financial products, such as income annuities, that can deliver tax-efficient lifetime income.
- For high-end advisers, a large part of their practice is designed for high net-worth individuals who have sufficient retirement savings to live off the interest and dividends, avoiding the risk of running through their funds.
- The algorithm that integrates annuity payments into an income allocation plan requires an understanding of income annuities, particularly the differences with annuities designed for accumulation.
- These experts often confuse the market value of an investment with its liquidity. Income annuities, just like a pension or Social Security, may not have liquidity, but they do have a market value.
The chart below shows for a typical Income Allocation plan the combination of the market value/liquidity of investment portfolios and the market value of future guaranteed annuity payments. The latter has significant value, creating stability in income as well as …….