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Boomers: Don’t worry, keep saving

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Michael Finke’s presentation at FPA Retreat 2013 in Palm Springs, Calif., on Monday wasted no time in surprising the advisors in attendance.

“Baby boomers have saved more money for retirement than any generation in history,” Finke, below right, a professor of personal finance at Texas Tech University said at the outset of “The New Retirement Reality.”

The somewhat contrarian speaker said that as such, although we’re in a retirement crisis, it’s a “bit overblown.”

He noted older baby boomers have saved less than younger baby boomers, and younger baby boomers have saved less than Generation X, even accounting for the poor asset returns experienced by the latter.

“And despite the conventional wisdom that it’s only getting worse, there were 40 percent more assets in defined contribution plans in 2012 when compared with 2005,” Finke argued.

He added that we are still “about a decade away” from this baby boomer “retirement experiment” with defined contribution plans.

“I’m here to tell you that as baby boomers in the middle of the demographic retire, it will be your job to be their pension managers,” he declared.

Finke noted that although pension managers get paid “a million dollars a year,” the advisor’s job is much harder.

“What do pension managers worry about?” he rhetorically asked. “They worry about asset returns in this low interest rate environment and longevity.”

He explained that advisors worry about the same thing, but a client’s sequence of returns and risk is theirs alone, and cannot be shared.

“The risk is idiosyncratic to the client. Not so with pension managers, who know that if someone lives to age 100, someone else will only live to 70.”

“Finke then turned to an area of controversy, his view that the 4 percent retirement withdrawal rule “is dead.”

“The 4 percent rule assumes that spending will be the same in retirement. But 50 percent of the couples will have one spouse that dies by the age of 80. What are the chances that one spouse will spend as much as two? Not much, and our ability to spend diminishes with age.”

Finke also noted that the static 4 percent rule not only performed worse than a more dynamic rule that took current events into consideration, it also performed worse that “a regular RMD payment.”

View complete conference coverage at Advisor One’s FPA Retreat 2013 landing page.

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