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How Merrill Navigates the Bizarro World of Retirement

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If 76 million boomers are retiring over the coming two decades — one every six seconds — then surely Merrill Lynch, because of its size, will be helping more of them than other firms.

Is there a uniquely Merrill approach to this demographic challenge?

Indeed, there is and David Laster, the firm’s director of investment analytics, laid out that case Tuesday in a presentation at the Retirement Income Industry Association (RIIA) spring conference in Chicago.

Known for, among other things, a seminal paper published in the late ’90s highlighting the value of global diversification, at a time when foreign investing was still too exotic for most U.S. stock portfolios, Laster is Merrill’s thought leader on the how-to of investing.

And the how-to as regards retirement success is a unique challenge because of the profound differences between accumulation and decumulation.

The former involves the largely straightforward tasks of saving and investing, whereas the latter involves living off of that savings, a tricky balancing act given profound unknowables such as one’s date of death.

The odd decumulation universe is akin to “non-Euclidean geometry,” Laster says, where bedrock “Euclidean” investing principles no longer apply.

Indeed, the PhD and CFA parenthetically appealed for the development of a new field of study, noting limited work on the problems of retirement economics in academic isolation. In contrast, Laster called agricultural economics — disseminating knowledge about a field representing just 5% of the economy— an established discipline. RIIA’s leadership, in later comments, was eager to take up that challenge.

Four key risks inhabit the Bizarro World of retirement: longevity and health care, which are personal risks, and the market risks of sequence of returns and inflation.

Retirees will differ one from another as to how long they live and their health spending needs, including whether costly long-term care will be needed.

Sequence of returns refers to the critical performance of the market in the years just before and after retirement. Retiring into a 2008-style market crash may adversely alter spending plans for the rest of a client’s life.

(Indeed, Laster cites a study showing a sharp recent decline in investor confidence of retirement readiness, falling from 41% of investors in 2007 to just 18% in 2013 saying they were confident they would have enough money for retirement.)

Inflation is a more perfidious threat to retirees, since their sources of income — unlike working wages — are less likely to adapt to the dollar’s reduced purchasing power.

With that understanding of the retirement challenge, Merrill’s retirement framework is designed to provide clients with lifetime income, deal with contingencies and address clients’ legacy concerns.

A significant income source for most retirees is Social Security, and Laster notes “it’s the rare person who waits past 66” to claim benefits.

Citing the behavioral economics concept of “framing,” Laster notes that age 66 is known, officially, as full retirement age.

“I would argue that you frame it so that 70 is the age you get the maximum amount of income, rather than say you get a bump up as you go up from 66,” suggesting clients will show greater reluctance to leave money on the table if advisors engaged in retirement planning framed matters that way early on.

Thus, a key insight for advisors is to “decouple” the question of when clients retire and when they claim Social Security, Laster says.

“One way to get around [the gap between age 66 and 70] is to provide an annuity which would provide the income over those four years, and they would get the step up at age 70,” Laster says.

The Merrill expert noted that the calculus as to claiming Social Security could change dramatically in individual circumstances, for example when a client is in poor health.

Another key factor in providing adequate lifetime income involves decisions about drawing down the portfolio, and the composition of that portfolio.

While Merrill favors equity allocations of at least 30% to 40%, Laster says “spending rates are the critical success factor for a safe retirement — in other words, restraining spending matters most.”

Merrill’s research uses age as a key determinant of a sustainable spending rate: Obviously, an 85-year-old can spend much more than a 55-year-old because of his reduced life expectancy, and Merrill offers tables reflecting these varying rates.

Another approach to improving portfolio sustainability are investments with downside protection, Laster says:

“We recommend combinations of variable annuities with guaranteed lifetime income; immediate annuities; or deferred income annuities (longevity insurance),” in part depending on results of an investment personality assessment Merrill has developed for clients.

The Merrill retirement path also factors in contingencies, particularly the wealth-draining possibility of debilitating illness necessitating assistance in daily living.

Common misconceptions regarding the need for long-term care (LTC) are that “it won’t happen to me” or that “the government will pay for my LTC,” but the realties are that over 70% of those over 65 will need some LTC and that need will either burden loved ones or exhaust one’s own savings, Laster says.

He enumerates five ways of addressing the problem: self-funding, an approach that clients with substantial assets could undertake if they wish; Medicaid, a governmental solution for the destitute; the highly limited support of Medicare; a traditional LTC insurance policy; or a hybrid life insurance policy including an LTC rider. For those not rich enough or poor enough to avoid LTC insurance, Laster notes that such policies are more affordable when purchased in one’s healthier 50s and 60s.

As to legacy concerns — the desire to leave a bequest to loved ones and charities — Laster cautions advisors not to make any assumptions, noting that results of Merrill’s investment personality assessments reveal many clients lack this desire, perhaps because of strained family relationships.

For those who do have this goal, Laster notes that life insurance may serve as an appropriate tool (and indeed notes that each investor goal is tied to a variety of products in Merrill’s retirement matrix).

Not all Merrill advisors follow the firm’s guidance on retirement planning. Laster told ThinkAdvisor that the firm disseminates its approach via white papers available to advisors and their clients, “which have had thousands of downloads;” breakout sessions at Merrill conferences; and other training and tools the firm provides.

“Penetration, though far from universal, is growing,” Laster says.

But advisors following the approach, which he terms “holistic,” have the opportunity to assist their clients with more than just investments and to broaden their discussion with clients to the deeper touch points surrounding health, family and legacy goals.

Or, as Laster bracingly puts it:

“If an advisor cannot address a client’s most meaningful retirement concerns, there will be other advisors who can.”

Related story on ThinkAdvisor:

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