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.