What Blanchett, Finke Predict for Social Security

Meanwhile, Finke looks at the retirement landscape and sees a different but related issue: "We're really in the peak of the defined contribution era," with the role of pension income rapidly disappearing. As a result, "We're giving people a lot of responsibility and telling them that they have to manage their own retirement income plan."

While many investors "just want to put their arms around their investment portfolio and not see it get smaller, as David has mentioned, we're gonna have to be OK with the idea of spending money out of our savings," Finke noted.

Both Blanchett and Finke are researching "how people are actually going to take their savings and turn it into a lifestyle," according to Finke — a challenge advisors can help clients tackle. "It's the big problem we have now in the defined contribution world. It's been a great system for accumulation, not so great for decumulation."

Future Shock?

Throwing a wrench in plans for retirement spending, of course, is the growing reliance on Social Security. "Of course, we've been hearing a lot of bad news about Social Security recently," Finke said, referring to the Social Security Board of Trustees' projection that one of the program's two trust funds will only have enough money to pay 78% of benefits starting in late 2032.

"There is a possibility that benefits could be cut at some point in time in the future, based upon what assumptions you use for … these projections, like fertility rates and everything else," Blanchett said. "Long story short: We're not currently funding social security in a way that is going to lead to benefits as they are currently designed."

At the same time, though, the PGIM researcher believes it's "highly unlikely that we're gonna see a 20%-ish cut to benefits" across the board anytime soon. Longer term, "it's possible that future generations … might experience lower benefits than individuals do today."

In this context, it's worthwhile for advisors to do some stress testing of plans, Blanchett said, so that younger clients in particular have a sense of what would happen to them in the event of a benefit reduction.

While a benefit cut of around 20% is a "worst-case scenario," Finke said, "the reality is that as long as there are people working in the United States … then people are still going to be paying those payroll taxes, and money's still flowing into the system." 

Shoring up Social Security's trust funds, though, is more problematic, he said. "What can we expect politicians to do between now and, say, 2033 …? Nothing!" What's likely to happen, he added, is that the government will "borrow money in order to give people the benefits that they've been promised."

If it were to "get serious about this," Finke pointed out, the government "would probably modify the increase in income that retirees get every year. It's very generous."

For Blanchett, Social Security should be seen by Americans as social insurance rather than investable assets. "It's just like other taxes that you pay, and it provides this social good," he said. The government's ability to pay for this social insurance is tied to the Social Security "taxes we collect."

The situation "actually could get worse than [benefits of] 80%, based on labor force trends and other things," he cautioned. "But at a high level, it's not going anywhere for a long time — though the benefits are likely to change at some point in the future. To Michael's point, no time soon, because it's going to be a … political hot [potato] to actually address."

See the video for our lively discussion, which also includes Blanchett and Finke's views on alternatives in 401(k)s and more.