I was a guest on a webcast, expressing my views on decumulation, happiness, and non-financial issues in retirement
As I mentioned a few weeks ago, I was featured, on November 4, as the guest on Pioneering Pensions, hosted by Stefan Lundbergh, Director at Cardano Insights. I’ve known Stefan for many, many years, and my high respect for him and for Cardano was why I happily accepted his invitation. The interview lasted about 35 minutes, and was followed by a live Q&A session of about 20 minutes. Here’s the link: http://www.pioneeringpensions.com/.
Briefly, here’s what we talked about.
Stefan started by referring to the previous Pioneering Pensions webcast, with Brnic Van Wyk of QSuper. I devoted Blog Post #129 to Brnic and his colleague Ben Hillier and their longevity pooling arrangement. In their early stages of planning Brnic and Ben visited many pensions gurus – and me! – and Brnic recalled to Stefan that what they remembered from our conversation was not any of the technical stuff, but my advice to satisfice: in other words, don’t seek perfection, just launch something that works well and is simple. Perfection can come later, in stages. In turn, Brnic posed a question for me, at the end of his conversation with Stefan: what can the industry do to improve things for participants in a satisficing framework, and what can be left for later? I’ll let you view the interview for details, but my notion is that the industry needs to take real life into account as regards decumulation by retirees, yet keep solutions simple. And I think there needs to be a decumulation default option, otherwise it’s not really helping, in this very complex field.
I’ve never seen anyone go down this path. We’re afraid to try, possibly for fear of lawsuits.
Stefan then asked me to explain my personal approach to decumulation, which (you will recall) I wrote up in an article for the UK’s Financial Times. Stefan also wanted to know what prompted me to take that approach. It was simply a thought experiment. What if my wife and I are the last survivors of a pension plan that is still less than 100% funded: what would I advise the trustees to do, for their investment policy, and what should the beneficiaries (ourselves!) do? Everything flowed from that analogy.
Stefan wanted to know what sort of people – what proportion of retirees – this approach might suit. My answer: most people, the modest middle; in fact, all but those who have so much money that they won’t have a lifetime spending problem, and those who have so little that they can’t satisfy even their basic needs.
From there Stefan asked about our asset allocation (far higher in growth-seeking assets than is usually associated with our age), and does it reflect a large amount of money? No, not a large amount of money. It’s partly that a lot comes from our equivalent of a state pension, which is never counted as a lump sum asset, even though it really has a very high value. But it’s also because we’ve redefined risk: for us, risk is not annual volatility of returns, it’s the chance that growth markets will fall and not recover for many years. So we end up with a 5-year risk horizon, not the traditional 1-year horizon, and that permits a higher exposure to growth-seeking assets.
Stefan had a very interesting calculation about the value of the UK’s state pension, compared with other (lump sum) assets.
From there we moved to broader thoughts about retirement, as covered in my Life Two book: not just the big financial question (“Will I outlive my assets?”) but also other possible fears, psychological (“Will I lose my identity?”) and practical (“What will I do with my time?”).
That led logically to a discussion of happiness. I explained the U-curve of happiness: the fact that happiness tends to be highest in the retirement years, though the explanation is neurological and has nothing to do with actually retiring. Whenever I explain this curve, people tell me that their first thought is: where am I on this curve? (My note to you: wherever you are on the curve, the best is yet to come!)
And that makes it a real shame that people of so scared of retirement. That’s because people haven’t been educated about this wonderful phase of life – and that’s what my Life Two book hopes to achieve. There’s more to life than money. We need not only something to live on, but also something to live for. The actual biggest problem in retirement tends to be loneliness.
The questions in the Q&A session:
If you haven’t yet bottomed out on the U-curve of happiness, what can you anticipate to stop the decline?
Though employers are scared to offer a decumulation default, what about UK master trusts?
Would I change my buckets in an environment of low interest rates and high inflation? I tried to summarize how I adapt my approach as conditions change, and didn’t do a good job of it. More about this in a stand-alone blog post in the new year.
What do I think about low Pillar 1 (state) pensions? A political question, not a technical or professional one, but I do have a personal view.
For DC pensions, are glide paths de-risking too fast?
How else can large DC plan sponsors help in the savings phase? Can they help with some customization before one approaches a financial planner?
Trust is an important issue: what can be done to help recover trust?
And then Stefan asked me to create a question for his next guest, Zvi Bodie, eminent professor of management at Boston University, and someone I admire deeply. So I find nothing to question in connection with the content of his writing (books, papers, articles); but I do ask a question about the context in which he places his popular writing, emphasizing how to avoid or reduce risk.
I thoroughly enjoyed the conversation with Stefan – he made me feel completely at ease. The relief I felt at the end (I’m a nervous sort, as far as public appearances are concerned) is a good measure of how very helpful and generous he was, in his attitude as well as his preparation.
Enjoy the webcast!
Retirement involves much more than just money, though of course financial issues are very important. Money is a means to an end, to allow you to focus on what makes you happy.
I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.