Life After Full-time Work Blog

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#96 Where Next?

I’m asking for your help in prioritizing topics for me to research

 

I seek your input, please and thank you.

Here’s the background.

I’ve been working for some years on researching retirement from the perspective of the individual. This led to the creation of this website and the writing of Freedom, Time, Happiness, from which Life Two (about a quarter of the original FTH) was extracted; now Life Two has been published and FTH uploaded to this website. That’s a lot of research, a lot of assimilation and organization of information, and a lot of writing. Along the way there have also been almost 100 blog posts, as you see. And, thanks to Common Wealth, we’re also uploading a number of podcasts that add the views of global experts on aspects of retirement.

It has been a wonderful time for me, and has brought me enormous pleasure as you send me comments and emails that sometimes guide my perspective and at other times bring gratification when you say you’ve benefited from some aspect of what I’ve written. Thank you!

While all of that represents a sort of completion, my love of the subject and of researching it remains as eager as ever. And I find myself with a number of possible future avenues to explore. They result from my ongoing dialogue with experts and my attendance and participation in conferences and seminars.

Quite simply, this is still a subject in its infancy. There is a lot to learn, even for the experts, about the way in which people think about the psychological, practical and financial implications of retirement. In fact, surveys suggest that few people think about it until it’s upon them, even though retirement itself is already changing so much from its traditional “end of life” to just being a new and happier phase of life. And those who are researching retirement tend to have two angles that they focus on. One is that they tend to concentrate on the financial aspects. The other is that they have a sort of top-down, societal perspective rather than a bottom-up, individual perspective.

Of course those are very useful perspectives. But there’s so much more! And the notion of focusing on the individual person rather than on society is (at least to me) so much more important, given that individuals have to manage their lives right now, in today’s circumstances; and they do not appear to be receiving adequate education (perhaps because the education isn’t available) about Life Two, unlike the education they receive before commencing Life One.

That’s why I’ll keep researching the subject. There are numerous angles to pursue. But in fact there are so many that I need to prioritize my focus, and that’s where I’d greatly appreciate your input. Permit me, in this blog post and the next one, to outline some of those angles briefly. And then, if you’re willing, let me know (either directly on this website or by emailing me at donezra@me.com) which ones you would place at the top of my list.

It would be even more helpful if you could tell me why you’ve made your choices, and/or what are your own views on the subject matter of your choices. But you don’t have to go that far, unless you want to. And I’ll keep the communications private unless you tell me it’s OK with you to publish them.

Right, here are the first choices (to be added to in the next blog post). And remember, you’re helping me decide which areas to do research into. I haven’t done that research yet, so I don’t have answers!

1) Individual financial dilemmas

I subscribe to a lot of newspapers and online publications that carry questions from readers, and then print possible approaches to resolving the questions, either from a columnist or from experts consulted by the columnist. I really enjoy these. (For example, there’s Rob Carrick’s column in the Toronto Globe and Mail: https://www.theglobeandmail.com/investing/personal-finance/carrick-on-money/ ). Typically the solutions offered are pretty good, though inevitably they reflect the retirement systems and tax regimes current in the country under consideration. What I’ve wondered about is whether it’s possible to generalize from one country to universal principles, and whether the responses would still be valid if the financial parameters in the question change.

For example, Catey Hill published a question in MarketWatch recently (https://www.marketwatch.com/story/im-38-with-315000-saved-for-retirement-but-have-30000-in-debt-should-i-lower-my-401k-contributions-to-get-rid-of-that-debt-2020-01-22) about a 38-year-old who has been saving 15% of pay into a US 401(k) plan (personal tax-favored retirement savings), but also has $30,000 in consumer debt of various kinds, and is wondering if it makes sense to lower the retirement contribution from 15% to 5% for 2020 and pay down debt.

The response is excellent. But what if this person was in a different country, with a different tax regime for retirement? What if the interest rate on the consumer debt were lower? What if the debt was for a mortgage rather than on credit cards? And so on.

Do issues of this sort appeal to you? And do you care about universal principles, or are you satisfied with in-country responses? Are there specific issues you’re interested in focusing on?

2) Emergency savings

I understand that in many countries (probably most countries, I suspect, because it’s certainly true in the US and UK), most people wouldn’t be able to come up with $1,000 or £1,000 if they had an emergency that required that amount of cash. So some retirement systems are experimenting with so-called “sidecar funds” (for example, the UK’s National Employment Savings Trust: https://www.nestinsight.org.uk/nest-insight-launches-sidecar-trial/) that permit the diversion of a portion of retirement savings for emergency purposes.

How widespread are these approaches? And what has been the experience, both of getting participants to contribute and of the use of these sidecar assets?

3) Increasing participant engagement in connection with retirement issues

Most participants in retirement savings plans are in them by default rather than positive choice (meaning that they have the option not to participate, if they explicitly choose to exercise that option). And their investment choices are typically default choices too. It’s good that typically these choices are very sensible, so a lack of knowledge or individual engagement does not prevent beneficial outcomes.

But the lack of engagement goes further. Participants tend not to read the statements they’re given periodically. And they might even abandon their savings when they change jobs and no longer participate in the former job’s plan.

And so on. As the old saying goes, you can lead a horse to water, but you can’t make it drink.

How can one improve engagement? Obviously not to the extent of making every participant fascinated by retirement (ha!), but at least making more of them consciously aware of where they stand and what are their choices.

This is a huge topic with employers and unions and plan sponsors of all kinds, and with record-keepers – and (selfishly) with me too, as Life Two is aimed at Defined Contribution participants, but I have no way of contacting them.

I’ll add the improvement of financial literacy under this engagement heading.

4) Decumulation

Saving for retirement (in other words, accumulation) has, over the last decade or so, received a lot of attention and there are now general principles promulgated, such as the so-called “investment glide path.” Perhaps it’ll take another decade before decumulation principles are promulgated; meaning … drawing down periodic amounts – like weekly or monthly or yearly – from accumulated savings, at a rate that is unlikely to exhaust the savings while the retirees are still alive. Surveys suggest that there’s a strong fear of outliving one’s savings.

What might these decumulation principles look like? How might an employer or union implement them, given the differences in circumstances of the retired participants? (Or a financial planner?) How might individuals decide if their circumstances merit departure from default options?

This is a very broad subject, of course. Linked to it is research on the so-called “spending smile,” implying that spending tends to start high after retirement, decline in a later phase of life, then possibly increase if health starts to fail near the end of life. How common is this pattern? Research suggests that it applies to society as a whole, but what proportion of individuals experience this pattern?

***

Enough for today! I’ll set out more choices next time. But don’t wait for next time before you respond, because those next choices are generally broader in their scope than these ones, which still relate pretty much to the individual.

Thanks!

***

14 Comments


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.


14 Responses to “#96 Where Next?”

  1. Cindy Deere says:

    HI Don, hope you are well. I’m so pleased to hear you say that your energy for research in this space continues to be high. That’s inspiring! Anyway, I really like all of the topics above but if I had to prioritize it would be around Financial Literacy and Participant engagement and then decumulation. For me financial literacy is a foundational thing that I do not think we do well (at least in the US) and it is a key to living independent, empowered lives. Participant engagement follows on from that. How can we catch participant’s interest earlier in their career and sustain it? And then the decumulation topic. While I know you’ve written about this, I think it’s one of the key concerns of people heading into retirement: “I’ve saved all of my life, it’s very difficult to think about switching that mindset to spending; and then when I do, how do I guarantee I won’t outlive my funds.” Just my thoughts. Best, Cindy

  2. Chris Buckham says:

    Hello Don
    As an area of focus related to No 4 on your list – declumulation – I’d like some consideration given to those of us living Life 1.5. That is where one partner is in drawdown and managing declumulation, while the other (probably younger) is still in full employment and accumulating. This is the situation that my partner and I are in, and although we apply the broad principles of financial planning, there is usually an implicit assumption from experts that the children are grown up and you are thinking about the grand children, whereas I’m sure there are many people besides me who are retired but still doing the school run for their kids!

    Perhaps a bit of a niche angle, but I thought I would put it in the mix.

    Regards

    Chris Buckham
    PS Really enjoying the podcasts, particularly the examples from other countries besides the UK

    • Don Ezra says:

      Thanks, Chris. I’ve never thought of the angle you mention, but now that you’ve brought it to my attention I’ll bet it’s much more than a niche angle.

  3. Ange says:

    Don
    Firstly thanks for all the info you post. Great to have new ideas and areas to investigate.
    Regarding topics. My husband and I are trying to be self funded retirees. Only 1 year retired so far. We think we have done a fairly good of accumulation – but we will have to spend the capital down. We keep on top of changing tax etc rules in our country. But we are struggling with the spending side. We are trying a bucket strategy. We have kept a good history of what we spend each year.
    The tricky bit is working out a plan so that we get to enjoy life now, without spending so much that we run out later. A topic that I know you have written about many times. The concepts are easy enough to understand, but actually putting it in practice and having confidence in it working is another thing.
    We would like to see some detailed options/ products/ approaches we could consider or try out.
    Thanks

  4. Mike Clark says:

    Hi Don
    Good question, delighted the research fires are still burning. It won’t surprise you that I’m going to try to insert a climate risk angle into your topics. It could just be how the person on the way to a pension starts to engage with their DC pot and asks how this risk is being managed. Or, knowing you like the obscure, how about the different perspectives on this issue between say the 20-40 year olds and those aged 41+ on this issue. A Xcountries issue too?! Best, Mike

    • Don Ezra says:

      Thanks, Mike. You’ll be glad to know that climate risk is in the next set of issues on my research list! I’ll be seeking your guidance on that one. Thanks for the angle about differences in approach by different age groups.

  5. Barry Gillman says:

    Don,
    In my opinion, the issue with the way the retirement industry is tackling engagement is that they are (mostly) going about this backwards.
    The conventional thinking is “while learning about retirement is boring (or even scary), it’s so important we have to find more engaging ways to convey the information and its importance.” So the industry tries to talk more clearly and simply, often with use of visuals to reinforce the message. Success rate of this approach is generally not high. Many of us have had the experience of explaining to a recalcitrant teenager why doing their homework diligently is very beneficial for them in the long-run. Mostly with similar results. As one of my sons used to say back then, “I’d do it Dad, but it involves reading.”
    I’ve found that a much more effective approach is to figure out what the target audience likes to do, and then build the subject matter into that structure. Use interactive visual games, competitions, and quizzes, blend in gambling and games of chance, even prizes where feasible. These clearly take more time (and imagination) to construct and run, but they are likely to be far more successful in engaging the target audience.
    Just one quick example: for a sample of 30-40 year-old employees, send half of them an email with a link to “a simple 5-page guide to retirement planning”. Send the other half an email link noting that “Most of our employees can’t answer the majority of these five questions about their future income. Can you do better?” Then see which one gets the better response.

    • Don Ezra says:

      Barry, thank you, this is wonderful! It stands the traditional approach (which I confess I shared, until I saw this) on its head.

  6. Geoff Warren says:

    Hi Don,

    I like topics 3 and 4. My reasoning is as follows. Helping people manage their way through retirement when they are all different is a huge challenge. The best response is personal advice, but the problem is that it is expensive and not scalable. We need to work out ways of ensuring that those who don’t access advice have available at least some acceptable solutions or rules that they can use to get them through. One is smart defaults – which effectively embed advice – where I am currently focusing some of my own research efforts albeit in an Australian context. The others include better engagement (topic 3) and simple rules of thumb that they might follow (topic 4), both of which can help them make better decisions. (Or they can read your blog!)

    Topics 1 and 2 are great too. But topic 1 seems as though it will become messy pretty quickly. Topic 2 is just not as important in my view as 3 and 4.

    Geoff

    • Don Ezra says:

      Thanks, Geoff. That’s compelling thinking — much appreciated. I’m looking forward to your work becoming part of my future research.

  7. Jeremy Brereton says:

    Dear Don,

    Firstly a huge thank you. After hearing your interview with Claer Barret on the FT Money podcast and reading your article, I then purchased Life Two and have enjoyed reading each of your blogs and your podcasts with Common Wealth. You have a really engaging style and I have derived huge value from your work. I retired at the end of December and your work has been the single greatest source of guidance and encouragement for me. I completed a PhD at the beginning of my career and so I love the way that your work references thinking from the best brains on each subject and enables the reader to explore areas in as much depth as they wish.

    So when I read your latest blog 96 asking for help, the least I could do is to reply!

    I would prioritise your topics as follows:
    Decumulation
    Individual financial dilemmas
    Increasing participant engagement in connection with retirement issues
    Emergency Savings (although this would be a distant 4th compared to the other topics)

    My thinking is as follows:

    I used to run a business with 140 associates (100 in the UK and 40 in the US). The UK associates contributed to a money purchase scheme with a provider and it was their responsibility to decide what funds they wished to invest in. I suspect that most were in a standard 60/40 Managed fund. Neither the provider nor our business provided any financial advice to our associates as they neared Life Two and from my experience their level of knowledge about what to do with their ‘pension pot’ was rudimentary. As an employer, I would have been grateful for third party guidance about the principles of decumulation that I could have given to our associates (being clear that it was not financial advice!). As you say, this is a very broad subject and options such as the certainty of an annuity have changed over the years, which makes it interesting!

    Regarding the topic of Individual Financial Dilemmas, I suspect (but have no evidence) that the majority of your readers have engaged with your work as a clear, comprehensive guide which helps them or their friends and families to navigate the path to Life Two. I suspect that individuals who move from country to country would be relative small compared to those who live, work and retire in a country and so I am happy with your focus on the UK in my case) and US and Canada rather than building universal principles as the foundation to any country/tax regime.

    I do have one question that I’m sure you can answer without extra research but it might be a subject to revisit under ‘Individual financial dilemmas’: Do bonds still play that important, lower risk role within a retirement portfolio in our world of central bank manipulation from QE?

    Please see the table below [NOT REPRODUCED HERE] for a comparison of a UK equity Index tracker (L&G) with an Index-linked Gilt ETF (INXG), the total return is 3% higher in the equity tracker, which also generates a significantly higher yield (useful in Life Two) but the surprise is the volatility – yes the 3 year average volatility is similar but the price volatility in a given year is as high in the gilt ETF which also has 2 negative years compared to just one negative year for the equity tracker. There is a similar picture comparing US assets: the Treasury bond ETF (IBTS) has a lower 3 year average volatility than the L&G US Index tracker but individual years show 2 negative years for TIPS compared to 1 for the US Index fund. What is more, the mean return on the TIPS was 0.66% compared to 13.7% for the equity fund. Current UK bank savings accounts are yielding 1.2% for instant access or 1.6% for 18month fixed – so why would you buy TIPS with the inherent volatility and low return shown below.

    So given the volatility and low return from post QE bonds, is a different strategy feasible? Looking at the chart below [NOT REPRODUCED HERE], no downturn has lasted for more than 3 years. So rather than choosing a Target Date fund (Vanguard’s TD2020 is 49% bonds/51% Equity) or increasing the percentage of bonds as a person nears retirement, is an alternative strategy to maintain equity investment at a high level with a tilt towards dividends and to keep a rolling 3 years of forecast expenditure in cash savings?

    I would love to know your views on this. I’m sure you’ve got the answer without more research 😊, but it might also be a subject that is perplexing more of your readers than just me.

    With kind regards and thanks once again – I really appreciate the guidance that your book, blogs and podcast have given me in the transition from Life One to Life Two (6 weeks in and so far, so good).

    Jeremy Brereton

    • Don Ezra says:

      Thanks very much, Jeremy, for many things: the kind words, your ranking of the topics, and for raising a deep and fundamental question, regarding the role of bonds in a retirement portfolio in these days of very low yields.

      I think that’s a topic worthy of a much longer response than I’ll give it here, but for the moment I’ll identify three potentially desirable characteristics in such a portfolio. One is long-term growth, for example from equities. A second is for certainty of cash flow in the short to medium term (a form of insurance, really) which could come from either cash-like savings or the dividend stream from an equity portfolio (exactly as you suggest). That combination could well suffice (exactly as you suggest). If the term of certainty is relatively short (for example, 3 years, as you suggest) you may be exposed to more sequence-of-returns risk than you’d like, in the sense that you may be forced to sell from your growth portfolio right after an equity downturn. In that case, you may desire the third characteristic, a reduction of volatility in the growth portfolio – in which case historically bonds have played a role. Whether that will still hold in the future, with QE in action, I wonder: but that’s speculation. (For myself, I go with five years of cash flow in cash-like savings and then don’t dilute my growth portfolio with bonds – but that’s a personal choice based on a slightly different interpretation of downturns.)

      Anyway, those are the three potential roles of assets, and how much you allocate to each will be a matter of personal comfort. Hope that helps.

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