CHICAGO One of the greatest challenges for retirement is getting people to save. There is no hope for those who never save.
In a panel discussion Thursday at the Morningstar Investment Conference, Steve Wendel, the principal scientist at Morningstar's HelloWallet, hailed default contribution options as a key to getting people to save more. He pointed to a survey showing that only 3% of those who wanted to save for retirement actually followed through at their desired level. In light of my unrealized goal of eating more health foods, I can relate to that.
So the key is to get those who save some to save more, said Michael Finke of Texas Tech University.
How do we advisors work better with our clients in increasing savings rates? Automatic savings is the key, said David Blanchett, head of retirement research at Morningstar, who noted simply that saving for retirement isn't fun. Finke argued that the answer is auto-escalation, where a portion of pay increases goes to increasing the contribution rate to retirement accounts. That way, consumers increase their savings but don't see the pain of the lower paycheck.
Asset allocation was next up. Finke pointed out that consumers have an amazing ability to time the market poorly buying and selling at the wrong times. In a rare show of judgment, I opted not to raise my hand to say that data shows we advisors also have this skill.
Meanwhile moderator Christine Benz, Morningstar's director of personal finance, presented data showing that most investor returns underperform fund returns. Target-date funds were the exception, however; there, investor returns exceed fund returns. I love target-date funds but generally don't recommend them as they ignore asset location from a tax perspective. Stock index funds are generally more efficiently held in taxable accounts, while fixed income and REITs are best held in tax-deferred accounts.
The panel was asked about managed payout funds. Blanchett noted that Vanguard had most of the assets, but equity allocation may be too high. I have been very critical of Vanguard for being too complex and including such funds as a market-neutral fund.
Finke also addressed cognitive decline as we age, saying that qualified longevity annuity contracts are a great solution; once a contract is owned, no more decisions need to be made on that portion of the portfolio. But no mention was made of inflation risk. Buying an immediate annuity is like buying a bond with the duration of the rest of the client's life, and, today, nominal rates are near an all-time low. One can buy inflation-adjusted annuities, but payouts are painfully low.
According to Blanchett, the advisor's job, relative to investing, is to the keep the client focused on earning market returns rather than on timing the market. I couldn't agree more.
Unlike last year's retirement panel, which I was on, the subject of safe spend rates didn't come up. Nor did the subject of fees and bad behavior on the impact of both wealth accumulation and the amount one can safely spend down in retirement. Fees and performance chasing can easily drop a safe spend rate of 3.5% by a percentage point or more. That spend rate is in real terms, increasing with inflation, which is needed just to keep the clients' standard of living the same.
I think of money as stored energy that gives our clients choices in life. Those people who haven't saved will either be working the rest of their lives or possibly living a very different lifestyle, financed mostly by Social Security.
Our role is to help those who have saved increase the probability they won't outlive their money. With the bull market now more than six years old, I see many advisors taking on unnecessary equity risk. Dying the richest person in the graveyard is not an appropriate goal.
Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for CBS MoneyWatch.com and has taught investing at three universities.
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