Experts Weigh In On Solving Retirement

There were a couple of very interesting retirement articles posted last week that are worth pointing out. The first on was from the LA Times and focused on research and comments on the research from Alicia Munnell from the Boston College Center for Retirement Research which, cutting to the chase, concludes most people will not have the retirement they hope for in financial terms.

She says the collectively we only have three options; being poor, saving more (which means spend less) or work longer. The most interesting point she made seemed to be that the Social Security replacement rate, the portion of expenses that SS will cover is going down. She also addressed the transition from defined benefit plans to defined contribution plans and the shortcomings of 401ks. She then made an argument for increased taxes to beef up Social Security’s solvency.

The other article was from MarketWatch and recapped different schools of thought from experts convened by MarketWatch for a conference they hosted on retirement planning.

Most interesting here was an idea put forward by Wade Pfau which was to think about being over funded or underfunded like a pension plan and he offered a couple of different ways to try to answer that question (over funded versus underfunded).

One idea that he offered was that if you can put half your assets into an immediate pay annuity and have the payout cover your expenses then you are over funded, if not then you are underfunded. For anyone new, I am not an annuity guy, I’ve never been paid for an annuity and most of the time they are very expensive. I would note that some of them are not crazy expensive and one thing I have said many other times before the people that I have known who have annuities seem to love them.

It is an easy way to benchmark where you stand regardless of whether you ever buy an annuity. The article had a generic quote that $500,000 into an immediate annuity would pay about $31,000 annually. That is an easy way do a high level check of where you stand assuming you think Pfau knows what he is talking about (I believe he does).