Stanford University Center on Longevity’s “Retirement Planning in the Age of Longevity” conference

Here are some real-time notes taken at the Stanford University Center on Longevity’s “Retirement Planning in the Age of Longevity” conference (with credit to Bob Seawright for developing this style with his  notes from the CFA Institute annual conference in Chicago). This conference focused on bringing a variety of voices together from industry and academia to discuss about issues related to how to go about getting more Americans into the mindset of planning for retirement.

Mostly, these are my interpretations of what other people said. Out of respect for the fact that this is an opportunity for people to experiment with ideas without necessarily having them attributed as their own views or views of their employers, I decided to provide the comments anonymously. Again, these are mostly my interpretations about the ideas expressed by others at the conference.

** Setting the Stage

-  Focus is on those who have enough to not be fully dependent on Social Security, but not enough to get detailed customized advice from professionals

-  Focus on what people should do, and how that can be guided by research

-  Two competing asset allocation views: 1. Stocks for the long run,  in for the long haul; 2. risk perspective and managing liabilities and avoiding shortfalls

-  Retirement is emotional issue and not just financial. People won’t be prepared to look at finances and will be disengaged from the process until they’ve managed emotions

- World is changing quickly with technology and cost of providing high quality advice and monitoring; it is getting easier to get help for people

-  How do we measure retirement readiness? How do we get people motivated to pay attention to post-retirement planning issues?

-  People seem to be in a state of denial about retirement (seems like the last stage before death and so people would rather just not think about it, and are otherwise intimidated to think about their finances and whether they’ve saved enough)

-  A lot of Americans are in the category of: I just hope I die before the money runs out

-  Change the nature of the conversation to more positive: plan for a long life; focus less on frailty and aging

- Throughout human evolutionary history, life has been short. Not many people survived to see any grandkids. Only since 1800s, and really in less than a century, average life expectancy shot up and doubled, compared to the whole previous history of human history. Humans were not evolutionarily prepared for old age. It really is something brand new for humans. Nothing in human history that has us prepared to plan for the long term. Evolutionarily, humans were better off focusing on the present and not trying to plan for the future. And so people have a lot of trouble thinking about their future selves in old age. We need to establish and real and emotional connection to our future selves. Make that future person more than a stranger, and give that future self emotions with wants, needs, and drives… not just an abstraction. Evolutionarily, shouldn’t sacrifice today to plan for an uncertain future

-  Since no one seems to save for retirement, people feel okay not thinking about it since it seems no one else is thinking about it anyway. It’s a social norm not to plan. That has got to change

-  Also, so much uncertainty: pension plans not being paid, stock market drops, companies going under. People would rather just not think about it

-  John Shoven’s new project: Efficient retirement design: best way to combine financial assets and Social Security to get the most out of what you have.

-  Retirement: people don’t get practice. You’ve got to get it right the first time. There isn’t room for mistakes and do-overs

- Problem: you were always told to get into safe assets at retirement. But plans called for 3% real returns on safe assets after retiring and now it is 0%.

-  Retirement is a 20^th century invention. Before, you basically only ‘retired’ if already well on the path to death and unable to work.

** Pitfall #1: Failing to Plan

-  Only 1/3 of those in their 50s have tried to devise a retirement plan. Fail to calculate how much they will need, fail to make use of existing educational resources

- Personal responsibility: individuals could become disengaged in the recent past as government and employers took care of pensions. Looking forward, what is the role of employers? Are government programs sustainable? People are very rapidly becoming personally responsible and may have missed the notice

-  DB to DC: employers are off-loading retirement obligations to employees and very rapid speed.

-  Employer DC pensions Version 1.0 are not delivering the expected results

-  Very difficult to define retirement at the household level. Do people even view themselves as being able to retirement. The view of retirement is shifting. What is the role of work looking forward?

-  When planning for future, how much control do you really have? Involuntary job loss, a health event that forces early retirement. You can make plans, but choices about when to stop working may be made for you and may be out of your control

-  Employees like gradual retirement and continuing part time work, but employers may not like that and may not want part timers.

-  Hard for people to internalize the consequences of failing to take action

-  Past generation: consequences of failing to plan meant parents moved in with children. Bringing up this point may get people thinking about how this may relate to their own children

- Most people don’t have an emergency fund and may experience big setbacks by small shocks. A big step must be overcome just to get people to maintain an emergency fund. Makes it even more difficult to think about how to frame the retirement issue

- Framing retirement: maybe wrong approach is thinking about how to make the right decisions. That is too hard. Could frame as a translation: saving x% of your salary today translates into y% future spending level.

- Scary to think you have to be right, but won’t know if you are right for many years

-  Language used around financial planning encourages very negative reactions among people

-  Labor mobility is very important in America, but makes the centralization of retirement planning decisions more complicated

-  People feel they were tricked by financial services. Their portfolios have not grown. This wasn’t supposed to happen

-  Framing the language. Example: cut your spending vs. simplify your life; don’t talk about eating catfood as it is just discouraging. Language must be more comforting

-  Why are people not planning: people think: I’ll just figure it out later, I’ve always been able to do that and will do it again in the future. False confidence.

-  The retirement and tax landscape will change a lot over time. Young people may plan for one thing but then face something completely different

-  Young people: realize they will need to take personal responsibility. Current generation of retirees: thought in terms of finding an employer with a good DB pension

-  Demographics: could have DB because not so many elderly so it could be covered. But the huge growth of 65+ plus means society can’t afford to bear all the risk for retirees

-  Uncertainty is the central feature of retirement planning, and humans are not good at dealing with uncertainty. Financial planning tries to eliminate the uncertainty by talking about deterministic returns, etc. Providing guaranteed products, but doesn’t eliminate counterparty risk, etc.

- People are more indebted now and we must look at retirement more holistically: how to allocate between saving and paying down debt

-  House: in past it worked as a good savings vehicle. Build equity in a home paying down mortgage over time. Stored wealth and provided potential source for retirement. But that may also be breaking down. For a lot of people, retirement planning meant Social Security plus paying down a debt on a mortgage

-  When educating on planning, need an immediate actionable step. People can only engage for 7-10 minutes on this stressful topic, and if too much time is spent on a topic people will disengage and never follow through

-  45% never do anything at all with their 401(k) plan that just the initial enrollment. This isn’t necessarily bad if they made good decisions at the start

-  Uncertainty, complexity, lack of control, opportunity to free ride by not planning

-  Best plans are those where employees are disengaged and may not know they have a 401(k). Auto enrollment, step up savings feature with good default asset allocation assumptions.  These plans bypass the need to effectively educate the users. Good policies may guide better outcomes rather than further consumer education

- Policy changes: make it hard for people to make stupid decisions

-  Reframe retirement around financial planning that begins very early in life (such as with Social Security) rather than specific retirement planning

-  Alcoholics Anonymous, Jenny Craig, WeightWatchers: understand how these organizations work with people’s denial and engage them and help them to make positive changes.  Related, perhaps building peer support models is helpful and critical

-  People may plan for a worst-case scenario, which is: I will work until I die. But this isn’t the worst case scenario since can lose job. Another “worst-case scenario” is to just live on interest, but that won’t work when interest rates are zero

-  Financial education vs. behavioral economics: not separate silos; we can help build better fundamental traits early in life. Fix some problems such as no understanding about compound interest, but that must start very early in life. Once people get on a track, they are on autopilot. There are only a few moments where people might change behavior, and we need to reach them at those times. Marketers know this.

-  People not observing any disaster about retirement, as actually poverty rates have continued declining for age 65+

-  Change math curriculum in schools: kids may not need trigonometry, but add compound interest, Monte Carlo simulation into basic math curriculum. Lots of things that could be more interesting and relevant for kids than traditional math curriculum. Movement to integrate personal finance better into math curriculum for children (but teachers can’t teach it because they don’t have these personal finance skills either)

-  Distinguish between incentives and barriers: people have retirement on their minds and don’t need further incentives. The big problem is barriers: fear and intimidation, complications, fear of need to get it right

-  Education could focus not on how to structure a portfolio, but just to get people started with a portfolio. Getting people engaged in the hard part. Once engaged, default options can take care of the rest

-  Make a “Marlborough Man” financial advisor image

-l  Frame it as how to remove uncertainties. Eliminate the longevity risk for individuals, etc. Lay out uncertainties one at a time and then try to deal with those

-  It may not be irrational to not save for retirement: something simple like saving for retirement vs. investing in your children’s future. What is the rational decision. Education avoids the emotional aspect of saving for retirement and making tradeoffs with other needs

-  Is there any data on the issue: are people thinking about retirement but more motivated to deal with other needs instead?

-  Will power: how to pierce hyperbolic discounting. How to get people more engaged with their future selves. New technology can help make future less strange and less remote

-  Wrap up: research questions: how to frame retirement planning, what education is needed – do people really need education in financial theory? What are people’s tolerance for dealing with these tough subjects? Now to provide bite size education? How to make planning holistic and focus not just on retirement which may be further down the priority list. Incorporating marketing tools to help educate people more effectively

** Pitfall #2: Underestimating Expenses

- People grossly underestimate expenses

-  What should be default recommendation on topic of default decision for long-term care insurance? Moral hazard that you expect to be taken care of in not buy LTCI. Do people trust that the insurance company will even be around in 35 years to payout on LTCI obligations? Are LTCI contracts inflation indexed? Uncertainty about their adequacy. Hard to think about “future self” in terms of living in a nursing home: will you be happier or not if you have LTCI in this situation. Lots of issues speak again LTCI as default. Criteria for whether you qualify for benefits are very subjective, which leads to a lot of adverse selection being included in the pricing

-  There is a window for LTCI: low wealth means can’t afford, high wealth means can self-insure

-  Companies are now pulling out of LTCI market.

-  By the time people may become aware of need for LTCI, it may be too late: too expense or maybe already a health problem so can’t qualify

-  Disability rates have declined in elderly population, but that is now turning around as increase in chronic diseases related to obesity, etc. People may have false expectations about how low disability odds will be during retirement

-  Reducing heart disease and cancer will lead to increased dementia

-  Mortgage debt: is the amount of mortgage debt being extended into retirement increasing? Are other new debt sources now being carried over into retirement? Are some retirees still even paying off student debt?

-  Is 60-70% a good replacement rate: depends on housing arrangements and health care situation. Consumption vs. welfare: people may downsize their lives and still be very happy. Compare ways to be happy on less

-  Move focus from retirement income to expenses; or focus instead on income and let people figure out how to get their expenses to match their income

-  One retiree: what they really cared about was making sure to be able to pay for daughter’s wedding

- Focus on guaranteed floor to meet fixed costs. But health care questions throw this off: housing needs may change, etc. So the problem is we don’t know how much to guarantee for the floor

-  People may be adjust to spending, but health care becomes an unknown unknown, and so it becomes very difficult to plan for

** Pitfall # 3: Underestimating Longevity/Years in Retirement

-  People expect to retire at 65, but actually retire at 61

-  Underestimate years in retirement because overestimate how long they will work and underestimate how long they will live

-  Just in the last 10 years the issue has arisen that actuaries may be underestimating life expectancy

-  What is more uncertain: market risk or longevity risk?  At age 60, market risk is bigger, at age 70, longevity risk is bigger. If not willing to be 100% stocks, it implies shouldn’t be willing to also take the longevity risk. Fat tail of long life impacts you more than fat tail of financial market risk

- Annuities shouldn’t be treated as investments to compare with self insuring… they should be treated as a type of insurance. They shouldn’t be expected to outperform on average, they should be expected to protect from longevity risk. Annuities can’t be expected to outperform investments.

- Adverse selection is real and shows that people act rationally when buying annuities.  But then why do they not act rationally when it comes to the Social Security claiming decision? How are the decisions framed, and why do people behave in inconsistent ways about them

-  People get planning at 10-15 year horizons, but for 20+ years people do not believe at all about plausibility of forecasts

-  People should have adaptive plans to respond to changing conditions, but at the same time as mental capacity diminishes with age, it is also important to set the plans in motion as early as possible

-  If a financial company realizes that a client has developed dementia, rules or law may prohibit doing what is right for the client as a human being

-  Important to embrace and build on the idea that people should work longer. Need to change the culture both in terms of expected retirement age, but employers also need to be willing to create further employment opportunities for older people

-  Retire retirement as a concept, instead focus on life planning, financial planning, and how this relates to continued work

-  Cultural aspect: people look down on the idea of elderly Walmart greeters, but perhaps these changes should be better embraced; health and societal benefits from being active with part-time work at later ages

-  Annuities: not buying an investment, but buying a stream of income.

-  What do people need to know? How should the information be framed? How should people go about finding good and trustworthy sources for the information?

** Pitfall #4: Retiring Too Early

-1961: the year Social Security added early claiming age of 62 for men, this happened for women in 1956. Since 1961, additional life expectancy for men at 62 is about 6.21 years.

-For couples: typical age gap is wife 2 years younger than husband.  For 62 man and 60 women, expectancy to first death=17.5 years, expectancy to second death is 29.2 years; length of widowhood=11.7 years. Even from age 70, widowhood could be about 10 years on average.  This assumes independent life spans. This is using cohort life tables from SSA

-  Trying the impossible: fund 25-30 year retirements with 35-40 year careers

-  Over last 35 years, retirement lengths (age of death – age of retirement) have doubled

-  Missed opportunity: defer Social Security claiming age from 62 to 70 = 76% more benefits

-  When the higher earner defers claiming age: two people benefit, the claimant and the surviving spouse.  At current interest rates, this is a pretty good deal!

-  With current low interest rates, people should spend their financial assets down first and hold off Social Security until age 70 [this is the Series strategy]. Don’t just tap all your assets at the same time at retirement (if retiring early) [this is the Parallel strategy].

-  Baseline strategy: Lower earner claims at 66. Higher earner gets this spousal benefit. Then at age 70, higher earner claims own benefit.  Take advantage of both sets of benefits.  This can produce significantly more lifetime income.

-  Note that the higher earner can collect spousal benefit for a while after reaching full retirement age

- “Paid Up” Once you’ve worked for 40 years, you should be treated as paid up since Social Security based only on top 35 years. This new class of worker should be free from paying payroll tax, both for employee and employer.  This would help encourage continued work. Also Medicare becomes primary payer instead of secondary payer, freeing employer of obligations for health payments. Employer would be encouraged to pay higher salary

-  State and local pensions: retire at age 50 or 55. We just can’t afford 35 year retirements with 30 year careers. No way.

-  Retirement is a 20^th century phenomena, and all of the further increases in lifespans are being taken as retirement rather than as work

-  Why is there age discrimination for jobs? Fear that older works have lower productivity but can’t be paid less; also older workers hurt health care pool and raises employer’s health care costs

-  Delaying Social Security can pay an internal real rate of return of 7% for a couple, 3% for a single.  Since Social Security is a type of TIPS, compare this to current TIPS yields!

-  People are aware of benefits of delaying Social Security claiming, but: (1) fear not living to 70, (2) fear that rules will be changed before 70

-  The deferral deal for Social Security has gotten better over time because of increased life expectancies, while the increases for deferral stay the same. As well, presently, with low interest rates the deferral deal becomes even stronger. Social Security implicitly assumes a 2.9% real return in the underlying economy

-  Low interest rates (real) dramatically change all of the relevant calculations about Social Security claiming

-  Not much gain for lower earner to defer but big gain for higher earner to defer

-  Social Security Administration employees are actually incentivized to get people started on Social Security benefits

-  Keep benefit structure exactly the same, but just reframe 70 as the full retirement age. That framing might have a big effect to delay retirement

-  People might be comfortable with complex claiming strategies if they could put their request on record with Social Security now without having to remember to do it later

-  Why are IRS ages like 59.5 and 70.5 never changed?

-  What does a headline like “Social Security runs dry in 2033” do to a person? Do they misunderstand it?  Is it why they don’t defer, because they figure that Social Security will disappear

- Are financial advisors scaring people by making them think (incorrectly) that Social Security is going to disappear?

-  When uncertainty increases, the discount rate increases, and you are really motivated to just spend it today

- Risk aversion measures of the population are up by 20-30% since early 2007

-  People see DB pension funds going bust, and are they extrapolating that too much to Social Security? Does it make people more skeptical about any kind of guarantee?

-  Would Social Security reform now help build trust about future solvency

** Pitfall #5: Failing to Save Enough

-  Near retirees were more likely to switch to all cash after the financial crisis and so missed subsequent recovery

-  Evidence definitely points to most investors buying high and selling low

-  Are people not saving because: (1) they can’t (2) they don’t know how much to save (3) they don’t want to

-  Evidence shows that setting defaults for saving with 401(k) s do work. Automatic enrollment, automatic savings escalation, diversified portfolio

-  Employers cut 401(k) matches as a way to cut wages in a more agreeable way for employees

- Auto enrollment: people assumed that default savings rate is the recommended savings rate, though it was only meant as a bare minimum. A reasonable strategy could be embedded in the default and then that would provide an opportunity to educate

- If people receive financial advice by default, they may ignore. But if they first have to answer yes/no about receiving advice, they might be more vested and interested to listen

-  New start up: harness the power of spending as a savings behavior. Partner up with someone else. When you don’t spend something (I skipped Starbucks) you send a text message and your buddy should reply and say a good job. Pats you on the back for saving and better links the spending and saving activity. They can move your money to a savings account for you. Is the satisfaction from buying something better than the satisfaction from having the good interaction with your buddy? Create a game and a social community around savings behavior. Can also enable conversations about targets and risk management between spouses

-  With default savings rates, we’ve set the bar too low and we are not communicating what a good savings rate should be

-  When DC plans started, they were meant to be add on plans for voluntary savings. But now things have shifted such that these plans become a key part of retirement income. But our attitudes toward the plan have not caught up with the fact that these plans are now so much more important

-l  Rule of thumb: Social Security contribution rate is 12.4%.  Is that enough to survive on in retirement?  No?  You want double that?  Well, then your savings rate should be 12.4%

Wrap-Up

-  We need to know why people claim Social Security early. Is claiming behavior related to asset levels?  Data suggests it is unrelated

-  Do people regret their savings and financial decisions after they’ve been retired for some time? Help people near retirement understand what it is like to be in retirement

- It would be helpful to figure out what the Social Security reforms are going to be sooner rather than later

- Got to get a community feel into the dialogue and get people supporting each other to work together toward meeting retirement goals

- Redefine role of work. Call it life planning, not retirement planning. Again, Retire Retirement.

- Need a Modern Portfolio Theory for the Retirement Phase; how do measure benefits and risks of different choices; need a commonly accepted theoretical framework; use technology to and financial intermediaries to bring help

- Segment life planning into 10 year chunks that people can really get their minds around

-  What 3 policy changes are most important to focus energy on

-  Get people more comfortable with uncertainty and just working with some basic guidelines