The US Retirement Crisis: Essential Reading and Resources

In May, when the Dow Jones Industrial Average closed above the 15,000 milestone for the first time, the Washington Post ran a story with a seemingly innocuous question: "The Dow’s cracked 15,000 and the S&P is at record highs, so it’s time to pop open the champagne and celebrate, right?"

The sober response: No.

"We face a jobs crisis, a schools crisis, an immigration crisis, an infrastructure crisis, an inequality crisis and a college affordability crisis (just to name some current favorites)," wrote Matt Miller. "But the sleeper crisis, the Next Big Shoe To Drop, is the retirement crisis."

Whether or not we call it a crisis, the situation is dire.

On the same day the Dow hit its new high (7 May 2013), Larry Fink, chief executive of BlackRock (BLK), took to the podium at New York University Stern School of Business to have a conversation with the students about, as he put it, the subject of old age.

He told those gathered there that day that longer life spans and underfunded retirement plans are the defining challenge of our age, and went so far as to recommend that the US consider making retirement savings mandatory. (Tadas Viskanta, founder and editor of Abnormal Returns, weighs in with a blog post: "Does the US Need a Mandatory Retirement Savings Program?")

To get a sense of the scope of the issue, consider this: $1 million isn't what it used to be, especially when coupled with rising life expectancies — the average 65-year-old woman today can be expected to live to 86, a man to 84 — and the fact that most people have undersaved for retirement and will need to rely on Social Security.

"We’re facing a crisis right now, and it’s going to get worse,” Alicia Munnell, director of the Center for Retirement Research at Boston College, told the New York Times. “Most people haven’t saved nearly enough, not even people who have put away $1 million.” (See full article: "For Retirees, a Million-Dollar Illusion.")

Given the stakes, financial advisors have an increasingly important role to play in building sustainable retirement income strategies for their clients. But as is the case with most investment advice, there is no one-size-fits-all approach: Is the 4% safe withdrawal rate still valid? What returns are safe withdrawal rates really based on? What is the appropriate mix of stocks and bonds in retirement? Is it beneficial to delay the receipt of Social Security retirement benefits? How does one build a retirement income strategy that will last?

With so much information out there, it can be tough to know where to turn for the best thinking on retirement planning. (A search for "retirement" on Amazon yielded nearly 19,000 results.)

To help me sort through the noise, I contacted four of the smartest minds out there:

• Wade D. Pfau, CFA, professor of retirement income at the American College and publisher of Retirement Researcher Blog.
• David Blanchett, CFA, head of retirement research at Morningstar Investment Management.
• Bob Seawright, chief investment and information officer at Madison Avenue Securities and publisher of Above the Market blog.
• Michael Kitces, a partner and director of research at Pinnacle Advisory Group and publisher of Nerd's Eye View blog.

I put a simple question to each of them: What do you consider the most essential reading in the area of retirement, be it books, research papers, articles, or blog posts?

Here, in no particular order, is what they had to say.

[Editor's note: This list was updated 7 August 2013 to include additional suggestions from readers and Stephen Horan, CFA, CIPM.]

Books

• Retirement Income Redesigned: Master Plans for Distribution — An Adviser's Guide for Funding Boomers' Best Years edited by Harold Evensky and Deena B. Katz
• Retirement Portfolios: Theory, Construction and Management by Michael J. Zwecher
• Retirement Income: Risks and Strategies by Mark J. Warshawsky
• Asset Dedication: How to Grow Wealthy with the Next Generation of Asset Allocation by Stephen Huxley and J. Burns
• Conserving Client Portfolios During Retirement by William P. Bengen
• The Future of Life-Cycle Saving and Investing edited by Zvi Bodie, Dennis McLeavey, and Laurence B. Siegel
• Social Security Strategies: How to Optimize Retirement Benefits by William Reichenstein and William Meyer
• The Retirement Savings Time Bomb by Ed Slott
• Life Annuities: An Optimal Product for Retirement Income by Moshe A. Milevsky. This book provides a summary of research on life annuities, longevity insurance, and their role in the “optimal” retirement portfolio. It starts with an overview of institutional aspects, moves on to discuss valuation issues, and concludes with a comprehensive review of the scholarly literature.
• On pension fund management: Pension Fund Excellence: Creating Value for Stakeholders by Keith P. Ambachtsheer and D. Don Ezra; Pension Revolution: A Solution to the Pensions Crisis by Keith P. Ambachtsheer; and Fiduciary Management: Blueprint for Pension Fund Excellence by Anton van Nunen

Blogs to Bookmark and Twitter Handles to Follow

• Above the Market (On Twitter: @RPSeawright)
• Money Over 55 (On Twitter: @SensibleMoneyUS)
• Nerd's Eye View (On Twitter: @MichaelKitces)
• Retirement Researcher Blog (On Twitter: @WadePfau)

Research Papers and Articles

• "Capital Market Expectations, Asset Allocation, and Safe Withdrawal Rates" by Wade D. Pfau, CFA (Journal of Financial Planning)
• "Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle" by Wade D. Pfau, CFA (Journal of Financial Planning). The author proposes that rather than focusing on withdrawal rates, retirement planning should focus on savings rates. He uses a historical simulation approach to illustrate the principle of a safe savings rate.
• "Managing Post-Retirement Risks: A Guide to Retirement Planning" (Society of Actuaries, PDF)
• "Spending Retirement on Planet Vulcan: The Impact of Longevity Risk Aversion on Optimal Withdrawal Rates" by Moshe A. Milevsky and Huaxiong Huang (Financial Analysts Journal). Recommendations from the media and financial planners regarding retirement spending rates deviate considerably from utility maximization models. This study argues that wealth managers should advocate dynamic spending in proportion to survival probabilities, adjusted up for exogenous pension income and down for longevity risk aversion.
• "Annuity Analytics: What is a Guaranteed Rate Really Worth?" by Moshe A. Milevsky (AdvisorOne)
• "Making Retirement Income Last a Lifetime" by Stephen C. Sexauer, Michael W. Peskin, and Daniel Cassidy, CFA (Financial Analysts Journal). To enable investors to spend down the assets in their defined contribution accounts more easily, the authors propose a decumulation benchmark comprising a laddered portfolio of TIPS for the first 20 years (consuming 88 percent of available capital) and a deferred life annuity purchased with the remaining 12 percent. This portfolio can be used directly by the investor (akin to indexing) or as a benchmark for evaluating the performance of a more aggressive strategy.
• "Explaining Risk to Clients: An Advisory Perspective" by Paula H. Hogan and Rick Miller (Pension Research Council Working, registration required)
• "Goals-Based Investing: Integrating Traditional and Behavioral Finance" by Dan Nevins (SEI Investments, PDF)
• "Should Households Base Asset Decumulation Strategies on Required Minimum Distribution Tables?" by Wei Sun and Anthony Webb (Center for Retirement Research at Boston College)
• "Optimal Withdrawal Strategy for Retirement-Income Portfolios" by David Blanchett, CFA; Maciej Kowara, CFA; and Peng Chen, CFA (Morningstar, PDF). Wade D. Pfau's critique is here (Retirement Researcher Blog).
• "Adaptive Investing: A responsive approach to managing retirement assets" by Sam Pittman and Rod Greenshields, CFA (Russell Investments, PDF)
• "Choosing a Retirement Income Strategy: Outcome Measures and Best Practices" by Wade D. Pfau, CFA (Munich Personal RePEc Archive)
• "A Framework for Finding an Appropriate Retirement Income Strategy" by Manish Malhotra (Journal of Financial Planning)
• "A Broader Framework for Determining an Efficicent Frontier for Retirement Income" by Wade D. Pfau, CFA (Journal of Financial Planning)
• "Alpha, Beta, and Now . . . Gamma" by David Blanchett, CFA, and Paul Kaplan, CFA (Morningstar, PDF)
• "Choosing a Retirement Income Strategy: A New Evaluation Framework" by Wade D. Pfau, CFA (Munich Personal RePEc Archive)
• "Low Bond Yields and Safe Portfolio Withdrawal Rates" by David Blanchett, CFA; Michael Finke, CFP; and Wade D. Pfau, CFA (Morningstar, PDF)
• "APPLIED Risk Management During Retirement" by Moshe A. Milevsky and Anna Abaimova (The Individual Finance and Insurance Decisions Centre, PDF)
• "The 4 Percent Rule is Not Safe in a Low-Yield World" by Michael Finke, CFP; Wade D. Pfau, CFA; and David Blanchett, CFA (Journal of Financial Planning)
• "How Do Spending Needs Evolve during Retirement?" by Wade D. Pfau, CFA (AdvisorPerspectives)
• "Lifetime Income for Women: A Financial Economist’s Perspective" by David F. Babbel (Wharton Financial Institutions Center, PDF)
• "Rational Decumulation" by David F. Babbel and Craig B. Merrill (Wharton Financial Institutions Center, PDF)
• "Resolving the Paradox — Is the Safe Withdrawal Rate Sometimes Too Safe?" by Michael Kitces (The Kitces Report, PDF)
• "The Annuity Puzzle" by Richard H. Thaler (New York Times)
• "Retirement Planning Gone Awry" by Bob Seawright (AdvisorOne)
• "Life-Cycle Finance in Theory and in Practice" by Zvi Bodie (SSRN)
• "The 4% Rule — At What Price?" by Jason S. Scott, William Sharpe, and John G. Watson (Stanford University, PDF)
• Behavioral Obstacles in the Annuity Market by Wei-Yin Hu and Jason S. Scott (Financial Analysts Journal). As Baby Boomers enter retirement, they will look to the investment industry for ways to generate income from accumulated savings. Why most retirees do not purchase longevity insurance in the form of lifetime annuities is a long-standing puzzle. Mental accounting and loss aversion can explain the unpopularity of annuities by framing them as risky gambles where potential losses loom larger than potential gains. Moreover, behavioral anomalies can explain the prevalence of “period certain” annuities, which guarantee a minimum number of payouts. Finally, investors may prefer “longevity annuities” purchased today to begin payouts in the future to immediate annuities because investors overweight the small probability of living long enough to receive large future payouts.
• The Longevity Annuity: An Annuity for Everyone? by Jason S. Scott (Financial Analysts Journal). As of 2005, U.S. individuals had an estimated $7.4 trillion invested in IRAs and employer-sponsored retirement accounts. Many retirees will thus face the difficult problem of turning a pool of assets into a stream of retirement income. Purchasing an immediate annuity is a common recommendation for retirees trying to maximize retirement spending. The vast majority of retirees, however, are unwilling to annuitize all their assets. This research demonstrates that a “longevity annuity,” which is distinct from an immediate annuity in that payouts begin late in retirement, is optimal for retirees unwilling to fully annuitize. For a typical retiree, allocating 10–15% of wealth to a longevity annuity creates spending benefits comparable to an allocation to an immediate annuity of 60 percent or more.

Reports

• Global Financial Stability Report — the Quest for Lasting Stability (International Monetary Fund, PDF). See Chapter 3, “Safe Assets: Financial System Cornerstone?” and Chapter 4, “The Financial Impact of Longevity Risk.”
• The End of Retirement as We Know It (Retirement Singularity, sign-up is required)

Blog Posts

• "Are Safe Withdrawal Rates Really Safe?" (FinancialMentor)
• "Why Planning To Save More Tomorrow And NOT Today May Be A Better Approach" (Nerd's Eye View)
• "What Returns Are Safe Withdrawal Rates REALLY Based Upon" (Nerd's Eye View). You can also watch Michael Kitces's February 2013 presentation on this topic: "Are Safe Withdrawal Rates Still Relevant in Today's Low-Yield Environment?" (Enterprising Investor)
• "The Asymmetric Value of Delaying Social Security Benefits As The Ultimate Hedge" (Nerd's Eye View)
• "Safe Withdrawal Rates in Today's Low Yield Environment — Walking on the Edge of a Cliff?" (Nerd's Eye View)
• "Realistic Retirement Planning" (Above the Market)
• "Is the Retirement Plan with the Lowest "Risk of Failure" Really the Best Choice?" (Nerd's Eye View)
• "Choosing a Retirement Income Strategy: A New Evaluation Framework" (Retirement Researcher Blog)

Video

• "Applying Financial Engineering to Wealth Management," featuring Zvi Bodie

Other Resources

• Center for Retirement Research at Boston College
• CFA Institute's Future of Finance project (see "Retirement Security")
• Retirement Management Journal (all back issues are available to the public and non-members)
• Social Security Benefit Estimator
• AARP Retirement Calculator
• Vanguard Retirement Calculator
• Finra Retirement Calculator
• Bloomberg Retirement Calculator

What have we missed? What do you consider essential reading? Are there tools or resources that you consider indispensable? Let us know by commenting in the field below.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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