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Retiring Minds: The Need to Focus on Retirement Literacy Mathew Greenwald Mathew Greenwald & Associates

Retiring Minds: The Need to Focus on Retirement Literacy Mathew Greenwald Mathew Greenwald & Associates. American Savings Education Council Washington, D.C. October 19, 2012.

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Retiring Minds: The Need to Focus on Retirement Literacy Mathew Greenwald Mathew Greenwald & Associates

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  1. Retiring Minds: The Need to Focus on Retirement LiteracyMathew GreenwaldMathew Greenwald & Associates American Savings Education Council Washington, D.C. October 19, 2012

  2. There is a compelling need for a stronger focus on “retirement literacy”: the information those transitioning to, and in, retirement must know to make basic financial decisions • Compelling evidence that poor retirement literacy has huge costs • Retirement finances more difficult and complex • Risks in retirement are substantial • Retirement strategies less well known • Little knowledge and use of key retirement products

  3. The culmination of accumulation in a defined contribution plan • Here is your check, the biggest you have every seen • It must last for the rest of your life • It must cope with inflation • It must handle unpredictable expenses • You must invest in unpredictable markets • The investments in our plan were not designed to provide income • You will not continue to get all of the support our company has offered

  4. Proportion of total income derived from Social Security, ages 65+ Source: EBRI

  5. The cost of retirement illiteracy • John Shoven, Director of Stanford Institute for Economic Policy Research • More effective Social Security claiming can provide additional wealth of: • $30,000 to $60,000 for average single person • $100,000 to $130,000 for average couple • Source: John Shoven and Sita Slavov, Efficient Retirement Design, 2012 Retirement Summit, Financial Engines, October 10, 2012

  6. The cost of retirement illiteracy David Blanchett, Head of Retirement Research, Morningstar and Paul Kaplan, Director of Research, Morningstar Canada The Additional Retirement Income from “Gamma:” “the additional value achieved by an individual investor making more intelligent financial planning decisions”

  7. The cost of retirement illiteracy • Impact of five types of Gamma relevant to retirees = 29% more retirement income • “Numerous studies …suggest.. alpha does not exist after taking fees into account • Source: David Blanchett and Paul Kaplan, “Alpha, Beta and Now…Gamma” Morningstar Investment Management, September 8 , 2012

  8. For retirees this is “a new world” • Fixed rates at historically low numbers • Increased volatility • Dividend paying stocks of large companies less dependable • Real estate taxes low • Health care costs rising • Less income from defined benefit plans, employer provided retiree health insurance and Social Security • More economic vulnerability

  9. Key differences between accumulation and retirement finances

  10. Retiree’s often do not, or cannot, get risk protections that workers have

  11. Little knowledge of key retirement products • Immediate annuities • Variable immediate annuities • Annuities with guaranteed living benefits • Payout mutual funds • Longevity insurance • Life insurance with accelerated benefits • Life settlement options

  12. Retirement strategies are not well known • Bucket strategy • Floor strategy • Total return strategy • Strategies for generating regular income are often sub-optimal

  13. Key retirement literacy objectives • Asset to income ratio: how much can a set amount of money prudently produce in income over an uncertain and potentially long period, e.g. when can I afford to retire • Liquidity needs: liquidity is costly • The most effective Social Security claiming strategies • What is life expectancy for a couple • Impact of current spending on future income • The difference between CPI and CPI-E

  14. Key retirement literacy objectives • Asset allocation strategies and use of guaranteed lifetime income products • How to adjust asset allocation to funded status • Tax efficient withdrawal strategies • Probable health care, health insurance and long term care costs • How to adjust spending levels to funded status

  15. There are behavioral economics obstacles that must be addressed • Mental accounting: which leads people to try to maintain the asset level they started retirement with and affects the proper deployment of assets • Loss aversion • Sub-optimal framing: which leads to sub-optimal decisions • Hyperbolic discounting • Inertia and procrastination • Distorted view of needs of future self

  16. An agenda • Educate near retirees on the value of higher Social Security benefits: • Inflation adjusted • Provides life insurance to lower earner • Favorable tax treatment • Obtain a benchmark measure of retirement literacy and target the most important areas of insufficient literacy • Provide benchmarks on determining when retirement can be afforded

  17. An agenda • Enhance framing of guaranteed lifetime income and educate on the value of a lifetime income stream • Develop better defaults and choice architecture for asset allocation at time of retirement

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