Robert Merton on Planning for Retirement Income

Well, good morning, everybody, and welcome to Dimensional's Thought Leader series. I'm Mark Gochnour, head of global client services, and we have a very special guest today, the legend Bob Merton. Now, a couple of housekeeping items before we get into it. These slides we'll be going through today are available for download. So just go to the Event Resources tab. You'll be able to see the download and can follow along with the slides that way. And then for the U.S. audience, this session is available for continuing education. So just be on the lookout for that little bell sound. When you hear that, you have to go in and answer the question. A little popup box will come up and enter the answer there and hit submit. Now, if you're in full screen mode, just keep in mind, you have to exit full screen to see the box where you enter that answer, and as y'all know, we're required to ask you three or four questions throughout the session. So just be aware of that as we go through that. So with that, let's get into it here and give you a little bit of background around Professor Merton. The professor, he is still teaching at MIT, Nobel laureate, and here at Dimensional, he has the official title of Resident Scientist. And I used that word legend very intentionally earlier. The contributions Professor Merton has made to the field of economics, the field of finance, and just being so incredible over the last 50 years. And one of those areas is this idea of retirement income and maintaining a certain standard of living throughout retirement. And that's what we're gonna dive into here today! So with that, let's welcome Professor Merton, coming from Boston, Massachusetts! Professor. Good morning. Good morning. It's great to have you here. And thanks for joining us on a special Thanksgiving week. I was just thinking that you're one of the very few people that have come back as part of the Thought Leader series, come back for a second round, so thank you for that. Well, great pleasure to be here. Okay, I've got a couple questions for you here before I turn you loose and we get into this in detail. And this idea of retirement income, it's a real challenge, problem, crisis, depending on how you want to phrase it, here in the U.S., and Bob, you travel extensively all around the world. Do you see a similar type of challenge outside of the U.S., as well? Absolutely, you pick anywhere in the world, Asia, I won't go into all the reasons, but Asia, throughout Asia, even, and I'll mention one country, because it's a very favorable mention, Singapore. Despite having over 30% contribution rate to its retirement plans and being very organized, it is very much focused on the challenges to retirement. So all throughout Asia, of course, here in the United States, I need hardly tell us about there, and of course, UK, Europe, but even in the Middle East, which has a very young population, there's concern, because developing a sustainable retirement system, as we all know, doesn't happen overnight. You have to look far ahead. So two points, one, all over the world, hence the term global in my remarks, but also, the good news is that while there are differences in every country, let alone region, it's remarkable how common the challenges are, and what are the issues that have to be addressed. So actually, in today's world, when you work out a solution for one part of the world, if you do it the right way, you can adopt it everywhere. And so, you know, there's the other side of this, which is the efficiency of being able to design a global product rather than one that's localized. Well, I like the idea that the efficiency and the scale of these concepts we'll be talking about, the global nature of that. But let me ask you this question, because so much of what we'll be discussing is directed towards, let's say, planned participants, yet the concepts, I would say, that are designated for sort of the middle-class, the average worker out there, these concepts would apply, I think, just as equally to, let's say, a high net worth individual, perhaps let's say they have $6 million of net worth. Is that a fair comment? Absolutely too, yes, and of course, when you talk about the challenges, and by the way, when you say challenges, and they're big, I also say they create opportunity. So, you know, it's not all looking down and bad things. So there are opportunities. But to answer your question, the challenges and the concern around the world, frankly, is not with people who have sufficient resources so that they have a lot of flexibility. It's for the vast majority of people who are working middle-class, but really don't have extra resources. That's where this is focused, and of course, when you're talking about a retirement system, that's where you need to focus, 'cause that's where the hundreds of millions, indeed, billions of people are. But that said, the same principles, the same technology that we are talking about in the context of addressing the global retirement challenge worked very well for those who are mass affluent, whatever your title is, or you'll have access to advisors. And I'd be happy to share that, but absolutely the same technology. So principles the same, retirement income, and so forth. Fantastic, well, Bob, let's get into it. I want to hear about these principles that you have in mind! Well, I organized my remarks this morning into two parts. The first part I'm going to discuss, as the title suggests, the title today, what I consider the six feasible components that are really needed to solve long-term, sustainable retirement system. And I'm gonna go through each of the six in varying degrees. And that's the general overview solution. And then the second part I'm going to drill and focus on what I think are most immediate and important elements of that. And that will be in the area of retirement income, let's say versus accumulated balance, to give it a contrast. And this is going to deal with whether we're talking about setting goals, whether we're talking about communicating where a participant is relative to that goal, whether we're talking about, you know, all of the different elements here, it's all about retirement income. If we're going to have a smooth move from accumulation to draw-down, all of these are gonna be the focus of the second part of my talk. And then of course, as I would point out here as we go into that, that the one big difference is, we talk about having an instrument to preserve our wealth. Well, when you come to retirement, preservation of the account balance is not as important as preservation of retirement income. But I'll come to that in my remarks. Great, I think that idea of communication is so incredibly important, just to start kind of a different way of thinking about things, from that big balance to actually what you have available to spend each year, so excited to hear what you have in mind there about how to communicate some of these ideas. Okay, well, now I'm going to interrupt myself and say, before I get into those two things, I have some bookkeeping order to take care of here. If we're gonna talk about retirement systems and designs and so forth, we have to know, what is the purpose of the system? I think we'd all agree it's a good retirement. But the question is, what do we mean by good retirement? Well, I'm not gonna open that up, but I wanna be clear what I mean by that. And this'll be the answer I would give to just about anybody, anywhere in the world. If they asked me, "What's a good retirement?" You know, the idea of having, to be able to sustain the standard of living that you enjoyed in the latter part of your work life, what you've gotten used to up to your retirement, to be able to sustain that standard of living for the rest of your life. I would consider if you can do that, that's a good retirement. Doing better would be great, doing worse is not so good. So for the discussion today, let's just be clear. That's what I'm taking to be the goal of the good retirement. Now I point out here right away that if indeed it's standard of living, how do we measure standard living in financial terms? Not by how much we've accumulated, what our wealth is. We measure standard of living always by a stream of income sufficient to sustain that standard of living, okay? And I just remind you of that because that's critical to understanding the elements of design that I'm going to discuss, so that's the first point. The second one is a reality check. You'll hear people saying all kinds of things in the world about how they can give solutions and what to do this. And I'm here to say, if I have a goal, let's say of a good retirement, and I look at how I'm proceeding to that, or someone looks at it for me, and they say, "You're not gonna get there," or, "You're way behind," and so I ask the question, "How can I improve my chances of success?" There are only four ways. Save more, which of course means consume at lower level of standard of living, work longer, okay, or take more investment risk. But if we take more investment risk, the absolute requirement for that is that you have plan B, I would call it, prepare for the consequences if the risk is realized. Too often, it's easy to say, "Hey, in the long run, these higher returns will come in basically for sure." Well, there may be a high probability of that, but that's different from saying "for sure." Risk is real, and if we're going to take risk as part of that solution, then we gotta be prepared for what we do if the risk is realized; it's real. Now, these three first ones are all about increasing the amount of assets one has to improve the benefits. The fourth one is a little different. It says, for whatever amount of assets you have accumulated, do everything you can for the same risk to improve the income benefits. Now, certainly for working and middle-class people, but I think for most people, that really, the two things that gonna really move the needle on that, and I'll talk a bit more about that later, are annuities. Now, when I say annuities, I don't care if you wanna someday do tontines or some other variation, but annuities have the feature, as you know, that you give people, you'll give the entity the money now, you get paid for as long as you need money every month, even if you live to 120, as the good books wish us all, but when you no longer need money, you've gone someplace better, then you give it up. And that's the essence of it. And as we all know, as a result of that, you can get a much higher benefit for as long as you need benefits. The other area which really can move the needle on this is equity extraction, and I'll talk, again, more about that a little later, give some illustrations, but the basic notion is you're everywhere in the world, I was amazed when I got involved in this, even in developing countries, the biggest asset that a household has at retirement is their house. It may be very modest or it may be very large, but it's the house. And the beauty of that is that, at least in working and middle-class, that that's basically all the saving that people do. I mean, they have retirement accounts and so forth, but I mean, personal savings. They may have a bank account. So by intelligently using the equity in that house, you can actually improve benefits without increasing risk. And because people are already saving that way, it has the remarkably practical feature that you don't have to change hundreds of millions of people's savings behavior in order to use it. So these are the only four ways. So someone who tells you they've got another way, if you have one, send it to me. I'll put your name in lights if it's valid, but I haven't seen it. So let me move on then to the main agenda, having set these rules. Now, as I remarked, the six feasible, I say the word feasible, well, they're not all being done as well as they could be right now. They're all feasible to do right now. And these are directions, if you like, that you wanna be thinking where I see that the retirement solution areas are gonna move anywhere in the world, it's along these six components that I'm going to present. And while I think of it as an integrated approach, each of these components can be introduced by themselves and standalone, be modular, so it isn't a big compound system. But I do believe, ultimately, all countries are gonna have to use all six in order to get to Nirvana. So let me just go through them quickly. The first ones, of course, everybody will recognize, is the classic social security pillar zero, pillar one, and DB employer, pension plans. And of course, people love those, and they have nice features and so forth. There's not much more I can say about them, except to run them as best as possible, but recognize, as we all know, that we can't depend on this pillar to provide a good retirement, or very many. It's a piece, but we have to realize we have to do a lot more than that, and that leads us to the second one, which is sometimes called pillar two, which uses DC, as we all know, that's the fastest growing area around the world in terms of formal retirement systems design. And here, I wanna call attention to really three elements that I think are critical for DC. First, it needs to be made as easy to use as DB is, and that's doable. As I said before, this is not a pipe dream. There's ways to do it. Not easy, but there's ways to do it. And the way it happens is we have to have a comprehensive, smart default offering. I use the term default as I think most of you know out there know what that means. I essentially mean a choice which they don't have to make any choices or decisions, other than if that's what they want. And as it is now, it's too mechanical, it isn't adequate, but if we make it smart, meaning it extracts information without asking people for it that's needed to revise the portfolio in response to both changes in personal circumstances as well as market circumstances, you can get people there. As we all know, this is very important because for most of the work life, most people are not thinking about retirement. You know, a 30-year-old, 40-year-old's still building their career and they're not thinking about their retirement or managing or anything else. You can't get people's attention. So having a DC system that works as robustly without engaging the member or participant is critical to making it as easy, and it can be done. The second one is that when we get people engaged, at some point they will become engaged, to wanna make decisions. Then we really need to design a very robust tool for them to get to those decisions, and I have... Look, I've been involved in financial services for 50 years so I'm not throwing darts at the industry, or at least, I'm throwing them at myself as well, but we've done a terrible job in my view in creating a lot of the personal finance products and services. Why do I say that? Because you know, it's all about finance things, teaching finance things, and when the participants don't understand it, you say, "Well, they gotta get educated." How are we gonna educate them? Stop. If you look at consumer product design in other areas, automobiles, for example, if you get into a 1955 Ford, that's a long time ago, and a 2020 Ford, the accelerator is in the same place, it'll even feel the same, you use it the same. They all have steering wheels exactly the same. This is not an accident. They design the product so that the user, the participant, doesn't need to be educated. It's designed to use the information they already have. They know how to drive with those things. Don't change it. So when they get into a car, you rent a car, you've never been in that car before, in general, you can just get in the rental car, drive it away, and be comfortable with it and know how it works. And again, that's not an accident. Similarly with cell phone, mobile phones, and other consumer electronics. Basically, they're designed so that you just take 'em out of the box and start using them. If you have to go through a manual and get educated, you've got a problem. In fact, most of those manuals are just on the internet in case something happens. So those are two examples, and I think we need to do that in finance. We have to get all the complexity and all the non-standard knowledge that anyone has, and we have to embed that in the product and the service in a way that they don't have to get educated. And I think this is a great opportunity. I think that's the way to really go, rather than try to have these programs to create literacy. I have nothing against literacy as a professor, but these programs. And so that's the second one, we have to have engagement. The third one is, just as in the early stages of the lifecycle, when people are accumulating, you can't get their attention on retirement. When they approach retirement, the opposite happens. They have to make some very big decisions, often one-door decisions, once you go through them, you can't reverse them easily, and they have a deadline, and that can be overwhelming. So we want it to be able to provide a transition that's smooth and as easy as possible from accumulation to the paydown phase. If we can accomplish these three, along with what everybody knows, as well, is some sort of way of being able to bring all these different DC accounts together for people to have sort of, not a unified account, but I won't go into that. But these are the three elements I see that are doable and have to be done and we go that way. Now, if you're gonna have a solution for a retirement system, you have to cover those people who are not participants in retirement plans, so uncovered workers, and that's even in the United States. First of all, that's always been a big component in the United States. It's getting larger, especially with the gig economy and then so forth, where they're really not part even of social security, often. And in any case, in other parts of the world, it can be even more than a majority of the working population. So how do you deal with that? They still need to provide for retirement. You'll also need to deal with the issues that those people who do have plans, whether it's social security or a national pension system or so forth, find that the benefits that they are being offered don't offer an adequate replacement ratio, and they need to be able to save additionally for that when they don't have an advisor. I agree, if you have an advisor, that, a big solution, but not everybody does, in fact, most people don't, and can't afford. So the solution for that, we have, is what we call a pension bond. Everybody loves a pension. And the way a pension bond works, it's just a standard government bond. Think of it just like, I'll use you U.S., U.S. Treasury, except it has strange payouts relative to most bonds. So what happens is, you buy this bond, and it pays nothing, no coupon, till some year in the future, let's say 2058, you know, for almost 38 years from now or something, is an extreme. And then, once you reach that date, it then pays a level set of payments like an annuity with no balloon payment at the end. So no payments until some future date, 2040, 2058, and then a level set of payments, let's say, for 25 years or so at that time. Well, you can see, that's exactly... That bond looks very strange if you're a bond buyer, but if you look at it not from a bond buyer point of view, but from a retirement point of view, that's exactly what you do when you put your money into a retirement plan. You put your money in today, you get nothing back until you retire. And then when you retire, you get a stream of income then. So this is a way of using a bond that can be purchased, and you have different dates of starting dates depending on when you expect to retire, sort of like a target date fund, except not the target date that says, but it's the date when the payments begin. And so all you do is pick the bond that matches the year you intend to retire and you buy that bond off the shelf, the government bond, and that's how you can get people at a very low cost to be able to buy, in very small units, what they need for retirement. And in that case, since it's income, they don't need to be educated. Everybody understands whether it's social security or pension, that they say, "Ah, I'm going to get X dollars a year when I retire," and they don't need a lot of education for this. Having said that, and going back to your comment to me, Mark, if those bonds were issued by the government, and so that's a longer story behind that, they would be for that purpose, but they would also serve the purposes of those who have advisors or investors who want to create that pattern for themselves, very well-tailored. In particular, institutions like pension plans, pension funds, and insurance companies writing annuities, they could tailor the payments they need to meet the risk-free part of their liabilities by buying these, we call them selfies, the particular one that we've designed, by buying these selfies to match the pattern needed either by the family, or in the case of the insurance company, their annuity liabilities. So this is a way of covering the uncovered that applies the principle I mentioned in number two, which is, it's designed to be able to be understood and know what they have without any education and so forth. And it would be priced by being auctioned at market in large-sized institutions, and then the small size would be priced off the auction prices. Okay, now the fourth one, provide more benefits, I've already alluded to, in the feasibility reality remarks. And here, I just simply say that enhancing the benefits, a reverse mortgage, I hate the name, that's the name in the United States. The best name for that I've seen the world is in South Korea, it's called the home pension. I like that much better. But that's designed to extract significant value to allow greater benefits without putting the retiree at risk of just ordinary borrowing and not being able to make the payments. And we can change that without behavior. I've already talked about that. The fifth one is, we're talking about people working longer. Well, if we're gonna ask people to work longer, as a possibility, they don't all have to do it, then I think it's time that we develop a systematically organized, retirement-friendly structure for employment. By that I mean, both in the private and public sector, not talking about make-work jobs, real jobs, but are focused on the comparative advantage of seniors. Seniors are not building a career. Seniors, I think, at least being one of them, are more calm, maybe, than some of their juniors be, and almost all of them, for example, have had experience in raising children and so forth. So take the comparative advantage of a senior and say, they don't need to be trained. You don't want jobs that require them a long learning curve to get into it, 'cause nobody wants to pay for that and they don't want it. But things like being able to look after very small children that don't require a lot of physical activity, but require attention and caring. If you wanna have parks, beautiful plants in your city parks, have them do that sort of thing. It's a kind of thing that can be tailored very well to that. And if you have seniors who are highly educated in some areas such as engineering, bring them into the schools to help out. The point is, design jobs that take the comparative advantage that seniors have, rather than try to keep them or fit them into a job which just really makes more sense for a different part of the life cycle. If we do that, I see us seriously offering a channel for people to work because either they need to, and also psychologically to make the transition from full-time employment in the standard way they'd been working for decades, to full-time retirement. And I think this is doable, and it will increase the productivity of the labor force. So that's my number five. And the last one, quickly, was motivated by a COVID experience that we've all had, that we may even wanna think about our retirement system not as a general savings account, but as recognizing that it may cover more than just the lifecycle component of retirement, but also shocks to the different other points of the life cycle, as many people experience, and in fact, we've implemented by allowing people to take money out of their retirement accounts. I think we might wanna institutionalize that in the sense of, have the retirement system be broader than just that, but focused. And I think we find that we get more support for that kind of thing, and it meets the world we're in. So those are the six. And with that, I now wanna move... That covers quickly the broad brush things. I now wanna move to the specialized areas, particularly the retirement- Hey, Bob? Yes? A couple of things here. One, I think you touched a hotspot for folks. You just got a bunch of questions as you were going through the pillars there. Some of them, I just wanted them to know, we're gonna come back to it. Some were around annuities and low interest rates and things like that. I think we'll touch on that a little bit later. Some were more detailed around the concept of selfies. Now I do wanna highlight something here, because maybe that's a place where working it addresses, from being sensitive to time. You're coming out with a new paper, right? I think it's gonna come out in a couple of weeks in the "Journal of Investment Management," excuse me, and it's about the integration of these six pillars. So you'll probably have quite a bit of detail in that paper. I just wanted to make sure that timing's right. Yes, absolutely. Thank you for mentioning that. Yes, they'll be out in the next month or so, the "Journal of Investment Management," and it has a similar title to these six items, and it covers these in more detail. If you wanna know more about selfies, you'll find in that article, you can look it up on, you know, all the sources. Arun Muralidhar and I have coauthored many papers on developing selfies. So if you're interested in that, there's a lot written on it. And maybe if there's enough interest, you can convince Mark and Dimensional that we could have a separate talk on that sometime, but that's not, you know, let's move on from that. Well, that's a nice offer. It's something that we'll definitely wanna talk about. The last thing I'll mention here, Bob, was a couple of comments around the communication side of it. And I loved what you were describing there around the need to keep it, I'll say, simple, the ability to engage with the participant. You don't have to have a finance degree necessarily to have a great experience but there's some questions about the challenge of communicating a lump sum versus an income stream, which I think that's right where you're going, so a nice setup to the next session. Well, you're absolutely correct. I'm about to do that right now. Now again, I remind you from my first slide that the focus for retirement, and I'm laser-focused on retirement, no other aspects, then, it's an income goal. It's income, just like social security is a benefit, defined benefits are a benefit. People understand them, and that's what they're interested in, okay? Now let's take a case of a DC plan now, where we have to show people their accumulated balance, mark-to-market, of course, we show them their balance. Now let's look at it, suppose you're 43 years old and you have this balance, $1 million. Now, even if I took, just so I be clear, this is not about education. Even if I took one of my brilliant MIT colleagues, you know, 150 IQ, three PhDs, nanotechnologies, curious as hell, if that was one of my colleagues and I said to that colleague, "How are you doing toward your retirement?" They don't know what to do with that number! That number doesn't mean anything to them. The reason I picked my colleagues is to say, this isn't about being smart or being highly educated or curious. In fact, you really can't answer that question about income. If you have any doubt about that, I mean, first of all, where are you? Is $1 million a lot, a little? How can you make a decision? But if you have any doubts about that, that's not enough information. Let me just give you a quick thing that you all can relate to. 15 years ago, if you bought a 10-year U.S. Treasury, which is roughly the pricing for let's say an annuity, roughly, okay, on $1 million, you would get $50,000 a year income, okay? Not an annuity, but from the bond. What would you get today? Well, it's up a little bit, 9,000. 50,000 versus 9,000, same balance. This is the real world. So knowing your balance, you have no idea how you are in terms of what matters, which is a benefit income flow in retirement. Now let's just imagine, instead of, or in addition to that, in fact, more importantly, we gave you this number, that based on the amount of money in your account, based on actual market prices, just as the accumulated balance is on market prices, how much retirement income could you buy at full retirement with your balance? That's a clear number, okay? And let's say that's $55,000 a year. Now think about that for a minute. If this, for example, someone who's making 80,000... And by the way, you can add as many zeros or whatever you want. This is not about any particular group. If you are living today on 80,000 a year and you then looked at this, which is about 70% of that, if you look at this and this is in today's dollars, not projected dollars when you retire in 30 years, you instantly know, with no education, no additional training, what that means. You're living on 80. And right now you have enough to fund, at the market, 55,000, that's 70%. Now, someone might look at that and say, "Well, I don't wanna live like that, I've got a ways to go." Someone else might look at that same number and say, "You know what? When I get to retirement, my kids are gonna be grown up, this or that, I'm a pretty modest guy, person. This'll be fine." But do you see that by just showing them the number of income, just as other benefits are shown, immediately, someone can make an intelligent decision, or thinking about it, at least, if not a full decision, on where they are, what they might need, and say, I need a lot more, or I'm okay, or anything in between; that's one benefit. What's the second benefit? If I'm looking at my DC account and I'm adding to that, let's say, social security, if let's say I had a DB benefit as well, the DB benefit, I can see what that is. That's telling me how much I can get at retirement as this social security, although those things can change, but that's not the point. You know, those numbers, if you had this number for DC, you could add the three together and have a sort of sense of where you are in terms of is. So that's just trying to show you, in terms of communication, the difference between showing them a $1 million balance, for which even the smartest of people and curious people don't know what that means, to showing them this, and immediately, they can think and understand about it, as long as it's in today's dollars, so it's meaningful. So that's the first thing I wanna show. Hey, Bob? Can I ask you a question here? I think Olivion made a great point that he sent in here, when we're talking about income. Let's just separate it. We're not talking about yield or anything like that. This is almost a paycheck in retirement, how much money you have to spend each month or each year in retirement, let's just, I wanna be crystal clear on that, right? All right, let me be crystal clear. This is not income like dividends and what you're earning in your account. This is the amount... Think of buying an annuity. Not that you have to buy an annuity, but I'm trying to be concrete. You're buying an annuity for some future date. And the question is, based on today's market interest rates, what you could actually buy today, so we're talking about mark-to-market, real, you know, not wished-for interest rates, not historical interest rates, but what you could actually buy today, the same way you look at your accumulated balance as what is your account worth today, not what you wish it was worth or what it used to be worth, okay? So this is that, and it's the price or how much you could buy in principle, the lock-in, at your retirement date, that amount of income, for basically for life, okay? So that's the number. If you're familiar with defined benefit plan investments, defined benefits only look at this number. They call it the funded ratio. What they're interested in is how much of their liabilities, if they promise to pay, are they able to cover with the assets in their pension fund? So this is something we've been doing in defined benefit investing and understanding for decades. So does that- I think that's a great, great way to phrase it, it's like a paycheck in retirement. Kinda like the old- Yeah, I mean just think- DB plans, right? In fact, it's like the selfies. Since you asked a question about it, if you bought a selfie, and each selfie paid, let's say, $10 a year in retirement, starting at some date in the future, let's say it was $10 per bond, if I own 3,000 selfies, I know immediately I own income of 30,000 a year, let's say protected for inflation, so it's in current dollars, 30,000 a year, starting in 2040 or whatever. And I know exactly what that is, and I know the price of it. It's the price of whatever the selfie is selling for today. And that's how many selfies you could buy with your account, that would be the number here, you see what I'm saying? Right away, it tells you that number. And that's your thing that you're trying to get to, so that's the most important piece of information when it comes to evaluating where you are with retirement and so forth, so that's the number one message here. Now, let me move on to say, I'm very excited, I saw the teaser you sent out on this talk and it mentioned the SECURE Act, well, the SECURE Act has done many things. And as those of you who are advisors or deal with it know, it's done many things. The part of the SECURE Act that's most exciting to me and fits my comments, is the one that now requires that DC plans will have to provide that kind of number to participants, probably to begin with, once a quarter or something. But I believe that once it starts, eventually, it's going to be shown on the screen the same way accumulated balance is. And so that is going to be very important for this for two reasons. One, by requiring it as a regulation, everybody's gonna have to provide it, so it's gonna be universally provided, and therefore useful, if only one entity provides it. Secondly, there'll be standards of how to provide it, so that you can compare apples and apples across different providers. And as long as those accounts are based on market prices, then they'll be very helpful. If you start to put in wished-for prices or other sorts of things, then it will fail. So it's critical, and it looks, that's the way to play it, as the act is going to be implemented, at least at detail. They look like it's definitely going to be current market prices. The second thing that's very important is that we should present those numbers not in projected income, when, let's say, I go to retire in 30 years and a cup of coffee is gonna be $20. They should be in 2020 prices if they're producing 'em today, so that someone looking at that 55,000 is looking at a meaningful number to them today, okay? So basically, you wanna give them the valuation or the income based essentially in real terms, okay? And there's a bunch of other details that are being worked out. But as long as it's mark-to-market, and as long as it's presented in today's dollars, it almost runs itself. You won't have to educate people. Oh my God, now I'm seeing the income I can buy. Actually, they'll learn that the same way they learned to look at accumulated balance. No one asked them the vote that they wanted accumulated balance. That's how the industry decided because of the history of DC to present things. And then we codified it in the rules and regulations, but they didn't ask us for that. And they're gonna find the income statement so much more intuitive, so much more useful, and so much easier to understand without having to have anyone explain it to them, that I have very great confidence that this will be a kind of learning process that will take place pretty darn quickly once it's implemented fully into the system. So I'm very excited in the extent that I think how important it is both for communication and for understanding risk, is what I wanna talk about next. So, some people say this about income, "Oh, you know, if you get the wealth right, if you get a big enough accumulation, yeah, you know, who knows what the interest rates will be 10 years, 20 years, 30 years from now. So you know, just get the right amount of wealth, and on average, or something, it'll be this." Well, this is where I would put it, it's a dimensional approach of looking at the data. I just want to show you some data in the United States over the last 17 years, because we're talking about standard of living, I happen to use tips, but it doesn't much matter. The point of the matter is if I look over the last 17 years in the United States, real numbers, okay? Then if I take the highest interest rate and I happen to retire that day that we had in that period, and the lowest one, the difference between the high and low for a 65-year-old is a 38% lower benefit, forever, you know, this is it, 38% lower benefit if you get the low-end interest rate versus the high-end. And it's worse, even, if you're preretirement, to the extent that you're not only, you know, your payout is lower for the same amount of dollars, but their earnings between 60 and 65 will be lower if the rates are lower. So this is just a fast way of saying, wealth is not a sufficient approximation to what's needed for retirement benefits. And ask any DB plan, whether the value of assets in their account versus the coverage rate and the funded ratio are basically the same thing. And you'll see that in the real world, there's a big difference between the riskiness and the amount of income, and the amount of wealth. Remember what I mentioned to you on the $1 million balance, the difference between 50,000 a year versus 9,000 a year, and six months ago, it would have been $6,700 a year when interest rates on the 10-year was 67 basis points. So there's huge risk differences between income and wealth. It's not a fine point at all, okay? Now the next thing I wanna point out to you is about risk. I think we can all agree, if you measure risk wrong, you can't possibly manage it right. And I wanna show you again with real numbers the mistake that can happen, and they have big impacts on the way things happen in DC. I won't probably have time to go through all of that 'cause I want to get your questions, but the left side is just showing the historical returns from rolling over 90-day T-bills from the last 17 years in the U.S., okay? And what do you see on the left side, what do you expect? The real returns on them have been basically flat, almost no volatility, very low, but flat. A 90-day treasury bill is the gold standard in U.S. dollars for preservation of capital, absolutely no question. But if your goal is income in retirement, that is to say, a stream of income that sustains the standard of living, the treasury bill measured in those units, units of income, how much income and retirement can you buy, is the right side picture. And that's the same real-world pricing of what a treasury bill provides to you, measured not in the value of the account, but measured in the amount of income that you can buy with the account, and you can see it's one of the most volatile assets or someone with that goal, on the planet. And what's worse, it's not only very volatile, it's very low return. So it's low return and high volatility. So I'm trying to underscore to you here how important it is that we measure the right risk-free asset, and the risk-free asset for retirement is not a treasury bill, okay? People have pension, they see a fixed amount of income there, or in social security, they see numbers there. If you valued that every day, the value of those two things would be very volatile, as I'll now show you. If you instead look at a, call it if you want jargon, the immunized portfolio, just think of portfolio, say, long-term bonds designed to match the duration and characteristics of income in retirement there. Then if we looked at that the way we measure it in terms of accumulated value, that's the left side. You see that that bond portfolio is incredibly volatile! It's not as volatile as the stock market, but it's pretty darn high; you can see the volatility. And that's a problem because, in fact, the income from a portfolio of tips or others, leave aside the levels of the income, is absolutely certain. There is no volatility in that, okay? And if you matched all the durations correctly, then measuring it on the right side in terms of income in retirement, if you have exactly matched the income in retirement, you have no volatility at all in income. But on the left side, that's what someone with a DC plan has. And as a result of looking at the wrong measure, and showing people red when it's down and green when it's up, they think they're better off or worse off, you're showing them the wrong number on the left side for retirement. And so they see that as very risky, and the treasury bill is very low risk, because there's very little value volatility, and in fact, what really is happening, if put them in treasury bills or short-term notes, we're making the value very stable, and we are making the income incredibly volatile. And so this is, again, if you don't measure risk correctly, there's no way you can possibly be managing it right. So I hope these numbers sort of get across to you the point that retirement income is the right call, retirement income is how you should present it to people so they can understand it. Even if you have an advisor, the advisor presenting it this way, people, I don't care how wealthy they are, they can understand when you tell them that standard of living or what they can get, or so forth, not in a way that you can do, as I've already been through, and as you say, if people are managing and showing them the wrong number, then they're going to be trying to control the riskiness of the value instead of the income, they're gonna managing the portfolio completely towards the wrong goal. And just to underscore it, we have cases, I won't mention where, but these are real, where plan sponsors a DC plan, you have provider who's, let's say, 60 year old or so, they've made their goal or close to it, and so they're in very, very safe long-term bonds, which is what they need to be hedged, if they don't need to take risks. But because showing them the value of those bonds, you saw how volatile the bonds were in terms of value. They sometimes see the value go down, because interest rates go up by 10%, and they go crazy. They say they think they've lost 10% of their retirement. When in fact, the income is exactly the same. And so what happens, then, the HR department gets the phone ringing off the hook. They call up the provider and say, "No way can we put up with this amount of volatility. Put 'em in a two year," and then you have them that you're actually exposing those participants to higher risk as they get older. I only mention this not to be a gadfly, but to point out how the impact of measuring the wrong thing, both for risk and for knowing where you are. So that's message. Now in my last few minutes before I open to questions, I wanna move on to talk a little bit about the fourth matter that I mentioned, which is when you get a client or a participant to retirement, they have the assets they have. Can't do much about that, okay? The question is, how can you increase their benefits without their risk? And as I've already mentioned, the two biggest ones are an annuitization, where it's just holding a bond and living off the interest, because you don't know how long you're gonna live, and the annuity, again, remind you, whatever format it takes has the feature that it pays for as long as you need, as long as you need money. So you're never gonna run out. You don't have to worry that you've spent down all your money and you don't have enough, as you're living, and at the same time, when you don't need money anymore, you give it up. It seems like a good trade to me. But now, the reverse mortgage, terrible name, and it's only federal and a bunch of other things. So both of these, the improved versions, and that's something, the industry, I hope, will work very hard to press for, to create these. 'Cause I want to show you how big the impact of these two instruments can be in achieving the goal. So to show you that, let me just go to this next slide. Now this is representative. I took the 50th percentile income in the United States, someone at 65. The interest rates have changed a bit but that's not the point. Where they have an income of 50,000, they wanna have a goal of a replacement ratio of 36,000. That's their goal, but they need, they have a certain amount in DC and they have a house with a market value. And now we consider stages. Suppose they just do a traditional DC, where they at the end take their accumulation, put it in safe bonds. If you wanna take risks, fine, but then you have to deal with the risk of it. So I'm just doing it with the safe asset. What can you have for safe for sure? And the answer is, since you don't know how long you live, you can't pay down on the principal because you may run out. So you just take the bond interest, you add that to social security, and that gives you a benefit in this example of about 60% of the goal. If you now take that same money in your DC plan and buy an annuity, that increases the payout because you're giving up the money when you don't need it. It gets you to 77%. If you now go and get a HECM mortgage, that's a government mortgage, not the best, we wanna improve on it, but if you get it under the terms now, you can get enough money so in principle, you could buy additional life annuity to increase the income. And when you add together the combination of using reverse mortgage to get the resources, putting it all in an annuity, then you have income for life no matter how long you live, and you reach 100% of your goal from 60. The message here, the big message is, these two things can do a lot to move the needle. Now you asked me earlier, Mark, about whether these are things only more for working and middle-class and not for wealthier people, and the reverse mortgage, leave aside that right now, it's only offered in the United States, 'cause the government put a ceiling on how much you can borrow. But I'm seeing the beginnings of the development, resurgence of a private sector reverse mortgage market, which would have larger caps. This could be an ideal vehicle. Let me just give you an example, quick example. Some people that have several million dollars, and many of those people have a good part of their wealth in their house, the house they wanna live in in retirement. And yet, they're either doing estate planning or they want to give a beneficiary's money now, when they need it, rather than waiting until they no longer need money, the parents no longer need money. They have no liquidity to do that. But if they did a reverse mortgage, they could get the cash, not for them to use, but the cash to fund the next generation, to have it invested. And because it's a reverse mortgage, and I'll very quickly mention this 'cause it's important, the two key features of reverse mortgage are, no matter where in the world, that you pay no interest or principal till you leave the house, and you're gonna be in the house if you're a retiree who picked it, probably till you the point where you don't need a house. So you never are gonna buy this kind of borrowing versus a home equity loan or some other kind of deal. You never have to worry about, well, what if I don't have the money to meet the monthly payment, et cetera, whatever, because that doesn't happen. The other is, it's non-recourse. So the design of reverse mortgage is very different from a leveraged buy. It really is not risky in the usual sense. There are risks involved, I don't wanna get off on that, but fundamentally, this is doing it. So that's what I wanted to show you. Last point I wanna make, we talked about a smooth transition to post-accumulation. First of all, if we've been showing them income on their accounts, even without an advisor, if we've been showing them an income for 10, 20, 30, 40 years, it's not gonna be a big shock to them when you say to them, "Okay, you gotta think about now, you're going to deaccumulate, you're gonna retire. What kind of income pattern do you need? And that's going to be first order, because people are suddenly not going to see their gears switch from 40 years of looking at their balance, and now talking about income. I believe, certainly for working and middle-class, but also for most others, that if you have four buckets, three plus one, really, buckets, that you can, by mix and matching those and using the right tools, you can cover a wide array of different needs in retirement. And that's important, even for working middle-class. They may not have complex financial circumstances, but they certainly have different circumstances of what they need in retirement. Some people are only responsible for themselves, okay? In that case, annuitization, et cetera, is obvious, since you don't wanna leave anything to anybody, all right? On the other hand, other people are starting new families when they're in their 60s. I'm not recommending it, but it happens. Some people are in great health, some people know they're not in good health. So the actual conditions that people are going to be in retirement, which they really don't know until the last maybe 5 or 10 most years before retirement, and usually closer than that. You really don't know the details of what you need in retirement till you get pretty close to it. So you don't wanna lock anything in really specific probably until that time when you can make the most important decisions. So, starting with how much you just want with guaranteed income, set- Hey, Bob? Yes? I was just going to throw out there, we only have a couple of minutes left. Oh, I'm so sorry. And there are some excellent questions that had been submitted. I wanna make sure we touch on a couple of those. Okay, so let's move on- Are you able to wrap up this slide fairly quickly so we can get to those questions? We're done. I'm done. I think you get the message. You can look at the slides. Go ahead. Okay, great. Thanks, 'cause there's a couple questions here that are coming in that I think's really, really relevant to where we are today. One of them ties to the earlier question about the low interest rate environment we're in, as it applies to annuities, but there's been several that have come in around tips, as well, in the case, getting into kind of a negative real rate on tips, and what is your thoughts on that? Sure, well, needless to say, tips are very, as all bond prices are incredibly low today, from at least the historical pattern. It's very painful, but that's what the market gives us. You know, sometimes the market gives us high sharp ratios and high real interest rates and sometimes low. We don't control that, so we can wish for things, but wishing doesn't establish things. So let's first say that we have to deal with the world we're living in. So now when you say, for example, people say tips have a negative rate. Well, of course a negative real rate, which is not good, but that doesn't mean they have a negative actual rate. The 10-year treasury has about 90 basis points of nominal income. That's far below probably what inflation will be, so that all the bonds in real terms are having negative real rates. Now, you can make a decision of a certain side, given the world. There is no way to get a risk-free asset that pays more than the government full rates and credited. That to me is a fundamental point. So if someone's offering you a risk-free asset that pays 2%, over, when the treasuries are yielding 90 basis points, unless it's... Let's not talk about about one-off little things. That is a general investment. You know, even if you don't know where the risk is, it's risky, why do you know that? Because it's very simple. Who buys treasuries? It's the most sophisticated investors in the world, sovereign wealth funds and so forth. Why would they buy 1% bonds if there was a risk-free way to earn 2%? They certainly know everything and have access to everything that you or I have, or as the provider, someone who's promising it to you. So like the magician who you may not know how they're doing the trick, you may not know where the risk is, but my advice to you is to first accept that there is no way to get risk-free a higher rate of return than governments, you know, or meaningfully higher. Now that given, then your choices are, with rates this low, do I have to take risks? The answer is perhaps yes. I would rather not, but would rates this low, if I wanna try to get somewhere I can't get to risk-free, then it's a intelligent decision to make to say I'll take more risk. And understand, as I pointed out earlier, that you have to understand the consequences. There isn't a choice there. Alternatively, you can say, I'll have to contribute more, because I don't want to take more risks. That's not fun, but that's the reality. That's why I gave you the reality on the second slide, that this is the way it is. You lock things in, you say, "Oh, well, it can't get worse." Well, that's what people said five years ago, three years ago, two years ago, okay? And you're taking risks whenever you do this. And I can't give you more information about a decision other than to say, that's the way to think about it. Yeah, it's a powerful concept, the reality check of, it's just what we want relative to what the reality is in the sense that, going back to the communication, it's just tougher conversations to have, but it is what it is in some of these cases. Bob, in one minute, I'm gonna ask you this question. In the financial services industry over the years, you hear a lot about just kind of a quick and dirty guideline of, well you can have, you can live on about 4% of your asset balance over time. Tell us your thoughts on that. There's a few questions related to that, about how variable do you get year-to-year when you're thinking about payout rates? I got it, first of all, the 4% draw-down as a solution, in my opinion, is from another era. I'm not gonna go into it. What does it mean, if you're taking risk, you know, 96% chance you'll be okay, but what happens in the other 4%, you starve? I mean, the point is, there's either risky or it's risk-free. There's nothing magical about 4% because that acts like somehow, the interest rate is constant forever. There's somehow, whether interest rates are minus 1.5% or something on tips, or plus 3% on tips, that the 4% is the right number or a valuable number. And you can find out what the number is to the buy it, you can look at annuity prices. So the 4% is way too crude and it doesn't convey anything about the risk that you're taking, which changes radically depending on market prices. Obviously, if I have an interest rate that is 4% real, that's risk-free on the income. So that's the first thing. Other things like 60/40, 70/30, all of these rules of thumb, if you're an advisor, by the way, you should be darn happy. In fact, if you're in the industry, you should be darn happy that those rules are not close to being good enough, okay? If they were, or just looking at someone's age, you could manage their money for the next 40 years, knowing no other information, if that were really true, we're out of business, there's no use for 'em! So actually, there's an answer to every financial question, I believe, it's just not the same answer. And so all these rules need to be reviewed, not as crude approximations, but just, why do you wanna use them? The world we are in now is we look at the problem that's there, whether I'm acting for a default for people who aren't even making decisions, or whether I have a client who I'm managing their advice engine, whichever it is, you want to look at what they are and what they need, and then come up with your best solution for them. And that's the approach, certainly, of the 21st century. And I believe those that provide that, along with a very critical thing, if you're an advisor, which is trust, because nobody trusts technology by itself, but that's for another day to discuss. So I'll just throw that out there. Those are the things that make advisors, or intelligent products, or like smart defaults, solutions valuable, and therefore, that's... Very strongly feel that people say, make it simple, yes, but no simpler than is needed to solve the problem. And things like 4% draw-down, 60/40, 70/30, things like that, it's just mechanical rules, are just not good enough. Well, Bob, thank you for all that summary. A couple of the key points that I jotted down here as you were going through it, I really liked that idea of you've gotta measure the right risk to manage the right risks there, and the idea there, too, of there's no silver bullet, you know, the ability, you have to customize, really, for every individual, to make sure that their specific needs are being addressed there, which gets back to the role of the advisor in some of these different cases, using technology as a tool, we still have to have that, that oversight over it. So thanks for your time. I do wanna highlight, too, you know, we mentioned the paper coming out in a month. You also wrote an excellent piece in the "Harvard Business Review." It's called "The Crisis in Retirement Planning." I would encourage everybody to go out there. A lot of these concepts are baked into that, too. That was an excellent, excellent piece. And the answer to the question we received, will this be recorded, the answer is yes, we will be recording this and posting it to MyDimensional, so you'll be able to go back and hear some of these comments that Bob was making. So Bob, thank you so much for joining us. We really appreciate your time, all the great wisdom there. Thanks to all of you for joining us, as well, and for those of you from the U.S. audience, have an absolutely fantastic holiday week. Thank you.