Top 5 articles, other good reads and a couple of TED Talks
Please enjoy some of the articles that I read this month, starting with my top five:
The Crisis in Retirement Planning
In this article, economist and Nobel Laureate, Robert Merton, addresses what he sees as the downfall in the current American system of retirement planning. As has been widely reported, over the past 20-30 years, American retirement planning models has shifted from a defined benefit pension model to a defined contribution model, most commonly the company 401(k). Workers now think of their retirement plan as assets (i.e. $1,000,000) instead of income (i.e. “two-thirds of my final salary”). Merton notes that the trouble is that investment value and asset volatility are simply the wrong measures if your goal is to obtain a particular future income.Merton suggests that the way to avoid catastrophe is to shift the mind-set and metrics from asset value to income. Risk should be defined from an income perspective, not asset price volatility. He recommends a framework of dividing income needs into three categories:
Minimum guaranteed income. Income in this category must be inflation protected and guaranteed for life.Conservatively flexible income. Income from this category should still be relatively safe and inflation protected. U.S. Treasury Inflation Protected Securities (TIPS) are a likely option.Desired additional income. Equity risk may be taken to increase expected returns in order to generate higher additional income.
The Crisis in Retirement Planning, by Robert Merton, Harvard Business Review
How Much Should People Save?
This brief the the Center for Retirement Research at Boston College sets out to answer the question, “how much should you save?” Specifically, they attempt to answer the question in three steps. What is the average amount of saving that will come from retirement savings plans? What is the average required saving rate to produce adequate retirement income? Given current saving patterns, how much more would household have to save?Most of the findings are consistent (or nearly so) with widely accepted rules of thumb. For example target replacement rates for all households is 73% of working income in order to generate a post-retirement consumption equal to consumption just before retirement. Interestingly, higher income households have a lower replacement rate. Presumably, this is because they are (or should be) saving at a higher rate. The biggest difference in replacement rate is typically no longer needing to save.The brief notes that a middle income household needs to save 15% in order to meet retirement consumption goals. More for higher income households due to the fact that Social Security has a lower replacement rate for this group.Of most interest is a table near the end showing saving rate for a middle income household required depending on “start saving” age and retirement age. To retire at age 62, a 25 year old worker needs to save 15%, but if starting at age 35, 24% is required, and an improbably 44% if starting at age 45. Of course, the savings rates are much more attainable for later retirement ages.
How Much Should People Save? by Alicia H. Munnell, Anthony Webb and Wenliang Hou, Center for Retirement Research at Boston College
When Advisers Charge you to Fire Them
Most consumers are familiar with termination fees imposed by their cable company or wireless phone provider if you cancel your contract early. Termination fees are also common in the sale of commission based investment products. Commissions are generally paid up front to the investment salesperson, with the cost of that commission collected from the investor over the next six to ten years. If the investor pulls their investment before that time, the provider of the investment product charges an early termination fee, generally called a surrender charge (for annuities) or a Contingent Deferred Sales Charge (for load based mutual funds).This article notes that non-commission investment advisers, who owe a fiduciary duty to their clients sometimes also charge a termination fee. Ostensibly, the fee is to recoup the expense of onboarding a client if that client terminates within a short period. There is no law or regulation that prevents advisers from charging a termination fee, however, it would seem to violate the spirit of a fiduciary relationship. Note that Navigoe does not charge termination fees.
When Advisers Charge You To Fire Them by Jason Zweig, Wall Street Journal
Is Exercise Work or Play?
In this clever study, participants were given a map and sent on a 30 minute, one mile course. Half of the participants were told that the purpose was exercise, while the other half were given MP-3 players and were told that the purpose was to determine the clarity of the music along the way. After the course, they were all given lunch. Of course, this is where the real study begins. The food and beverage choices and quantity was observed, and not surprisingly, the participants who viewed the course as fun made better choices at lunch time. Those who were told that it was exercise tended to “reward themselves” for the effort.There is a strong correlation in people’s work life. If you view your career as fun or rewarding (at least some of the time), you will be less likely to make financial splurges. If your job is viewed, indeed, as a “job” or “work” then you will be more likely to incur larger luxury expenses in the name of “I work hard, I earned this.” This is the real magic behind the notion of the advice “do what you love.” I would amend it and say, “do something that you find fun or rewarding at least some of the time.” Not as catchy, but perhaps more realistic for many.
Is Exercise Work or Play? by Melissa Healy, Los Angeles Times
Retirement Saving Makes One Wealthy and Healthy
It’s no surprise that people who tend to be more conscientious about saving for retirement also tend to make better decisions when it comes to their health. The title of the article is certainly misleading, in that it implies causation. Retirement savings certainly does not make one healthy. Of course, the article itself notes that the study, which was the focus of the article, was correlational, not causal. I like the idea of implementing tools that have been utilized to promote health into the battle to promote retirement saving. Weight Watchers is an interesting model that could be successful in personal finance. Most social pressure around spending/saving money is really on the spending side of the ledger. Creating positive social pressure or competition might be the most effective tool to encourage young people to save.
Retirement Saving Makes One Wealthy and Healthy by Robert Powell, USA Today
Others good reads:
What you don’t know about Social Security, but Should, Wall Street Journal
A Nudge to Save a bit More, New York TimesVoices: Scott Leonard on Dynasty Trusts, Wall Street Journal
1 in 4 Americans Confess They Never Exercise, Shape MagazineSimilarly: 1 in 4 have no emergency savings, Wall Street Journal
Why your 401k won’t offer this promising retirement income option, Money Magazine
Ted Talks:
Cartoonist and physicist, Randall Munroe tackles “What if?” questions with incredible depth of analysis and humorous cartoons.
Famed singer Sting delivers a powerful talk (with, of course, some song) about his battle with writer's block. The real lesson is the brilliance of great story telling. How I started writing songs again