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But it Must Be True; it’s in The Wall Street Journal

In Uncategorized on 6 December 2011 at 1:16 am

An article with the hopeful title: “How to Catch With Your Savings” appeared in yesterday’s WSJ.   The article’s takeaway – save a lot more, wait as long as possible to take income – is certainly true enough.  However one of the article’s three primary financial illustrations was way, way off.

The illustration in question is as follows:

“Financial Engines looked at scenarios for a 50-year old earning $65,000.  Putting 6% of that salary per year in a mix of stock and bond funds would likely lead to a portfolio at age 65 that should generate $31,700 of income annually for life.”

As several commenters on the article noted, an annual lifetime income of nearly $32k after only 15 years of savings seemed too good to be true.  So I ran the numbers using these assumptions:

  • Our 50-year, Bob, old gets 3% annual raises
  • The average annual return of his balanced portfolio is 5%*

The result of 15 years of savings was a portfolio worth $106,667.  To maximize his income, suppose Bob leverages mortality credits and purchases a life-contingent annuity.   According to, Bob would get a check for about $637 per month, or $7,644 annually – less than ¼ of the $31,700 in the illustration.

Earlier in the article, the author stats that “[t]here’s no disputing that the math isn’t pretty after getting a late start on retirement saving.”  How right he was.

Either Financial Engines miscalculated (less likely) or some key facts – perhaps that the Read the rest of this entry »


Great Day For Up! (with apologies to Dr. Seuss)

In Uncategorized on 30 November 2011 at 9:52 am

The markets are going up.

The Fed Reserve,
ECB too
Have made access to money easier for you!

Bank of Japan!
Swiss National Bank!
Print as fast as you can.

Swap arrangements!
I don’t quite understand
But 50 bps cheaper!
Say, that is grand!

S&P 500!
Nikkei too!
DAX! and FTSE…
up UP with YOU!

Up Liquidity!
Can’t have too much.
To spend, Spend, SPEND
on stimulus and such.

Up sentiment!
Rally! Higher!
Bunds and gilts
are better, STRONGER!

Treasuries too
could not be brighter
Down yields! Up prices!
Up Timothy Geithner!

Unsustainable you say?
Some problems, you wonder?
But our best and brightest will ponder…

Problems now have gone away!
We’ll pay for it some other day.

The Great Collapse of the 21st Century

In Uncategorized on 13 October 2011 at 10:29 pm

Editor’s Note:  One bright spot in the current economic malaise is the surprising availability of gently used time travel equipment at very reasonably prices (I practical stole my Wenger quad-lithium SRP-22 from Seth MacFarlane).  While flitting about space-time, openly mocking Hawking’s chronology protection conjecture, I brought back a chapter from a 22nd century textbook titled “American Economic History – The New England to the Martian Colonies, 500 Years that Changed Everything”.   Enjoy.

Chapter 13:  The Great Collapse of the 21st Century

The Great Collapse, was different than the other depressions and recessions that preceded it.  It was not simply market speculation, shenanigans, and bad fiscal policy (though those undoubtedly played a part), nor was it just a particularly nasty downward slope in the business cycle.  Rather, it was the build-up of decades of pressure from unsustainable societal choices with respect to spending, taxation, domestic policy, and labor, combined with stunning political cowardice, that resulted in a Read the rest of this entry »

How About If I Pay You To Save?

In Uncategorized on 7 July 2011 at 4:35 pm

Poor plan sponsors, they just want to do the right thing by their employees. However, according to this article by Anne Tergesen in today’s WSJ, it appears as though, once again, the road to hell (perhaps not “hell”, exactly, but certainly a “Ramen Retirement”) is paved with good intentions.

The 2006 PPA allowed employers to automatically enroll workers in 401(k) plans. The problem, according to an Employee Benefit Research Institute analysis done for the WSJ, is that more than 2/3 of companies set the employee contribution rate to 3% or less. Since inertia is the 2nd most powerful force in the universe (behind only Matthew McConaughey’s ability to repel shirts), employees are locked into paltry savings rates that are below what EBRI analysis shows employees elect when required to opt-in to the plan. What to do?

There are lots of ideas on increasing employee contribution rates, and I have blogged about a couple. These generally require some kind of new strategy on the part of Read the rest of this entry »

Be Still My Whirling Heart

In Uncategorized on 14 June 2011 at 12:05 am

I read a story today that inspired me to write my first post after a long hiatus.  The story has nothing to do with any aspect of retirement planning, but it offers an excellent lesson on innovation to our industry, and to any industry that offers goods and services in exchange for money.

On 2 December 1982, a Seattle dentist named Barney Clark became the first recipientient of a permanent artificial heart.  The Jarvik 7 (I always wondered what happened to models 1-6) was implanted into his chest, and the external pneumatic compressor kept the device “beating”, and Dr. Clark alive, for 112 days of media frenzy.

For the next three decades, doctors, scientists, and medical device manufacturers have been in search of the cardiac holy grail; a device that replicates the beating of the human heart.  It now appears they have been pursuing the wrong goal.

Today, NPR’s Morning Edition reported on two doctors – Billy Cohn and Bud Frazier – at the Texas Heart Insitute that have developed an implantable device that Read the rest of this entry »

Notes and Observations from the 2011 Retirement Industry Conference

In Uncategorized on 21 April 2011 at 12:02 am

Last week, I attended the Retirement Industry Conference in Las Vegas sponsored by LIMRA, LOMA, and the SOA. Below are my notes and observations on three themes that ran through the conference: 1) looking to different disciplines and industries to spark innovation; 2) becoming more customer-centric; and 3) the use of technology and social media.

At the end of my post, I also include some notes on a very interesting case study of Eddie Bauer’s 401(k) plan. Two key takeways from that presentation:

  1. The most important brand may be the employer’s not the plan provider’s.
  2. There will be greater use of “tactile” applications to increase engagement and a continued shift from focusing on participant “education” to changing participant behavior.

Next week, I will do case study of 401(k) plan makeover that I will be presenting at the 2014 Retirement Industry Conference.


Looking outside of our fishbowl
Several presenters across multiple panels cited the need to employ behavioral science and to look to industries Read the rest of this entry »

Set the Dial to “Senior Citizen Me”

In Uncategorized on 30 March 2011 at 9:59 pm

Improving retirement savings behaviors is ultimately an exercise helping people learn how to delay gratification. Convincing people that they can surmount the discomfort that comes with deferring pleasure for the benefit of their future selves is, well, really, really hard.

In this weekend’s Wall Street Journal, Jason Zweig covered an interesting project at Stanford University that aims to “close [the] gap between the present self and the future self.”

Researchers have identified a “Proteus effect”; differences in real-world behavior based on changes in how we are physically represented in a virtual world.  In an exercise reminiscent of Calvin and Hobbes transmogrifier, researchers use software to “age-morph” photographs of young adult volunteers to create senior citizen avatars of the college-age study participants.

In one study, participants who saw their gray-haired future selves reported they would save twice as much compared to those who did not.

In another study, participants were shown avatars of themselves that smiled when the saved more and frowned when they saved less.  Participants “whose avatars were morphed into retirement age said they Read the rest of this entry »

Breaking through the “4% rule of thumb”

In Uncategorized on 14 March 2011 at 9:12 pm

Last week, The Wall Street Journal published an article by Eleanor Laise titled “How to Cash out in Retirement”.  The sub-title was “A look at four strategies that could help make a retiree’s savings last a lifetime.”

How many of those strategies for making “savings last a lifetime” do you think involved the use of mortality credits or any annuity products?  Hint:  The answer is the same number of times I have been on a beach and mistaken for Matthew McConaughey.

In Ms. Laise’s 1,800 word article, she reviewed:

  1. the 4% withdrawal rule;
  2. making retirement spending a function of performance; and
  3. bond ladders.

The fourth “strategy” is a reminder to “remember tax efficiency”.  Good advice, though curiously the tax efficient aspects of immediate annuities were not discussed. Her only reference to annuities was a parenthetical at the end of the 6th paragraph; “[a]nnuities, of course, may still be a good retirement-income solution for some people.”

Before I illustrate that very point, Read the rest of this entry »

Rethinking Our Approach To 401(k) Matching Contributions

In Uncategorized on 3 March 2011 at 12:59 am

The employer match or “free money” is major motivator used to encourage employee participation in 401(k) plans. The most common employer matching structure is 50% of each dollar up to the first 6% of employee contributions. The conventional wisdom heard by most participants is to contribute “at least up to your employer’s match.” In practice, it appears the “at least” part is ignored; the average deferral rate for non-highly compensated employees is 5.5%, while the average for HCEs is 6.6%.*

Unfortunately, 6% (or even 9% with the typical match) is not nearly enough to fund a 30+ year retirement, and very few participants are saving enough outside of their 401(k) plans to make up the difference. Can applying behavioral economic theory to matching contribution structure increase deferral rates?

Though there has been much discussion on using behavioral economics to influence investment selection and increase 401(k) participation and deferral rates, there is one idea to increase deferral rates that I have yet to hear discussed; backloading the match so that the more participants contribute, the higher the matching rate.

To encourage greater employee deferral rates, many companies have increased their matching rates (say from 50% of the first 3% to 100% of the first 3%). A January 2005 study by Watson Wyatt suggests Read the rest of this entry »

The Spirit Is Willing…

In Uncategorized on 24 February 2011 at 4:24 pm

Two articles in my daily Life & Health email from National Underwriter offer an interesting glimpse into investor behavior that recalls the challenges of changing investor behavior discussed in yesterday’s post.

The first, cites “concrete evidence of an increase in interest in saving” from Financial Finesse, Inc., a workplace financial education firm. Finesse cites the increase in the percentage of calls (24% in 2010 vs. 15% in 2009) to it’s financial helpline related to retirement planning and the decrease in the percentage of calls focusing on debt (21% to 16%) and cash management (17% to 14%) as proof workers are thinking more about retirement planning.

The second, cites statistics from a recent survey conducted by America Saves and the American Saves Education Council (ASEC) for “America Saves Week.” (last night’s tweet “And the bad news…” contained a link to another article on that survey). This survey, which asks questions on savings behavior, reports that the number of adults who said they are saving enough for retirement dropped from 60% in February 2010 to 55% this month. The percentage who reported they are spending less than they earn and saving the difference fell from 73% to 71%.

In other news, I have thought a lot recently about getting back into the gym…