Blog | CB Investment Management

The Retirement Crisis Requires Your Proactive Engagement.

75% Don’t Have Enough Savings. 50% Die Broke. Here Is What You Need To Do To Take Charge Of Your Finances.

“Show me the incentives, and I’ll show you the outcome.”

Charlie Munger, in 1995 in his famous “Psychology of Human Misjudgment” speech at Harvard.

“Stay Clear Of Conventional Planning And Conventional Planners.”

“Not a single decent economics or finance PhD program teaches conventional planning. – for a clear reason. It’s predicated on behavior that’s at total odds with economic fundamentals, not to mention common sense – producing recommendations that no one in their right mind would follow.”

Larry Kotlikoff, Economics Professor at Boston University.

 There are multiple challenges facing retirees today:

  1. Economic Policy is now on tilt, Government debt growth is unsustainable.
  2. The greatest problem being that inflation has become a major long-term concern.
  3. Retirement benefits typically no longer have employer insurance.
  4. Insurance policies may be only a partial solution.
  5. Tax planning can make a huge difference.
  6. Real estate needs a different perspective in retirement.
  7. Investment needs very careful planning and skilled execution.
  8. Sadly, most Financial Plans fall short of providing reliable sound guidance.
  9. Join a network with experienced PhD financial planners for a second opinion, best practice, and advocacy if needed.

In order to address all these components, there are several things you can do, but this does need your attention. Good advice may be harder to find than you think, and the stakes are high! You need to ensure you have informed consent, so you can verify that you are adopting best practice. Even then you must stay actively engaged and verify your progress with the best measures and markers.

 What share of workers aren’t saving enough to maintain their living standards in retirement?

  1. 75 percent
  2. 50 percent
  3. 25 percent
  4. 15 percent

And the answer is …

The answer, provided in a 2022 Federal Reserve study, is 75 percent. This study, like many others on this issue, relies on a goodly number of imputations. It’s also focused on those with retirement plans — households that should, by rights, be far better prepared for retirement. Other studies claim that a far larger share of retirees are able to maintain their living standards per household member from that experienced in their working years. Yet other studies show that half of the elderly die broke — with no or precariously low financial assets.

Why you must take full responsibility for your financial plan with best practice  guidance.

It has been a 45 year journey for me to find a financial plan I could believe in. Conventional financial plans that are used almost everywhere have the same problems, which I discovered several decades ago. These plans, in my opinion are inaccurate, misleading and unacceptably risky. I am not alone. The best research I can find on this takes a similar view. See below.

Conventional Financial Planning still uses the failed approach used for Defined Benefit Pensions (DBP)

In the early 1980s, for a short period, my job as an Actuarial Trainee was to audit DBP plans. This was a legal requirement in the UK, and so there were pension consultancies that were set up to do this. I worked for a consultancy and used the technology that I was given.

I did not stay for long because I did not believe in the methodology or the results. Just because you get a result from some software doesn’t mean it’s either accurate or useful. As a Math MA at Oxford University, perhaps I understood the problems better than others.

No surprise to me, a few decades later the whole DBP plan approach was abandoned. The plans kept on delivering insufficient funding, which the company then had to bail out. The problem, however, was not the structure of the DBP plans. It was the financial plan calculations that completely failed. Simply because they were biased to being far too optimistic on how much funding they needed!

What really went wrong was the bad methodology, calculations, and incentives of the Actuarial Consultancies and the company CEOs. However, as CEOs preferred having a stable and lighter liability, they blamed the Defined Benefit approach and switched to defined contribution model.

Too many assumptions, wide range of results, so … use assumptions that produce the “good” results? Great today … really bad down the road.

At a high level the problem is easy to explain. Multiple assumptions were thrown at the data and some highly unstable results were produced. Some results looked good and some not so good. Who could really tell which assumptions would be accurate over the next several decades? No one.

So the incentive was to use assumptions that made the results look good. The actuaries wanted to show good results and the CEO wanted to get good “results”, so his pension plan was a lighter burden on company finances.

The reason that DBPs ended up repeatedly underfunded was that rosy assumptions were chosen on top of a bad financial model, so no wonder there were insufficient funds for the pensions. That did not necessarily mean that DBPs were a bad arrangement.

However, this leaves the employee or retirement beneficiary with the whole burden of risk for getting their pension funding right, with no backstop from the company or any retirement insurance plan. Now the planning, investing and financing is all down to the individual. That is a great deal to take on, when even with several professionals involved it did not work out well for DBP plans!

Now Investors and retiree beneficiaries are on their own and must take the responsibility on themselves, but they can’t necessarily trust the “experts”. Either on the planning, or on the investing. There is a solution but you need to ensure you are getting Best Practice.

Let’s spell this out clearly.

  1. Your financial plan may include assumptions chosen because they show a good result for you. Your planner does not have much incentive to show you bad results. Make sure you have a realistic assessment based on an accurate, stable and secure financial planning approach and software. Do not take your plan results or assumptions for granted.
  2. Most likely “good” financial planning results are a direct function of using a high investment return assumption. This may not be clear, and even if it is, it is at best a guess.
  3. High investment return assumptions may lead to a much higher risk level to your plan. This may well include an unacceptable risk of bankruptcy. Make sure you understand this.
  4. If the findings of the “financial plan” suggests a bias towards high risk investing is needed and becomes part of your investment plan, this is simply bad investment advice based on flawed analysis. It violates investment best practice, which prioritizes risk management.

The individual has to take on a great deal. Most investors simply do not have the time and experience to understand these issues, let alone master them. They need help, with informed consent and objective verification of best practice from experienced practitioners.

Here are some details that provide an update on the whole Financial Planning scene from the top experts.

Are the SEC and FINRA Ignoring their Regulatory Responsibilities?

The orthogonality between economics-based planning and conventional planning should be of extreme concern to both the SEC (The Security and Exchange Commission), which regulates RIAs (Registered Investment Advisories), and FINRA (The Financial Industry Regulatory Authority), which regulates broker/dealers. Indeed, both agencies should read this description of the bait-and-switch as well as this paper by Wade Pfau and Massimo Young. (Larry Kotlikoff discusses their paper here and in my podcast with Wade.) Their study shows that many RIAs are placing their clients at even higher than one-in-five destitution risk by selectively choosing the data used in their conventional Monte Carlo simulations.

 Most of these problems can be addressed by using:

Maxifi

 

A Secure Financial Plan Needs To Reach A Much Higher Standard. It should

1. Be Assumption Free.

2. Be based on lifelong spending. Assets and income are often pre-tax, so a clearer picture emerges by basing results on spending from after tax assets, calculated accurately. Spending is in any case what matters, and is much easier to control.

3. Separate out investment assumptions, which introduce huge variability and require investment specialists to avoid poor advice.

4. Accurately address longevity and complexity. Highly advanced software is important.

5. Enable full optimization of multiple asset and income sources.

6. Be secure. A 20% failure rate is too high, even though it is often considered a “fiduciary” standard. It is irresponsible to offer results that are not authentically grounded.

7. Have excellent software support and 3 different experienced PhD sources for a second opinion.

8. Be part of a network that can provide ongoing Best Practice advice and provide guidance and advocacy in the case of issues with either Social Security or Medicare.

 MAKE SURE YOU ARE MOVING FORWARD WITH A BEST PRACTICE FINANCIAL PLAN.

 

Best Practice is a matter of your Best Interest.


Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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