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 As I write
this, I have been retired for a few days, so postretirement
investment and drawdown strategies (asset “decumulation”) are very
much on my mind. (Decumulation — apparently a made-up word of recent
origin, but aren’t all words made up? — is the opposite of
accumulation.)
Other people in previous generations, and some in the current
generation, of retirees have relied on traditional ways of getting
by, or of thriving, as they age. The historically earliest ways were
“I will let my children support me” or “I will work until I die.”
These are less than fully satisfying. A fairly large population of
lucky or shrewd retirees can say, “I will live on my defined-benefit
pension plan.” Another group, generally less fortunate but still able
to survive, must say, “I will live on Social Security,” or whatever
the lowest-tier government pension program is in any given country.
Then there is me, and several tens of millions of people like me:
“I will live on my savings.” (Savings includes defined-contribution
plan balances.) But what does it mean to live on your savings? How
much can you afford to spend? What should the asset allocation of
your investments be, taking into account your home, Social Security
and other guaranteed income, and (diminishing) human capital? Should
you work part time? What will you do if you run out of money when you
are very old? Is there a way to make sure such a catastrophe never
happens?
Unfortunately, finance does not give me and my compatriots much of
a tool kit to work with. Where is the body of economic theory and
empirical work that helps to answer these questions?
The authors of The Future of Life-Cycle Saving and Investing: The
Retirement Phase (PDF), published by the Research Foundation
of CFA Institute, begin valiantly to work toward such a theory, which
must address a number of thorny issues. Among these are the role of
annuities and other insurance products, sustainable drawdown rates,
the effectiveness of using adjustments in one’s standard of living as
the principal risk control mechanism, and the integration of human
capital (income from work) into the postretirement equation. From a
public policy standpoint, leaders of government, business, and
voluntary associations must consider at what age retirement benefits
are to be provided, how large the benefits should be and how quickly
they should grow over time, how to fund such benefits, and how to
answer such ancillary policy questions as whether phased (partial)
retirement should be encouraged or discouraged.
This book is the outgrowth of the second Future of Life-Cycle
Saving and Investing conference held at Boston University on 22–24
October 2008. The first such conference, which addressed retirement
saving and investment issues at the broadest possible level, was
organized by Professor Zvi Bodie of Boston University and took place
at that location on 25–27 October 2006. It resulted in the precursor
to this book, The Future of Life-Cycle Saving and Investing
(PDF), published by the Research Foundation of CFA Institute in 2007.1
Professor Bodie also organized the second life-cycle conference.
He wisely chose to focus on the part of the retirement equation that
has received the least attention and that is thus closest to the
frontiers of finance: the behavior and investment strategies of those
who have already retired — thus the emphasis on asset decumulation in
this book.
As noted in the foreword to the predecessor volume, this series of
conferences is distinguished by its avoidance of a finance-only
faculty and its inclusion of a varied group of experts, among them
actuaries, accountants, lawyers, regulators, nonfinancial corporate
executives, union leaders, and trade association representatives. The
variety of thinking that comes from bringing such a wide array of
people together is invaluable.
Through our sponsorship of this series of conferences and our
publication of the associated books, we hope not only to stimulate
thinking but also to promote real change. This book showcases finance
at its most practical, and we are especially pleased to present it.
Laurence B. Siegel is research director of the Research Foundation
of CFA Institute.
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