The "New Economics of Retirement"

As we slip into the weekend, I wanted to share a few thoughts on investing, retirement, and investing in retirement. It is quite common for each of these topics to be discussed as though they exist in a vacuum; however, life doesn't work that way. Try as we might, it can be quite hard to compartmentalize our life savings into clean categories.

My thinking for this post began with a recent publication by Goldman Sachs. They published a report titled "The New Economics of Retirement." As someone who has been specializing in retirement planning for almost 17 years, I couldn't wait to find out what was changing and why it merited a report.

​If you'd like to read the report, you can download a copy here.

If you have better things to do that read the 37 pages, I'll give you some brief highlights:

First, there is nothing in this report that I would classify as "new." Perhaps that adjective was thrown in by the marketing team who wanted to make sure the finance nerds like me downloaded the report. It worked.

A Financial Vortex Can Disrupt Retirement Saving

What I found interesting is that Goldman is seeming to affirm ideas that we have known for a long time--many Americans are feeling squeezed financially. Debt, spending shocks, and inflation are having a measurable impact on people's ability to save. This is nothing new.

There is a strange divergence between how people feel about retirement and their beliefs about whether their money will last. It's not uncommon for survey participants to respond with high levels of confidence when they are asked about retirement readiness; however, the main concern for many retirees is "Will I run out of money?" In this report, Goldman writes:

While savers report they are on track for retirement, a large portion also believe that they will run out of money during their lifetime. And projected benchmarks of savings-to-income ratios vs. what people have actually saved are falling further behind as savers get older.

Good Investor Behavior Matters

Of course, Goldman doesn't use these terms. Instead, we now have "Financial Grit" as a contributing factor to long-term financial success. Again, this is nothing new.

In fact, there's an entire branch of finance called Behavioral Economics that has copious amounts of books and research on this topic. Here's the rub-- having a financial plan that can help you stay on track and adapt to your changing priorities over time is what allows you to have this "grit" that Goldman writes about. At least, that's my opinion.

Higher Investment Returns can Improve Retirement Outcomes

I don't think anyone needs a PhD in finance to understand this concept. However, I don't believe that Goldman is trying to point out the obvious here. In fact, I think they raise a fair point-- many pre-retirees and retirees are using sub-optimal portfolios that don't fully account for their projected longevity.

Yes, we have to consider the volatility of markets, along with personal investment constraints; however, I find that many people are tempted to invest too conservatively. Instead of a having a thoughtful plan for how to invest, they simply go into default allocations like target date funds or allocations with vague descriptions like "moderately conservative."

I believe all investors should be investing according to a personalized investment plan... which in my view, should create the potential for higher returns or improved investing outcomes.

Annuities Can Help Build Retirement Income

A blend of insurance and investment solutions can help bolster or sustain higher retirement income levels. More and more research is affirming that using some form of annuity income may enhance outcomes for some retirees. Annuities often get bad press because they are product that is often sold as a magic elixir for anyone and everyone.

But, that's not what they are. Annuities are a tool, and if used correctly, they can be game changers for retirement income planning. Goldman is the latest group to publish a study showing how annuity income can actually increase retirement income. Here's what they found:

Of course, there can be many different ways to structure a retirement income strategy. Not everyone has the same goals, desires, or even the same resources. So, it would be silly to suggest that one plan works for everyone. 

Final Thoughts

Ultimately, the report from Goldman had some good takeaways. It was nothing groundbreaking. My biggest takeaway was people need to have a financial plan--now more than ever.

When you consider the factors that Goldman discussed in their report, doesn't it make sense to have a plan that can help you save more, improve your investment outcomes, have financial grit when necessary, and enhance your retirement income?

I think so. Let me know if you agree.

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