February 2012

Finding Retirement Security in the New Economy: A New SOA Monograph

By Anna M. Rappaport and Steve Vernon

Each year the Society of Actuaries Committee on Post-Retirement Needs and Risks identifies major topics in thinking about retirement where they feel that more research and thought is needed. Three of the topics that have gotten attention in the last few years were "holistic thinking," "new paradigms" and the implications of the recession of 2007-2009 and the ongoing turbulence in the economy. The committee has several approaches that it can use to address key topics, and it decided to address this combination of topics with a Call for Papers. When a Call for Papers is issued, prospective writers submit abstracts, and if approved, then they write the paper.

Research and external background for the project
The primary focus of the committee's work is understanding post retirement risk. In 2011, we issued the third edition of Managing Post-Retirement Risk: A Guide to Retirement Planning. This risk chart reviews a wide range of risks and provides possible ideas for managing them. One of the conclusions reached quickly when you look at Managing Post-Retirement Risk is that there are many different challenges, and it is hard to think about them together. This led to a focus on integrated or holistic retirement solutions, and a discussion about what they might be and how to think about them. At the same time, another group in the committee focused on how employer sponsored benefit plans are changing while at the same time new products are emerging. The two projects–the search for new paradigms and the search for holistic approaches–were merged, leading to Call for Papers that was the basis for the monograph "Retirement Security in the New Economy: Paradigm Shifts, New Approaches and Holistic Strategies."

The shift away from defined benefit plans changed the rules for individuals as they plan for retirement. The new economy that emerged from the recession of 2007-2009 created new challenges for many individuals, as they were seeking retirement security and planning for themselves. Eleven papers were submitted in response to the Call for Papers, and some were presented at the 2011 Society of Actuaries annual meeting. Most of the papers are published in the monograph, and all are described in an overview at the beginning. An abstract is included at the start of each paper in the monograph. The overview and abstracts are a quick way to identify which papers you wish to study.

In this new monograph, authors turn their attention to retirement issues facing individuals and families in the New Economy. It is the latest SOA study to probe pressing issues about retirement trends and issues in America. Earlier works have included a monograph on retirement housing plus publications on retirement risks and retirement solutions for middle-market individuals. Recently, the SOA also published a set of 11 Decision Briefs on retirement; these briefs spotlight the many decisions people confront as they approach and enter retirement.

What the Papers Covered
Two of the papers looked at big picture views of retirement. Steve Vernon focused on what he means by holistic retirement planning, and Chuck Yanikoski did the same. Both presented very provocative ideas about how to fit the management of so many aspects of our lives together.

Several of the papers provided ideas about how to get to retirement. Hoyem and Yu looked at money management before retirement and strategies to be able to retire if there is not enough money. This is a huge issue for many people today. A paper on Liability Driven Investments by Michael Ashton looks at a different approach to money management before retirement. This approach brings to individuals some conceptual ideas being used in large plans. Gregory C. Freeman focuses on diversification (before and after retirement) and tells us to think about managing for best tax result. He also points out that tax diversification offers protection if tax laws change.

Several papers focus on the post retirement period. Anna Rappaport looks at the big picture with regard to the post-retirement period and the payout of benefits. She challenges benefit plan sponsors to rethink default options for the payout period and she challenges policymakers to support new options. Felix Schrippa and Chris O'Flynn analyze the withdrawal rates from retirement savings, and find that with a four percent withdrawal rate (a commonly used percentage), there is a much higher chance of failure than many people expect. (It should however be remembered that while four percent is not risk free, it is much better than withdrawing whatever you need to cover expenses, and hoping that money will not run out. Jeffrey Dellinger challenges conventional thinking on the best time to annuitize, and Garth Bernard focuses us on the value of having illiquid investments in retirement. Bing Chen closes out our focus on the post-retirement period with ideas for restructuring the long-term care financing system. Melissa Knoll gives us another perspective and different way to look at the issues as we focus on these papers. She looks at how and why people make decisions and provides an explanation of why economic analysis does not explain common choices.

Things We Have Not Thought of or Disagree With
Most of us will probably find that even though we consider ourselves experts, there are things in these papers that we have not focused on, or that we disagree with. Some of the things that were interesting to Steve and Anna include:

  • The idea of tax diversification and setting a strategy that hedges against changes in tax law–we have traditionally thought of diversification by asset class and income type, but tax diversification is a different idea.
  • The analysis of the four percent rule for withdrawals. Since seeing that paper, we have learned that this is quite a controversial topic, and at least one expert thinks two percent is a safe withdrawal rate.
  • A very different idea for financing long-term care in the United States.
  • Varying views on whether annuitization is desirable, and when it is a good idea.

While there is disagreement about what methods of withdrawing funds are desirable, some people just use funds to cover expenses, and withdraw them more quickly than they would be withdrawn under any of the methods. Either four percent or annuitization would make the funds last a lot longer than this approach. If you have comments on some of the papers or would like to start a discussion on retirement planning issues, join the Pension Section LinkedIn group, and start the discussion going. It is fine to pose questions as well.

Favorite Ideas from the Paper
Anna's favorites are the discussions of holistic approaches in the Vernon and Yanikoski papers. Chuck Yanikoski (founder of the Association for Integrative Financial and Life Planning and founder and president of Still River Retirement Planning Software, Inc., Harvard, Mass.) looks at holistic planning in an unconventional way. There is "a mistaken impression that, when people actually do retire, accumulation simply becomes 'decumulation,' that we can just put a minus sign in front of the savings rate, and posit (or assume) that withdrawal rate and investment performance are now the two critical elements," Yanikoski writes in his paper. He proposes "a reality-based financial decision-making model" would be better.

Such a model would focus on everything that affects the retiree's money, and also include comprehensive data collection and analysis, he says. If the object is to avoid running out of financial resources before death occurs and to provide for financial legacies, he adds, "then everything that affects that outcome is relevant."

What does he mean by "everything"? Yanikoski presents the following list of issues as a starting point. The issues are prioritized by impact, control and prevalence. He says most retirees and near-retirees need to deal with these issues in their financial planning, and that retirement plans should also be detailed, incorporate scenario testing, offer specific integrated advice and be holistic (in the sense of bringing in non-financial issues too.)


Most investment-oriented retirement models do not address those issues, Yanikoski allows. But he argues they should because such considerations can not only work but they can also "improve results by orders of magnitude." Further, he says models of this kind can be built and can be made usable by ordinary people. Anna really liked the idea of thinking about a range of issues, and focusing on impact, control and prevalence. However, we recognize that this model is much more complex than many of the models used today. We do not want to discourage the use of simpler models for those who wish to use them. Many Americans who are not doing much planning, and not ready for more sophisticated models, can benefit greatly by using simpler models. Yanikoski's ideas give us a lot to think about, and presents ideas that there will certainly be debate about.

SOA member Steve Vernon, a columnist for CBS MoneyWatch and president of Rest-of-Life Communications, Oxnard, Calif., maintains, in his work and his writing, that holistic strategies are "essential." His paper focused on holistic planning as well and he gives us 10 steps to planning.


To achieve retirement security in the New Economy, he says, middle-income Americans will need to integrate finances with their lifestyle and make the most effective use of available resources, too.

Steve's favorite ideas focus on several areas. Get very serious about taking care of your health, to reduce the odds of getting sick and relying on the medical system, with care financed by Medicare and/or private insurance. In the coming years, such insurance will only get more restrictive and require higher out-of-pocket expenses. Steve also suggests that retirees find work that they enjoy and that provides personal meaning and purpose. Retirees don't need to make the same amount of money as in their main career years. But it helps to make enough money to equal their expected Social Security benefit and then to delay receipt of Social Security so that the monthly income will grow. It also helps to make enough to cover regular living expenses and to delay tapping pensions and/or 401(k) resources to let them grow. Steve also reminds readers of the value of simple approaches.

Many middle-income Americans definitely saw their retirement plans suffer setbacks during the prolonged economic downturn. These setbacks have been compounded by advancing age, lack of knowledge about how to manage retirement funds, and prospects of longer lifespans than previous generations. In that context, the often-expressed uncertainty about whether retirement will ever be possible is understandable.

In their monograph papers, the authors have sketched out a range of ideas. They are saying that challenges exist but there are some things that middle-income Americans and financial advisors can do to improve the likelihood of achieving a secure retirement.

Some approaches may entail working longer; saving more; delaying Social Security; spending less or differently; or using annuities, long-term care policies, and other insurance and financial products. Others may involve new investment strategies, ways of managing money and withdrawal percentages, and holistic planning that incorporates housing options, second careers, hobbies, geographic locations, relationships and more. Advisors who work with older clients will likely find themselves talking with them about emotions, preferences and lifestyle as much as financial constraints and opportunities.

Considering the alternative–never retiring at all or never feeling financially or personally secure during retirement–those options seem well worth considering.

The monograph papers are essentially an invitation. They are inviting financial professionals and interested Americans to the table of engagement, inspiration and innovation. New Economy or not, some approach or finding the one authors put forth could be the very one that sparks a solution to a stubborn problem or that opens the door to an opportunity not yet considered. For that reason alone, the SOA's monograph papers are well worth exploring.

And, we want to add an important P.S.: The papers add to the dialogue on the important topics of retirement security in the emerging economy, but there are many further steps to be taken. If you have more to say about these topics, please write an article for the Pension Section News, post a comment on the Pension Section LinkedIn site, or write a paper for the North American Actuarial Journal.

Comments about the papers and monograph can also be sent to anna@annarappaport.com or ssiegel@soa.org.

Anna M. Rappaport serves as chair of the Committee on Post-Retirement Needs and Risks and Steve Vernon served as chair for the Project Oversight Group for Retirement Security in the New Economy. Both authors wrote papers for the project.