The Business Week Cover Story on Retirement--Life-Cycle in Theory but Status Quo in Practice

Business Week just ran a timely cover story on the post-financial crisis retirement landscape.  Portions of the feature present a remarkable contradiction. While there is a clear endorsement of life-cycle investing as a post-financial crisis retirement planning alternative, most of the actual discussion and recommendations are based on conventional approaches—asset accumulation, diversification, asset allocation with relatively heavy exposure to market risk, precautionary savings, and draw-down rates.

Life-cycle investing is placed front and center as an alternative to the status quo alternative which basically involves trying to accumulate enough assets to “be safe no matter how long you live or what goes on with your health or markets.” 

The flaws in this conventional or status quo approach to retirement planning are all too clear for millions of people who are approaching or recently in retirement with significantly fewer assets than a year and a half ago.

As discussed in previous posts, the fundamental objective of life-cycle investing is to smooth consumption over the course of one’s lifetime.  Human capital is an important component of life-cycle investing as are the use of insurance and hedging to protect against nasty downside shocks from things such is premature death, sequence of returns risk, retiree health expenses and longevity risk

Annuities are a natural part of any life-cycle strategy since they convert accumulated human capital (i.e. financial assets) into a sustainable stream of income.  In addition, annuities help hedge longevity risk which is one of the major risks faced in retirement.

There are several sections in the Business Week retirement feature that address annuities.  For example, there is a section dedicated to the Obama administration’s focus on retooling defined contribution plans with an emphasis on guaranteed income and annuitization (in other words, the use of annuities in 401k plans).  There are also a few brief references to longevity annuities.      

What is remarkable, though, is the section titled “five action plans for a family slammed by the slump.”  In this section, five actual financial advisors provide advice to a hypothetical couple who is struggling to revamp their financial strategy in light of the meltdown. 

There is not a single reference to the use of annuities in any of the five action plans.  Common themes of the recommendations include higher savings rates, delayed retirement, and various (and ridiculous) tweaking of asset allocation recommendations and return assumptions.  In other words, the actual practitioner recommendations basically boil down to trying to accumulate enough assets to “be safe no matter how long you live or what goes on with your health or markets.”