Battling the new math of retirement (excerpt)On the Trading DeskSM—
By Peter Nulty
Americans are in a fight for their lives to build even modest-sized nest eggs. James P. Lauder, portfolio manager and CEO with Global Index Advisors, Inc., explains in this excerpt of the On the Trading DeskSM podcast from Friday, June 28, 2013.
Jim, you wrote an opinion article for the financial profession publication Ignites. It was titled, "Target Date Managers Who Ignore Risk Should Be Fired," which gives us a good sense of where you stand on the matter. What compelled you to write the piece?
There were really two reasons. First, despite what we went through in 2008, I think there's still a very large disconnect between what the industry is selling in the target date space and what most fiduciaries and individuals really want and need. That disconnect is primarily in the area of risk. Second is the continued lack of transparency. I think the fund industry has progressed, and there are new ways people are taking risk on behalf of participants and investors and fiduciaries. And I think there's a real lack of understanding and transparency there.
The kernel of the idea for this interview came from that opinion article, in which you wrote, and I quote, "Americans are in the fight of their lives to build even modest-sized nest eggs. They are battling the new math of retirement." Can you explain to us now what the new math is?
Very simply, I think today's workforce, including me and everybody else, has less time to fund longer and costlier retirements. I'd add that we also have a lot more responsibility. I think the easiest way to look at what the math is, is to look at what is commonly called the work-to-retirement ratio. As an example, in the early '70s, most people entered the workforce at around 18 years old. They retired at about age 64, and they lived to about 71 years old. If you do the math on that, the number of years that they were actually working and had the ability to put away funds for their retirement, you have a ratio of about 6.8 or 6.9 to every year of retirement. Now, we're entering the workforce later because more people are getting advanced degrees. So right now, the average is close to 20 years old. The average retirement age is somewhere around 62½, 63, but we're living a lot longer. The average life expectancy is 78 years old. If you do the math on that, you come up with a work-life-to-retirement ratio of about 2.7 years of working and saving to fund each year of retirement. So that's a huge shift, and again, as I said earlier, the responsibility really lies on the individual to make the changes in their behavior and their savings rate to try to make up for that changing math in the retirement landscape.
Now, let's discuss some ideas to help prepare for this battle. You mentioned, “A fiducially sound glide path is the foundation on which we can help participants wage their retirement battle." Can you explain that?
Absolutely, in my mind, a fiducially sound glide path is one that manages the transition from accumulation of assets to preservation of assets in a way that really fulfills your fiduciary duty and is 100% compatible with your views on how much risk is appropriate, whether you're a fiduciary or an individual, over time. And how much risk you're going to expose people to as they progress from accumulation to preservation. If you're an individual looking at these, a fiducially sound glide path may not be the same as somebody that's sitting next to you.
Now, building on that, what can an individual investor do to prepare?
You know, I think the first thing they have to do is to face that math that we were talking about. They have to understand really what their likely sources of retirement income are going to be. What burden will be placed on these target-based savings, if that's what they're looking at, whether it be in a 401(k) plan, an IRA, an individual account, or whatever it is, and look at that in terms of replacement rates, etc. Then, with that knowledge, they really need to focus on a handful of other things. We need to look at getting engaged first of all, participating in a plan, early. Two, look at your savings rates. Your savings rate is going to be a huge piece of helping you fix that math problem that we've got. That's going to have a bigger influence on your outcome than the individual investments that you choose. Then, look at the investments. And fourth would be to stay the course, not to get discouraged. Don't panic in bad times. Then lastly—and I hate to beat this to death—but a fiducially sound product that's going to help you meet those goals.
Jim, we'd welcome a parting thought, perhaps, to help us overcome the challenging math you've described here.
My parting comment would be that it is doable, but you do need to understand the math that's behind it. You need to understand what you're up against and really take a holistic approach to help solve that. But it can be done. Don’t give up, even with the current market volatility that we've seen here over the last month or so. You've just got to stay the course.
Well, Jim, thanks for joining me here On the Trading Desk.
Thanks for having me, Peter.
The views expressed are as of 7-3-13 and are those of Peter Nulty, Jim Lauder, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.