Plan For 100℠ Podcast logo image

With Michael Finke, Ph.D.

00:00 -00:00

In our first episode, we take a look at the income challenges many Americans may face as they plan for more years in retirement than previous generations. Dr. Finke discusses strategies to create more security around retirement income and spending.


Voice Over: [00:00:08] Thanks to medical advances and healthier choices, Americans are living longer, more active lives well into their 80s, 90s and beyond. Welcome to "Plan for 100," a new podcast from AIG. This podcast series is devoted to educating and empowering Americans to prepare for longer lives and retirements that could last four decades or more. Our podcast aims to help you "plan for 100," no matter what age you are today.

Mike Treske: [00:00:37] Hello, I'm Mike Treske, executive vice president and chief distribution officer for AIG annuities and mutual funds. I'll be your host today for episode 1 of AIG's new podcast, "Plan for 100." I'm very excited to kick off this podcast series with today's guest, Michael Finke, Ph.D. Dr. Finke is a chief academic officer at the American College of Financial Services, contributing editor at Investment Advisor Magazine and a research fellow for the Alliance for Lifetime Income. Michael, welcome to Plan for 100.

Michael Finke: [00:01:14] Thank you, Mike. Great to be here.

Mike Treske: [00:01:15] Michael, there is no doubt that retirement today is different than it was a couple of generations ago. Pensions as a source of lifetime income are disappearing. At the same time, people are living longer than ever. What challenges are Americans facing as they try to plan for retirement that could last 30 or even 40 years?

Michael Finke: [00:01:35] Well, Mike, we're really in the first generation of defined contribution retirees, and these retirees are going to have to take a lump sum and turn it into a lifestyle in retirement. And that's not easy. It's not easy for even economists to figure out how to do it right. You're always going to be balancing the lifestyle goal with a security goal. Lifestyle meaning that if you don't spend the money, you're not going to run out of it, but you're not going to live very well in retirement, and if you do spend the money, there's always going to be a chance that you're going to run out too early. And the reason is because, you frankly don't know how long you're going to live in retirement. Retirement could be a 20 year time horizon, it could be 25. It could be 35 or even 40 years. Nobody knows ahead of time. So they have to plan to spread their savings out for an unknown number of years. And they also don't know things like what asset returns are going to be. They don't know what inflation is going to look like. So that understandably creates a lot of anxiety among today's retirees. And when I do surveys, I see that over and over again, that retirees are anxious about the fact that they don't know how much they can safely spend in retirement.

Mike Treske: [00:02:59] So given these challenges what strategies can retirees and their financial advisors use to create more security around retirement income management?

Michael Finke: [00:03:08] Well, most economists -- nearly all economists -- would say that the right thing to do with any kind of an unknown risk, such as how long you're going to live, is to hedge that risk by pooling it with other retirees. So what does that mean, to pool risk? Well, I mean, if you think about 100,000 retirees, all at age 65, not knowing how long they're going to live, they can all plan to, say, fund their safe spending, their basic lifestyle in retirement, by simply investing in safe investments like bonds. They could invest in a bond ladder, for example, and if they do that, then they're going to have to pick an age with which to create this bond ladder. So maybe it's age 90 or age 95, or age 100. But we know right now that if you look at the actuarial tables for a healthy couple at the age of 65, there's about a 43 percent chance that one of them is still going to be alive at the age of 95 and none of those retirees know which couples are going to need to fund spending all the way to 95 or 100, or 105. So that's that's why I have long said that the right way to approach creating, especially a base income in retirement for those fundamental expenses that you simply need to come up with, and that would include things like health care, or paying tax on your on your home, that you have no choice. So you can't necessarily invest in risky assets to fund those safe expenses. You're going to have to invest in bonds. But if you invest in bonds, you're gonna have to pick an age at which you're going to run out of money. Why not instead pool your money together with other retirees, and let the actuaries figure out, on average, how long a retiree will live, and then they can estimate how much income the average retiree will receive. But by pooling their money together, none of the retirees will be bearing that risk of running out of money, because the insurance company then provides a protected income that lasts until death. So pooling risk is the right way to approach important unknowns, especially the unknown like longevity in retirement.

Mike Treske: [00:05:38] So Michael, given this lifetime income club, what role would annuities hold for the idea of guaranteed retirement income?

Michael Finke: [00:05:45] So an annuity is really just a financial product that is created by an insurance company. It goes a little bit beyond a normal type of investment product, because it incorporates longevity and expected longevity. So there is this actuarial science, actuaries have a good idea of how long, given a large enough sample of retirees, how long they're going to live, and they can estimate how much each retiree can safely receive for their lifetime, based on that distribution of lifetimes. And they can also estimate how much they'll be able to receive from their investments that are pooled together by those retirees. So it's really two elements of the equation. And the difference between annuities and, say, a bond ladder investment, is that you're incorporating that element of longevity or expected longevity, and that element allows annuities to provide a higher and safer income than if each individual retiree was trying to create income on their own.

Mike Treske: [00:07:00] Michael, you mentioned your research, and I know you've done some proprietary research for AIG recently, that included polling Americans about their thoughts and concerns about retirement, especially what they would do differently if they knew they were going to live to 100. Can you share some of the responses you found particularly interesting?

Michael Finke: [00:07:17] Yeah. Well, one of the most interesting responses is that about two thirds of retirees are more afraid of running out of money than they are of death, which leads them to behave differently in retirement. If you're constantly afraid that you're going to run out of money, and your friends ask you if you want to go out to dinner, you might think twice, or you might think twice about going on a vacation. And what I saw from those open ended responses of today's Defined Contribution retirees is that there's a definite fear of spending money that very often they don't want. They don't feel comfortable spending money without that income guarantee. What I'm seeing over and over again is the same story, that if you want to get the most out of retirement, having that base of guaranteed income is going to give you the security to be able to live well.

Mike Treske: [00:08:07] Well, Michael, there's obviously a very, very complex kind of a scenario but any other thoughts for people to consider as they plan for one hundred?

Michael Finke: [00:08:16] Yeah, I think that you need to sit down with your advisor and plan out what your goals are for your savings in retirement. The way I like to think about it is, all right, you have these safe spending goals. What's the best way to fund safe spending goals? And economists believe that guaranteed income is the right way to fund safe spending goals. You may have goals like a legacy, and it may be important to develop a investment strategy that's appropriate for that legacy. Or you may have more flexible spending categories and you may want to develop a different type of portfolio strategy for that. But I think that all retirees need to have a plan to allow them to feel comfortable about living well in retirement.

Mike Treske: [00:09:03] Great advice and insight as always. Mike, thanks for being with us on today's "Plan for 100" podcast. We hope you come back and join us again.

Michael Finke: [00:09:10] Thank you. My pleasure.

Voice Over: [00:09:11] Thank you for joining us for AIG's "Plan for 100" podcast. Guarantees are backed by the claims-paying ability of the issuing company. For more information, please visit our website, planfor100.com.