Financial Advice Does it Make a Difference?
The Future of Retirement Income in America
Presented by:
Michael S. Finke
Professor & Director, Retirement Planning and Living Department of Personal Financial Planning
T EXAS T ECH U NIVERSITY
Growth in DC assets vs. assets in public and private defined benefit (DB) pensions $8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0 1974
1979 IRAs
1984 DC plans
1989 Private-sector DB plans
1994
1999
2004
State and local government DB plans
2009 Federal DB plans
2014
Net Tax Benefit for US DC Plan Participation 75.00% 65.00% 55.00% 45.00% 35.00% 25.00% 15.00%
Authors calculations, Percentage benefit of saving over 30 years vs. taxable account at 9% in a 50/50 portfolio
Defined Contribution Plan Balance by Income Age 43-50 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 0
1
2
3
4 Median
5 75%
6
7
90%
Source: 2008 National Longitudinal Survey of Youth
8
9
Defined Contribution Plan Balance by Age Group $600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0 25-34
35-44 20% Percentile
45-54 Median
80% Percentile
55-64
Financial Literacy Particularly Low Among Less Educated Americans 70 60 50 40 30 20 10 0 Basics
Borrowing 85
Does Money Make you Happy?
Source: Ho and Finke, 2015
45
Because Rich Retirees Spend More?
Same Cohort Health and Retirement Study Consumption 2000-2008
Source: Browning, Cheng, Finke and Guo, 2014
46
Financial Wealth Differences
Source: Browning, Cheng, Finke and Guo, 2014
47
Income & Consumption by Wealth $70,000
Average Income
Real Consumption
$60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Lowest Wealth
Quintile 2
Source: Browning, Cheng, Finke and Guo, 2014
Middle Wealth
Quintile 4
Highest Wealth
48
Consumption Gap High Wealth 100%
80%
Success Rate
60%
40%
20%
0%
30 Year Retirement, 40% Reserve A c t u a l S p e n d i n g
$40k
GAP
$60k
M i n i m u m S p e n d i n g $80k
$100k
$120k
Benefit of Late Life Annuities $100,000 $90,000 $80,000 $70,000 $60,000
Cost of Buying $100,000 Income at 65
$50,000 $40,000 $30,000
Mortality Weighted Cost of Buying Income
$20,000
Difference = QLAC Efficiency
$10,000 $0 65
70
75
80
85
90
95
100
Bond Ladder Vs. QLAC (Assume 4% Bond Return)
Invest $125,000 in a Bond Ladder at Age 65 $300,000
$250,000
$200,000
Can Fund $125K QLAC Income Until Age 91
$150,000
$100,000
$50,000
$85
86
87
88
89
$(50,000)
Bond Portfolio
Spending
90
91
92
Need to Invest $248,000 at Age 65 to Fund Spending From 85 Until Age 100 $600,000
$500,000
$400,000
$300,000
$200,000
Or Simply Invest $125,000 in a QLAC at Age 65
$100,000
$85
87
89
91
93
95
97
99
Options for Funding Late Life Income
How much would a 65-year old male have to set aside today to fund same level of spending at age 85? Cost to Fund $44,623 in Spending at Age 85 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 Buy a QLAC
Bond Ladder at 4%
Bond Ladder at 3%
Cognitive Risk
Immediate and Delayed Average, 2010 Health & Retirement Study 6
Episodic Memory 5.5
5
4.5
4
3.5
3 60
65
70
Source: Browning and Finke, 2013
75
80
85
90
Dementia
Rates of Cognitive Impairment by Age 80 70 60
39
50 40
Dementia
29
30 20 10 0
37 16
24
5 71-79
80-89
Source: Agarwal, Driscoll, Gabaix and Laibson, 2010
Cognitive impairment, not demenita
90 +
Age and Financial Literacy
Source: Finke, Howe and Huston, 2013
Financial Literacy and Confidence 90
Financial Literacy
Confidence
80
70
60
50
40
30
20
10
0 60
65
Source: Finke, Howe and Huston, 2013
70
75
80
85
Risk Aversion Change and Market Sentiment 0.25 0.2 0.15 0.1 0.05 0 25 or under
26-35
36-45
46-55
Over 55
Equity Allocation and Cognitive Decline Percentage Change in Equities 2008-2010 by Word Recall 0% -5% -10% -15% -20% -25% -30% -35% -40%
Low Cognition
Average Cognition
High Cognition
Questions/Comments
Michael S. Finke, Ph.D., CFP®
Professor, Department of Personal Financial Planning
T EXAS T ECH U NIVERSITY
[email protected] Twitter: FinkeonFinance
Presented by:
Michael S. Finke
Professor & Director, Retirement Planning and Living Department of Personal Financial Planning
T EXAS T ECH U NIVERSITY
Growth in DC assets vs. assets in public and private defined benefit (DB) pensions $8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0 1974
1979 IRAs
1984 DC plans
1989 Private-sector DB plans
1994
1999
2004
State and local government DB plans
2009 Federal DB plans
2014
Net Tax Benefit for US DC Plan Participation 75.00% 65.00% 55.00% 45.00% 35.00% 25.00% 15.00%
Authors calculations, Percentage benefit of saving over 30 years vs. taxable account at 9% in a 50/50 portfolio
Defined Contribution Plan Balance by Income Age 43-50 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 0
1
2
3
4 Median
5 75%
6
7
90%
Source: 2008 National Longitudinal Survey of Youth
8
9
Defined Contribution Plan Balance by Age Group $600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0 25-34
35-44 20% Percentile
45-54 Median
80% Percentile
55-64
Financial Literacy Particularly Low Among Less Educated Americans 70 60 50 40 30 20 10 0 Basics
Borrowing 85
Does Money Make you Happy?
Source: Ho and Finke, 2015
45
Because Rich Retirees Spend More?
Same Cohort Health and Retirement Study Consumption 2000-2008
Source: Browning, Cheng, Finke and Guo, 2014
46
Financial Wealth Differences
Source: Browning, Cheng, Finke and Guo, 2014
47
Income & Consumption by Wealth $70,000
Average Income
Real Consumption
$60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Lowest Wealth
Quintile 2
Source: Browning, Cheng, Finke and Guo, 2014
Middle Wealth
Quintile 4
Highest Wealth
48
Consumption Gap High Wealth 100%
80%
Success Rate
60%
40%
20%
0%
30 Year Retirement, 40% Reserve A c t u a l S p e n d i n g
$40k
GAP
$60k
M i n i m u m S p e n d i n g $80k
$100k
$120k
Benefit of Late Life Annuities $100,000 $90,000 $80,000 $70,000 $60,000
Cost of Buying $100,000 Income at 65
$50,000 $40,000 $30,000
Mortality Weighted Cost of Buying Income
$20,000
Difference = QLAC Efficiency
$10,000 $0 65
70
75
80
85
90
95
100
Bond Ladder Vs. QLAC (Assume 4% Bond Return)
Invest $125,000 in a Bond Ladder at Age 65 $300,000
$250,000
$200,000
Can Fund $125K QLAC Income Until Age 91
$150,000
$100,000
$50,000
$85
86
87
88
89
$(50,000)
Bond Portfolio
Spending
90
91
92
Need to Invest $248,000 at Age 65 to Fund Spending From 85 Until Age 100 $600,000
$500,000
$400,000
$300,000
$200,000
Or Simply Invest $125,000 in a QLAC at Age 65
$100,000
$85
87
89
91
93
95
97
99
Options for Funding Late Life Income
How much would a 65-year old male have to set aside today to fund same level of spending at age 85? Cost to Fund $44,623 in Spending at Age 85 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 Buy a QLAC
Bond Ladder at 4%
Bond Ladder at 3%
Cognitive Risk
Immediate and Delayed Average, 2010 Health & Retirement Study 6
Episodic Memory 5.5
5
4.5
4
3.5
3 60
65
70
Source: Browning and Finke, 2013
75
80
85
90
Dementia
Rates of Cognitive Impairment by Age 80 70 60
39
50 40
Dementia
29
30 20 10 0
37 16
24
5 71-79
80-89
Source: Agarwal, Driscoll, Gabaix and Laibson, 2010
Cognitive impairment, not demenita
90 +
Age and Financial Literacy
Source: Finke, Howe and Huston, 2013
Financial Literacy and Confidence 90
Financial Literacy
Confidence
80
70
60
50
40
30
20
10
0 60
65
Source: Finke, Howe and Huston, 2013
70
75
80
85
Risk Aversion Change and Market Sentiment 0.25 0.2 0.15 0.1 0.05 0 25 or under
26-35
36-45
46-55
Over 55
Equity Allocation and Cognitive Decline Percentage Change in Equities 2008-2010 by Word Recall 0% -5% -10% -15% -20% -25% -30% -35% -40%
Low Cognition
Average Cognition
High Cognition
Questions/Comments
Michael S. Finke, Ph.D., CFP®
Professor, Department of Personal Financial Planning
T EXAS T ECH U NIVERSITY
[email protected] Twitter: FinkeonFinance
