June 11, 2008
Pensions: perhaps we should panic after all
At the weekend, I wrote:
The economist Erik Hurst has recently calculated that while most American households do cut back on spending after retiring, that does not literally mean tightening their belts: the cutbacks mean spending less on commuting and work clothes. Spending on food also falls, but the retirees eat just as well: they simply spend more of their plentiful leisure time cooking at home. Spending on entertainment and donations to charity increase. No sign there of a penurious dotage.
An admired analysis of retirement saving was published in 2006 in the Journal of Political Economy by John Karl Scholz and two colleagues. They concluded that more than 80 per cent of Americans seemed to be on track to retire with enough money in the bank; the remainder were mostly not far short of sensible savings.
In other words, while government and corporate pension provision may lack credibility, personal pension provision seems to be just fine.
Now I’ve received an email from Martin Weale, director of the National Institute for Economic and Social Research. He is not so sanguine, and not convinced by Scholz et al:
The US study makes two questionable assumptions which could be regarded as biasing its findings. First of all, it assumes that people’s life expectancies are defined by 2002 mortality rates. There is no provision for rising life expectancy. Secondly, it is assumed that DB schemes continue in existence. In the UK the ending of DB schemes has been associated with reductions in employers’ and therefore total contributions. Some people who had planned on the basis of continuing DB schemes in 2002 would now find they have not been saving enough.
There is a third point over the definition of savings adequacy. The study assumes that housing wealth is available to fund retirement. In one sense this is true. However, housing wealth includes the value of land which has increased sharply in price. Society as a whole cannot finance its retirement out of rising land prices, except by imposing an extra burden on future generations. Thus financing retirement out of rising land prices is much like doing so by issuing national debt. If the overall question of adquacy of national saving is explored then the effects of rising land prices have to be left out of the equation. On that basis the United Kingdom currently has a substantial savings shortfall, and it is in considerably a worse position than France and Spain.
Martin Weale’s own paper is here; he concludes that the UK is short of savings.
There’s a tremendous number of articles on retirement / retirement savings / retirement planning, etc.
This is fine with me. I’m an aging baby boomer and will retire in a few years.
But I wonder if all these articles on retirement just make a different problem worse: the feeling among younger readers that newspapers are for old people.
Posted by: ZBicyclist | June 11th, 2008 at 3:11 pm | Report this commentAs a financial adviser I read your article with great interest and decided to research Laurence Kotlikoff calculator .I would like to inform that some enlighten advisers in the UK use a similar method of calculating post retirement life styles.
These cash flow models not only cash flows in actual ,but also in today?s terms I have been using cash flow statements for the last 16 years and I know that they have help many of my clients have fulfilling and enriched retirements
Any one who wants to plan for there retirement should take heed of the comment of Alan Lakein “Planning is bringing the future into the present so that you can do something about it now”
In other words calculate how you would like to spend the rest of your life and what it will cost you today Dived by a rate of withdrawal you would comfortable taking each year from your savings and that will come up with the pool of money you are likely to require.May I suggest a withdrawal rate of 2-4% ,but no more , as their could be a danger of running out money in later years
To illustrate the point .If you calculate you need an post retirement income today?s terms of £50,000 at withdrawal rate of 3% you would need a retirement pot of £1.6 million.
That the easy bit .The hardest bit is ensuring that you have a structured a disciplined investment process Sadly to many people have a policy to try and attempt to time markets, which offers you consistently a lower probability of success rather than a investment strategy investing in a well balanced portfolio that you buy and hols for the long term, which will give you a greater chance of success in enabling you to maintain your dignity and Inderpendance in old age
Posted by: Jim Clancy | June 12th, 2008 at 2:45 pm | Report this commentYup. Martin Weale is right that if we try to finance retirement out of a rise in asset prices, we are doing so at the cost of those who buy the assets after we retire. The only sane way to finance retirement is out of title to future income streams including rents from real property, interest on national debt incurred to finance public investment which yields a worthwhile return, etc. However, the price signals in the market do not convey that information to the saver. Any ideas on how to put that right?
Posted by: David Heigham | June 12th, 2008 at 8:52 pm | Report this comment