A critical issue is looming for baby boomers – decumulation.
Expressed another way, it is how those entering retirement in wealthy, industrialized nations will ensure that they can continue to spend sustainably in their golden years.
This is not a simple issue. Changing demographics, plus social and financial pressures, are removing many certainties – perhaps “expectations” is a better word – that have surrounded retirement for the last 50 years. These changes are challenging traditional sources of retirement income and forcing individuals to assume greater responsibility for financing retirement. This is a complex task even for professionals versed in the intricacies of investment. The risks associated with critical long-term decisions are significant.
Then, too, the crisis has exposed weaknesses in retirement investment models and mauled household savings. This has been devastating for many in or near retirement. Stemming from these experiences, this edition highlights two arguments relating to asset ac-cumulation and asset de-cumulation.
First, noted experts such as Professor Bodie argue that preservation of principal is critial to retirement finance security. Risk should be eliminated in the investment decisions of most prospective retirees to ensure savings retain value and provide financial support in later life, he argues.
On the other hand, Professor Maurer and Barbara Somova make a powerful case for a phased drawdown. They argue individuals could enjoy a lifetime consumption level up to a third higher with a payout strategy involving investment in stock, bonds and annuities.
What may seem like the basis for a lively argument is partially clarified by context. Professor Maurer and Somova write about Europe where many countries addres longevity by requiring full annuitization of funds. Professor Bodie bases his discussion on the US perspective, set against a year of dramatic losses in pension assets. Buy beyond market-specific experiences: this is a fundamental debate about how retirement savings are spent wisely.
In the end, retired invidiuals will need to make the decisions that ensure the sustainability of their spending power. Yet, the financial services industry can assist them to save assets and spend them wisely with well thought out products that address all phases of the investment life cycle.