DIY Investor came across this video, produced by MIT World, at Calculating Investor's site. It is a speech by Robert C. Merton, Nobel laureate, on "The Future of Finance" given at MIT on 1/28/2011.
First off, DIY Investor has to say a word about the technology. To be able sit at the laptop in the morning and browse and come across an excellent quality video of a speech by one of the top finance economists of the age is a real marvel. DIY Investor appreciates all the brilliant people who have and are making this possible at a low cost.
Dr. Merton's quest is to solve the "retirement problem." I'm not sure he does that, and he definitely doesn't do it to my taste. On this I agree with Chad, the author of the Calculating Investor blog. But more on that later. What I really like is the explanation towards the beginning of the problem. He lays out, rather succinctly, that we have been put in charge of our own assets. Financial planners do a plan and come up with a probability of success in terms of not running out of money. He casts the probability in terms of a grade - suppose its 60, meaning that there is a 60% chance of not running out of money. He notes this wouldn't be acceptable to many people and that they then have 3 choices: save more, work more years, or take more risk.
People push back against saving more, and they don't want to "move the slider" in the direction of working longer, so that leaves more risk, i.e. greater stock market exposure. In the end, it results in greater volatility and, hence, uncertainty for the possibility of realizing retirement goals. This, of course, is what is taking place in today's investment markets, especially for those nearing retirement.
He then turns to an annuitized unit approach that eliminates volatility. I don't like this approach partly because it is so unfamiliar but mainly because it, as I understand it, takes away from individual freedom. I hold to the view that education, combined with a well-thought plan including appropriate low-cost investment choices, is the way to go.
If it was up to me, I would like to see a plan available to everyone patterned after after the Thrift Savings Plan (TSP) available to government workers. This plan has the lowest cost in the nation and has only a few choices, including lifestyle funds. Considerable educational resources are available to educate participants on how to set up a secure retirement using the plan. This, of course, retains the basic desired features of potentially leaving an inheritance etc.
For those who are wondering, Dr. Merton was on the board of directors of Long Term Capital Management--the hedge fund that imploded in 1998 and was bailed out by the Federal Reserve. This moral hazard episode is part of the path that led to the housing crisis of 2008 for which American taxpayers and unemployed workers are still paying dearly. Thus, though I respect Dr. Merton's brilliance, I am not a fan.
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