In it for the long haul: Re-securing retirement with guaranteed income

Nov 12, 2020
  • Bill Sharpe
  • Laura Carstensen
  • Rob Crothers

Bill Sharpe, Nobel Memorial Prize Winner in Economic Sciences, and Laura Carstensen, founding director of the Stanford Center on Longevity, discuss the challenges of financing longer lives and ideas companies can consider to secure retirement for their employees.

  • Anne Ackerley:  Vijay and Matt, thank you for that case study on how UPS is responding to help its employees build emergency savings as a foundation for long-term savings. Next, let's look at the other side of the equation, the financial implications of the pandemic have impacted many people's retirement plans at the same time that people are living longer lives. How can we make retirement more secure for individuals? We're so excited to hear from two leading minds on longevity and what it means for retirement security. Nobel Memorial Prize winner in Economics, Bill Sharpe, and director of the Stanford Centre on Longevity, Laura Carstensen. We've asked Rob Crothers, our head of retirement product at BlackRock, to lead us in this discussion but before we jump in we have another quick clip for you to frame the conversation.

    Moderator: Bill and Laura, thank you for joining us in this important, important virtual conversation. Laura, to start with you, if you could help us set the stage, we hear a lot about longevity and living longer. What are the implications of longevity on retirement and retirement planning?

    Laura Carstensen: Mmm, when people about longevity, they're, they're referring to the length of time that people live, and, err, tacitly, these days, when we talk about longevity, we're talking about very long lives. Err, in the twentieth century we added nearly 30 years to life expectancy, and to put that in perspective, that's more years added to life expectancy in a single century than all the years added across all prior millennia of human evolution combined. So, in a blink of an eye, we nearly doubled the length of the time that we're living. And humans are, are, are creatures of culture. We rely on culture, social norms, to tell us when to get an education, when to marry, when to work, when to retire, and these norms really evolved around lives half as long as the ones that we're living today. So, essentially, bottom line is we inherited, from our ancestors, this gift of time, 30 extra years, and we tacked them all on at the end. So, the only stage in life that got longer was retirement, and that is the challenge that we're facing today.

    Moderator: Thanks, Laura, picking up there, Bill, and, and turning beyond just longevity, you've been quoted describing the retirement issue as 'the nastiest, hardest problem in finance'. To you, what is it that makes it so difficult?

    Bill Sharpe: Oh my, um, well, first of all, I suppose-, well, first of all, I would say-, echo what, what Laura said, um, it's a long period in expectation, and second, you don't really know how long it's going to be, um, and there is substantial variation, and in many cases, there are two lives involved, um, yourself and your partner. And so dealing with all that uncertainty, along with some financial uncertainty in, in many cases, err, is, is very challenging, and, and basically, people are not very good with probabilities and uncertainties. And, and the other thing I would say, I, at some point, wrote a little program to do little bar-charts, err, 'How old are you? How old is your partner? What's the probability, in twelve years, that you'll both be alive, one or the other, neither?' And I offered to do this with some friends, and they did not want to see this. They did not want to even confront probabilities of being dead, err, to put it-, put it crudely. So, so right there, you've got a problem, before you even turn to the financial side.

    Moderator: Picking up there with, with you, Laura, let's talk a little bit about the behavioral elements, the human elements surrounding this issue. What, what challenges do you see most often as you talk to people preparing for retirements, and, and what sorts of potential solutions are out there?

    Laura Carstensen: Well, you can already see that, err, err, Bill Sharpe is a very good psychologist. Um, he really nailed, I think, the psychological reasons that this planning is so hard. Humans have a really hard time with large numbers, err, it, it-, even before they get to probabilities, you know, it's just hard for us to see-, to, to recognize, say, a difference when someone says, 'Err, it's $1 trillion,' or, 'It's $1 billion.' It's not like we just kinda go as-, in our human brains, 'It's a lot.' And then there's uncertainty. So, humans have a very hard time with uncertainty, you know, even, even-, we, we can deal better with terrible events, if you tell us something bad is gonna happen, we cope better with that than not knowing if a terrible event is gonna happen or not. So, this uncertainty is really difficult, and then I'll just add one more psychological one, and that is something psychologists would call 'affective forecasting', knowing how we will feel in the future. So, I can tell you, um, how, um, cognitively, what it might be like for me to be living ten years older than I am right now. But it's very hard for me to feel that. Err, in, in some sense, it's why-, it's why New Year's resolutions are easy to make and hard to keep. It's because if something's off in the distant future, we say, 'Well, I'm, I'm not gonna eat candy anymore. I'm gonna give that up, no problem, you know,' and-, but, but we, we fail to be able to appreciate what it feels like when we're hungry and there's delicious piece of candy sitting in front of us, being offered to us. And, and we don't-, we don't factor that in. So, we, we can do these kind of cold, cognitive calculations much better than we can do the emotional ones. So, when somebody says, 'How much money do you need to live well and to be happy, err, in retirement?' People often guess way too low. They, they think that they'll be able to live on what they lived on in graduate school. You know, it's kinda like, 'Nah, no problem, I did it once, I'll do it again,' and they can't really put themselves in those, those situations.

    Moderator: That, that's great, Laura, I, I feel like we're gonna spend a, a lot of this time talking about uncertainty and, and managing through it. So, maybe to pick on, on that thematic a, a minute, Bill, as you think about this, you know, in terms of the toolkit, in the US, there's Social Security, there's retirement assets. How do you think about something like a guaranteed income solution, you know, annuities, for lack of a better of a better way to put it, in that mix, err, in terms of what our participants or, err, an employee, err, can rely on?

    Bill Sharpe: Well, I think the easiest way, and that's not necessarily totally optimal, is to think about a lump sum of money that will be turned into income, and guaranteed income. Err, that's the easiest way, but even there, there are problems, err, because, in most annuities these days, err, the guarantee, if it's a guaranteed annuity, is on nominal dollars, not on real dollars, not on purchasing power. We used to have annuities that, that covered inflation, if you will, price changes, err, those are very rare now, err, they're almost impossible to find, partly because the insurance companies don't have a rich enough venue of, say, treasury securities to hedge out the, the risk and what will cover the risk. So, even there, you've got uncertainty but at least you've got some certainty, and you can arrange to have the amount that you receive be a function of, like, frankly, who's alive, both of you, one of you, the other of you. Um, and so that's the easiest, at least, for the humans that, err, Laura's so well-described, to, err, to process. That doesn't mean it's optimal, um, but we can talk about that separately perhaps, but, but that at least gets you a start, and even then, it's hard for humans to process that.

    Moderator: That, that's helpful, Bill, and, and I'll ask both of you this next one, but maybe if you-, if you don't mind starting, Bill, to pick up on this. If, if you think about our, our audience here, you know, most of the issue, or a lot of the issue, also relates to complexity and, and choice. If, if you were sitting in, say, an employer's seat, evaluating this for their employee set, how would you think about or what would be the top of your consideration list when you think about adding a guaranteed income solution to a retirement or a work-, a workplace plan?

    Bill Sharpe: Right, let me differentiate two aspects. First, I think you really need, to help the, the employees, let's say, to help the employees, see how X dollars in his or her accounts, and partner's, translate-, could translate to a guaranteed income. Um, and, sort of, instead of saying, 'Oh, you've got X dollars,' you should say, 'You've got enough money to finance Y per year, err, in your-, for your retirement,'and then you can deal-, well, you can still have the deal with the two-person issue. Um, and then there is the second question, 'Should I lock that in, or at least give myself an option to allow me to lock that in?' Um, and people differ, um, there are many people who feel, if they die young, they'd really like to leave something to their children and their university. Um, and there are others that say, 'Well, that's, that's a luxury I can't afford.' So, you need to give them some sense of that, but, but certainly, to, to-, anything you can do to move them from, 'I have X dollars,' to, 'I have enough to finance Y per year in retirement,' err, I think is, is a-, is a real plus.

    Moderator: Laura, what would you add? What, what do you think, from your perspective?

    Laura Carstensen: I, I think, um, it, it's also helpful for people to have a, a breakdown in terms of the odds that they're gonna survive. Err, individuals can look at retirement age and say, 'Well, for-, if-,' um, I mean, life expectancy and say that, 'Life expectancy's 79, so I'm 65, I only have to plan for this many years.' But of course life expectancy at 65, err, is much longer than that. And so-, and, and then besides that, as Bill's saying, you, you often have a partner issue. So, it's-, you've got two people and what are the odds that one of them will survive for a particular period in time? And, and I think, when you, you, you get to the point where you're saying, 'Well, there's a 25% chance that, err, one of you in a couple is gonna live into your 90s, when you retire at 65,' and that's right. There's a-. There's a good chance of that happening. Err, but it's not more than 50%. It's, you know, closer to 25%, and so you start to say, 'Well, we're probably not gonna be here anyway, so why shouldn't we enjoy what we can today? Why would we stretch this out longer?' And so that, that tends to be the kind of reasoning. Again, it's our temporal discounting, we-, that, that humans engage in, where, where the money that we might get into the future, especially when it's an uncertain future, err, is, is less valuable than the money that we could have, err, today. Err, so, I, I think that's-, I think that's some of it. Um, I also think there's one other factor, that's kind of a psychological one, that couples engage in, and that's that they think that if it's only one of them that survives, they only need half as much money, err, in any given month, and that's not true. You, you know, your rent doesn't cut in half. Your gas bill doesn't cut in half. Um, your electricity is still gonna be what it was before. And so people don't make those kinds of determinations. They also-, this gets back to affective forecasting, they somehow think they want wanna do anything fun anymore. So, 'If, if my husband dies, I don't-, I'm not gonna want to travel. I won't go out to dinner. I won't do all those things.' And again, it turns out people still like to do those things. So, um, it, it's, it's hard for people to imagine these different kinds of circumstances.

    Moderator: That, that's great, Laura. Just picking up a little bit on, on that, that point, err, and, and this, this issue around, sort of, solving for uncertainty, it, it feels like, over the last few years, we've seen more and more innovation in this space, and I think there's lots of solutions out there, err, and, and more and more coming from this retirement industry, err, that you're speaking to today. How do you think, and, and I'll start with Laura on this, and then, Bill, would love your thoughts as well, how do you think about what we can do as an industry to make this more actionable for both the employers and the plan sponsors, but then, ultimately, the participants at the end? How can we improve the outcome?

    Laura Carstensen: Yeah, again, speaking as a psychologist, I think what people do respond to, um, often better than large numbers or probabilities is, err, anecdotes, and that might not be a, err, a-, the most accurate way to help people understand their futures. But they seem to remember better when you tell 'em about-, the story about John and Mary, and what their lives were like as they get older, than they do, err, these more abstract numbers and, and probabilities. So, I think giving them scenarios, err, is, is helpful, is useful.

    Moderator: Bill, what would you add?

    Bill Sharpe: Err, well, I, I would-, I would add just a footnote to that. Um, I think-, and first of all, let me endorse it partly, um, I think a lot of people who have not thought about this until they absolutely have to, um, their, their experience is their parents, grandparents etc., and how they lived in retirement etc. But, to go back to Laura's earlier point, that's a very bad surrogate because they didn't live as long as you are likely to live I have, err, several friends who work at a very good private wealth company near, near me. And, err, and I said, 'Well, what do you do about talking to your clients about longevity?' And their answer was, 'Well, we just assume they're both going to live to be 100,' and- which, for their client base, is fine. Um, there's plenty of money there. But, but, you know, that's pretty crude, and, and in talking to people who will advise relatively well-off people, err, on retirement income, that seems to be-, they, they really don't talk about even the expected length of life, let alone the minimum, the maximum, the range of possibilities, how complicated it gets when there are two people. Err, it's just a, a, a terrible problem in getting people to process this issue, um, period.

    Moderator: That, that, that's really helpful, Bill, and, and I, I would say what's interesting to me, at least, is that many of the things that we talk about as solutions to this challenge, err, many of the things that, you know, there's innovation being done on, also aren't terribly new. You know, annuities and spend-down models and payout funds have existed for, for a long period of time now in some cases. Bill, if you wanna start, what, what do you think is different about the current that sets up the employers and the employees for greater success here, and maybe if you have some advice to give the industry on how to enhance that, what would it be?

    Bill Sharpe: Well, I think, err, the employer has an opportunity to help educate and inform the employee before, you know, they, they hit the retirement age, they leave their job, and now they've, they've got this money, and unless they're quite wealthy, they, they can't afford to go to my friends for advice. So, I think the employer, and I've felt this for a long time and tried to help implement some things, err, can help the employee, during the saving period, sort of map, as I, I mentioned earlier, map amount of money in the 401K account to a lifestyle, err, in retirement. Err, in various ways, some of it can be just projections. Um, we now have-, we're seeing a whole panoply of, of new instruments, um, and, sort of, the two things, I think of it as pooling. You pool-, you can pool mortality risk and you can pool investment risk by diversifying, and, and those are both very powerful, err, tools, and the more they could be used, that doesn't mean you should put all your money annuities and borrow everything you can on your house and put that in an annuity. Because most people really would like to leave something for their children and their universities, I might add, um, if they possibly could.

    Moderator: Laura, anything you'd add there?

    Laura Carstensen: I believe, as, as Bill was saying, we need-, we need to talk about these issues more, a lot more, and we need to talk about them a lot earlier. Um, I, I think a, a lot about games, and that games could help start conversations too. But you can imagine, err, in, in-, I guess now it would digital, but a, a board-game, you know, like The Game of Life but you're investing through it, and you're playing this game on a regular basis with your friends and you start playing that game as, as a-, err, in your teen years. And you just keep playing it, you know, and you see what happens when you invest all of your money in annuities, um, and then you die at 62 and you see what happens when you don't invest any of it in annuities and, and you live to be 100, and you just play this game. And the reason-, it's not so much, um-, it, it is educational but more than anything, it gets people starting to see what that's like and to be able to experience what these odds are like. So, they know sometimes they win the game, sometimes they lose the game, and they can come to experience, err, the, the emotion of the uncertainty and what their risk tolerance is like. So, it does two things, (1) it actually gets them to run through what's-, what odds mean, right, but it get them to be able to talk about dying, err, and to do that, err, early in life, when it isn't such a threat, I think, makes it easier to talk about later.

    Moderator: I, I love that idea of, of orientation, Laura, is almost what you're talking about, starting, starting to figure out this earlier and, and earlier. Maybe a follow-up to, to you, Bill, just quickly, um, as, as we think about this, these instruments too are, are also historically relatively complex. Some of this is educational but I have to believe some of it is simplification too. Maybe give us a, a, a bit of, of thought there on, on your perspective.

    Bill Sharpe: It's such a big subject. Um, err, again, I, I, I loved Laura's idea and I was thinking, as, as she was describing this, um, I have a group of friends, err, none of whom happens to be an economist, um, we used to have coffee a lot and have lunch, and now we do Zoom calls. Um, but, um, and we are of varying ages. Err, I guess I'm the oldest at present, um, in this group, and we never ever talk about any of these issues, ever, um, which is-, you know, we talk about Lord knows everything else. Now we talk a lot about coronavirus but because some of them are virologists but, um, it's just-, it's, it's, it's really a stretch to get people to, to really begin to think about this, um, and, err, and maybe a game is the way that we need, somehow, to do that. And, um, it may well be that as these new instruments become available in the accumulation phase, in 401K plans, for example, that that will start people thinking about these issues. I mean, if I have to make a decision as to whether or not to try to make a killing in the stock market or cover a steady income in retirement, um, that, that, that may well help. And I, I, I-, this is off subject but I don't wanna fail to mention it, it turns out that my income in the future is more expensive than it used to be, err, real rates, if you will, have been coming down steadily and the terms for annuities are less and less favorable in terms of what it costs you to buy X real dollars in retirement or X nominal dollars. Err, so, err, that may turn around but it very well may not. So, the problem is even more serious and, and one of the-, one of the things that-, trying to help people understand what their present savings will buy in retirement, one of the advantages of that is that they will say, 'Oh my Lord, I'd better save more,' err, which is-, which is a, a very important byproduct.

    Moderator: That's a great comment, Bill, and, and you, you brought in the current environment, so maybe, Laura, one final question to you, how do you think the current environment changes this behaviorally, err, certainly the stress on the system and stress for people, financial stress and economic stress? How do you think the current environment will change this for people?

    Laura Carstensen: Well, you know, I, I know the topic here is decumulation but I think one of the solutions that individuals are gonna have is to work longer, and it's to continue to accumulate, err, err, funds. Err, when you really can't count on much of a return of-, on, on your investments that you've made, I mean, there's not a lot more that you can do than to continue to earn. And so it, it's another-, it's another angle on this that employers could think about, part-time work, err, err, call-backs, um, and policies also that we could think of, err, like making the primary funder, so that older employees aren't as expensive, um, for employers, and that they'd be able to work longer. Um, the-, those are the kinds of-, you know, sort of, if, if you zoom out, I think those are some of the broader solutions that may be all that most-, that, that-, for some people, for a lot of people, their only choices are gonna be to work longer to be able to, err, manage.

    Moderator: Well, thank you to you both for spending the time with us today. A couple of things I heard in this session, it's certainly a complex issue. There's no one size fits all solution, I, I think, and, err, a lot of this is going to be around not just offering choice but turning the complex into the simple, orienting people earlier, and, err, ensuring that, you know-, like your words, Bill, I think employers have the opportunity to work with their participants and their employees to get a better outcome later in life. I appreciate the time you spent with us today.

    Bill Sharpe: Thank you.

    Laura Carstensen: Thank you, thank you.


Bill Sharpe
Nobel Memorial Prize Winner in Economic Sciences
Laura Carstensen
Professor of Psychology at Stanford University and founding director of the Stanford Center on Longevity
Rob Crothers
Head of Retirement Product, BlackRock
The BlackRock Savings Summit

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