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Douglas Goldstein, married, father of four, is the owner and director of Profile Investment Services ( He is the co-author of the book "Rich As a King: How the Wisdom of Chess Can Make You a Grandmaster of Investing," and blogs on on how using chess... More
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Rich As A King - How the Wisdom of Chess Can Make You a Grandmaster of Investing
  • How To Retire In A Rapidly Aging World 0 comments
    Apr 28, 2014 8:29 AM

    With growing advances in medical technology and everyday conveniences, life expectancy is growing around the world. In the United States in particular, the baby boomer generation is coming up to retirement, which means that many people are currently facing the challenge of how they will pay for their golden years, given that they will probably live as senior citizens for longer than their parents did.

    To find out how retirement planning is having to adapt to this new reality, I interviewed Professor Robert C. Merton, winner of the Nobel Prize for Economics in 1997.

    To listen to my interview with Professor Merton, go to

    Below is a transcript of this very interesting interview.

    Douglas Goldstein: One of the biggest issues that I see as a financial planner, and certainly in the academic journals, is the problem that people are living too long. How has this affected the economic decisions that you think people need to be making?

    Robert Merton: First of all, the retirement challenge part of what we call the life cycle is a permanent part of our existence. It needed to be addressed 200 years ago and it will need to be addressed 200 years from now in every place in the world. So it is a very fundamental part of our social economic existence, and it is a really big global challenge at the moment and as mentioned. The fact that people are living longer is a great thing. As one who is well along in years, I appreciate the opportunity to continue to be here for a while, but it does also raise in the retirement space some major economic challenges.

    In very simple terms, we help each other out, but at the end of the day, our retirement system and the economic system has to balance. We can't produce what's not feasible and we can't do what's not feasible. Common sense says the following: On average, each of us have to pay for our own retirement. A simple way to think of it is that if you take an educated population where they do not really start working until they're in their early 20s, so they will work, depending again on that particular country, for about 40 years. Then, when they retire, they must have accumulated enough savings to be able to sustain the lifestyle to which they have become accustomed in the retirement phase. So, if in the past we worked for 40 years and retired for 10 years, so we worked until we were 65 and on we on average lived until 75. So then we had to pay for 40 plus 10 or 50 years of consuming from 40 years of work. If you do the arithmetic, that means that you basically have income for 40 years and you've got to pay it for 50. So you are going to have to save 25% percent of your income to cover that on average. Now, that can come from all kinds of sources: social security, saving in your house and so forth, but that is the basic number.

    If we now, instead of living 10 years from age 65, live on average for 20, if we still work forty years now, we have to support 60 years of consumption with 40 years of work. That means that to pay for the 20 years when we are not working, we have to save 33% percent or so of our income while we are working. That is a very high saving rate. People who have been saving it at the old rate or in retirement systems that projected that you would live, in my example, 10 years, and adjusted the amount of saving into those plans for that are now seeing themselves perhaps living 20 years. This puts great pressure on the system because not enough saving was done for that. That is at the heart of the challenge, and then there are many other elements also going on.

    Douglas Goldstein: How should we as a baby boomer generation be seeing that? Are we going to be able to count on the government?

    Robert Merton: That's a very good question. I can give you an opinion, but it is not a scientific answer, because it's really of course a government decision as to how much they do. It is largely a political system for which I have no special expertise and forecasting. My own opinion is that most governments are going to try to sustain their obligations for retirement, but what it may mean is that because of the reality, the more affluent members of the population will not get as much from the government so that those who are less affluent can still be covered.

    I think eventually, when you see these bankruptcy projections, their projection is based on the status quo, nothing changing. I think that at least over a somewhat longer horizon not next year, and the year after - and in any case these systems are not going to go down in that length of time - behavior is going to change. It isn't just that we may up the social security or up the required contributions to pension plans. To reflect what have I said to you before, if you're going to have a greater fraction of your life in retirement, then you're going to have to save more, and so it is reasonable to ask people, to expect people in the system to save more. So people see the rate going up, but it really is a statement that whether it's social security or your own private savings, you are going to have to save more and that means consume less, and that is because things have changed. The good news again is to remind yourself that you are going to live longer.

    Douglas Goldstein: The baby boomer generation is really next in line, and the studies that I read seem to say that these people statistically and on average are just not properly prepared for retirement. Should they literally be panicking now?

    Robert Merton: I do not think they should be panicking, because panicking is not generally a very productive approach, but should they be concerned? Absolutely. Should they be adjusting plans or trying to make provision for it? Absolutely. When you say the boomer preparation, again I am more familiar with the U.S. system. I know about some of the other systems. Retirement generally is broken into three sources: government, employer plans, and personal saving family. Many of the older of the boomers, at least in the U.S., have employer-defined benefit plans in addition to social security, and despite the fact that they are under pressure, those are likely to continue to pay.

    So older boomers, ones who are retiring sooner, if they come through that kind of system, are probably going to be in reasonably good shape or not in particularly worse shape. Those who are retiring further down the time and do not have that kind of retirement system are going to have to save more. I think the answer is going to be quite frankly that people are going to work after retirement even if they formally retire at 65, or whatever number you pick, because they are living longer and because they are not just living in a sense of breathing, but they are more vital. They are able to continue to work, many of them, if they do not have health problems, and many are going to work another five years. So before anyone changes any official retirement rules, I think you are going to see that as a phenomenon and that is going to be one the things that are going to help later boomers to be able to sustain some kind of a comparable retirement to the style of life that they have when they were working.

    Douglas Goldstein: So that is a practical solution, which is that if you do not have enough income coming in, just go back to work.

    Robert Merton: That of courses presumes that you can go back to work. I think, without getting off topic, that because the boomers have been so big, once they start really retiring, we are actually going to see in many countries, and particularly in the United States, an absence of experienced employees. So companies are going to look to their healthy, meaning capable, older workers and even if they formally retire, they will hire them back on the contract basis, let's say to work 5 years. I think this is going to be feasible for a number of people.

    Obviously, people who do not have the opportunity to go back to work or cannot do it because of health issues are going to have to find other means. The third part, I should just mention, is around the world, I have been traveling a great deal around the world talking about retirement, meeting with both governments and private sector proprietors, and so forth, that this is a recognized big issue particularly in Asia. As much as the United States is aging, China is aging even faster, particularly with the one child policy. Korea is aging even faster than China, and so forth. So I see governments are taking this quite seriously and are revising and developing their systems. The problem is that this does not happen overnight. You do not build a new retirement system in a year or two and fund it.

    So the longer term issue for the later boomers is that they may see changes in the systems that are designed to help them to better accommodate themselves. This is somewhere where also you can bring in new technology. Once you make the decision, whether as a country or as a private sector company that you are going to have to change your system, that's the big deal and it's the bad news. The good news is if you're going to rebuild it, do it with all the most modern financial technology we have, so that we can get the most we can out of the assets that are dedicated to retirement. It is even possible that these countries that are rebuilding their systems could leapfrog countries that have better retirement systems now by using the new technology, not unlike what you saw happen when you build phone systems now. You don't put up telephone poles and so forth like we still have in the U.S. You do everything with the modern technologies of digital phones.

    I do see that in a number of Asian countries in particular. I would like to believe it is happening in the U.S. There is a lot of technology being introduced, but it is really hard to get people excited about it until sometimes they have to see what they don't have, and then they say, "Now we have a crisis."

    Douglas Goldstein: How can people follow you and follow your work?

    Robert Merton: I have a MIT website, which you could just put in Google. Probably put Robert C. Merton and you'll get it. I have a personal website You can also see some of my more commercial or private actual implementation of these ideas at Dimensional Fund Advisors, which you can get off the internet as well.

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