Robert Merton: A Data Visionary Senses A Coming Crisis

by: Gerstein Fisher
Summary

Nobel Laureate Robert C. Merton participated recently in a ‘Q Factor’ podcast.

Famed for his pioneering work in valuing derivatives, Merton today is worried about an approaching crisis in retirement funding.

To hear Merton’s advice on how to fund a “good retirement,” listen to his podcast.

I recently sat down with Robert C. Merton for an installment in my podcast series, 'The Q Factor,' in which I discuss the importance of data and quantitative analysis with leading thinkers in a variety of fields. Merton, who was awarded the Nobel Prize in Economics in 1997, is renowned in finance for his pioneering (and quite esoteric) work in establishing an option-pricing model and for other cutting-edge research in derivatives. But what was on this finance guru's mind was something quite down to earth: he foresees a looming retirement-funding crisis in this country and abroad.

Merton's definition of what's a "good retirement" is quite simple: the ability for one to retire and maintain one's standard of living as indicated by the years just prior to retirement. By this yardstick, he says the funding numbers generally do not add up-whether it is "vastly underfunded" public sector pensions, corporate defined-benefit plans (and the woefully underfunded government Pension Benefit Guaranty Corporation), or individual defined-contribution accounts such as IRAs. Not only are investment-return expectations unrealistic and highly risky, investors are focusing too much, he thinks, on accumulating a particular pot of money rather than on a stream of income in retirement to sustain the pre-retirement standard of living.

To hear Merton's tangible advice on how investors can improve their chances of achieving a "good retirement," I invite you to listen to our podcast: "The Q Factor".

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