Baby Boomers – Is this the Holy Grail for Retirement Income?

The Pension Research Council stated that Investment Advice is misleading and can be potentially harmful to investors. This is in their report “An Analysis of Investment Advice to Retirement Participants. They also talk about escalating annuities that protect us against large losses. Could this be the Holy Grail for Retirement Income?

At last I have found something that begins to make sense regarding a way to protect our nest eggs and avoid large losses in retirement. A report written by Zvi Bodie entitled “An Analysis of Investment Advice to Retirement Participants” gives a real insight into what we should be demanding of the financial planning industry.

Don’t let the title put you off – this is really valuable information and a “must read”. Here are the highlights, but I urge you to download the 27 page PDF report and read it thoroughly. Its only 13 pages of text as the rest is graphs and tables.

To all those Baby Boomers who responded to the Survey on Baby Boomers and their Retirement mentioned on a post on the blog The Survive and Thrive Boomers Guide and are not sure what steps to take next – read this Zvi Bodie’s Report. Take a copy with you to your next financial planners meeting and go through it with them.

Here are some of the highlights that should make you want to grab your free copy to discuss with your financial planner.

Zvi Bodie states:

“Much of the advice given on websites by financial services firms and investment advisory services is logically flawed and dangerously misleading.”

The Advice from these Websites is very similar:

“Investors should diversify their total portfolio across asset classes

The equity portion should be well diversified across industries and companies.

The longer the time horizon the more we should invest in equities.”

This is all good-sounding marketing hype.

Zvi writes that holding stock for the long term does not reduce the risk because average market returns taken over many years are used to justify these statements. And average returns give the illusion of reducing risk in the long term because each year’s results adds to the average market return figure and the longer you leave it the closer it gets to the long term average return. The variation of the average returns figure diminishes over time giving the impression that risk is reduced. But if the long term average since 1970 is say 10% and you lose 40% of your nest egg between 2000-2003, what good are 30 years of average market returns to you at that point in your life? You’ve just lost half your nest egg when you need it most.

He also says the financial industry only talk about the probability of a loss but not the size of the loss if it occurs. In 2000-2003 the fact a loss occurred was not as important as the actual loss to those people who lost 40% of their nest egg.

If stocks were less risky in the long run then taking out a Put as insurance against a stock loss should be cheaper the longer the time horizon. But it is not.

Zvi goes on to say that linking age with equity investing is flawed. But linking age with portfolio asset allocation is valid. There is more on this in the report.

Zvi conducted an experiment by pretending to be highly risk averse and tried to select an ultra-conservative portfolio on several websites. This would mean investing most if not all of his money in fixed income securities. But all the websites wanted him to put a large percentage of his nest egg into stocks. Apparently nearly all Online Asset Allocation tools are heavily biased towards making you invest a large portion of your nest egg in equities. Government inflation protected bonds and real annuities are rarely mentioned.

Those who are in retirement and drawing a pension from their nest egg face special risks when they invest in stocks he says.

The Financial Planning industry tell retirees they need a substantial part of their portfolio in stocks because they may live a long time and this is the only way they can get the returns they need to live on.

But at the same time we are reducing our nest egg by taking a pension.

Their response is for us to determine how many years we will live and divide that into the amount of nest egg we have. Then draw the resultant amount each year. If the average returns are 10% they will show you that all the money will be used up by the 20th year. So everyone is happy ;0(

But life isn’t like that. What if in the early years the real returns are negative but over the 20 years the average return is still 10%? Well this is a very different story. Then from the example your money would run out in just 9 years. If you want a real example do the sums from 1999 to 2008. It is the real returns and the actual losses that affect us in retirement not the average returns.

Another fallacy is that stocks are a hedge against inflation. In the 1970s inflation was in the double digits, but the stock market was flat for most of it.

The responsibility for our retirement now rests primarily with us. The government and companies have handed over that responsibility to us. But we are ill-prepared to take on that responsibility. We now suffer from “over-choice” in investment options many of which we do not understand. So we really are vulnerable to the financial industry marketing machine that makes everything sound so good but leave us with all the downside risks.

These are too many sales people masquerading as financial advisers. And according the the survey mentioned earlier these are the very people we are going to go to for financial advice. It’s like lambs to the slaughter.

In the USA traditionally Annuities have no protection against inflation. But annuities can now be made available that have partial or complete inflation protection using inflation protected government bonds. They can be combined with stock indexes to get potentially higher return too. He calls these escalating annuities. There is more detail on this in the report. This might be the holy grail for retirees. We just have to find financial planners who can set them up for us.

I need to state at this point I am not a financial planner and this is not investment advice. I am presenting my understanding of this excellent report and believe it is something Baby Boomers might consider and might want to discuss with their trusted financial planner.

I have tried to interpret the report and explain what it is saying. I’m ready to be corrected if I have misunderstood any point, so please comment on this post and offer a corrected version of any topic discussed for the benefit of all Baby Boomers.

In summary the report believes that today the financial world can design new investment products that insure against severe market declines and ensure we can avoid large losses to our retirement nest egg. The next step is for all us Baby Boomers to demand such products and insist our financial planners make up our portfolio using them.

3 Responses to “Baby Boomers – Is this the Holy Grail for Retirement Income?”

  1. […] unknown wrote an interesting post today onHere’s a quick excerptThis is in their report “An Analysis of Investment Advice to Retirement Participants. They also talk about escalating annuities that protect us against large losses. Could this be the Holy Grail for Retirement Income? … […]

  2. Rita says:

    Thanks for the interesting post. This report, on first glance, sounded helpful. But the “pitch” seems to be that boomers should buy annuities instead of what financial planners traditionally tell people to do. I’m not sure that’s the right approach. Suze Orman warns people to be wary of annuities.

    I write a blog for boomer consumers called The Survive and Thrive Boomer Guide at


    P.S. Thanks for mentioning my blog in your post.

  3. admin says:

    Rita, Thanks for your comment on this post. You are correct in saying it is a pitch for annuities, but based on research and knowledge. Zvi Bodie is a Professor of Finance and Economics and has done extensive study on retirement planning and is considered an authority on this topic. His research states Baby Boomers or retirees should not be in the stock market for the long term when in retirement as stocks are risky long or short term. He did say in a video that he will invest in inflation adjusted annuities himself in “chunks” as he moves into full retirement. He would buy a little at a time. His philosophy on this is we Baby Boomers need to ensure we have income for life and inflation adjusted annuities is how this can be done. Here are some informative videos that might be worth watching.

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