Rich and Co.

Retirement Income and Consulting Blueprint? Lecture: Robert Merton @MIT Video

Out of all topics Merton choose the quandary of retirement income.  He is straightforward and seems to lay-out the blueprint for addressing this very tough challenge.

Here is the full lecture on video — worth studying and watching — more than once.

To illustrate society’s need for financial innovation, Merton uses “a live case study:” the vast problem of retirement funding. In the past decade, stock market declines and falling interest rates have hit mainstream employer pension plans hard. Municipal pension plans may be underfunded to the tune of three trillion dollars. (“It makes the S&L crisis look like nothing.”)

But people seek, and are due, “the standard of living during retirement they enjoyed in the latter part of their work life.” 

Generally, determining this standard of living means adding up likely medical, housing and general consumption costs, and Merton describes how to target such retirement income. The main ways to achieve the desired goal are by:

  • saving more, 
  • working longer or 
  • taking more risk. 

Merton would like to design a software-based tool for ordinary people, simple on the user end, complex on the provider end, which would serve as a “next generation pension solution,” offering a way to manipulate the key variables in retirement income and demonstrate potential financial outcomes. This tool would help users continuously optimize risk to help them reach their retirement funding goals.

There are regulatory obstacles now to the implementation of such a method on a widespread basis, and a gap between how managers, advisers and financial institutions think about pension assets, and what Merton has in mind.

Nevertheless, he says, “What we need to do for most of the people who don’t have extra money and must do the most with their assets is deliver a simple, easy to use, and if they don’t use it still gets them there, solution.”

Merton acknowledges those who think the giant problem of pension funding can be solved by what’s already available — bond and equity markets, bank loans – and who hanker “to get rid of all the complexity, go back to 1930, ’50 or ’80.” From his perspective, this means “throwing away a lot of what you could do, because the market-proven strategies people have developed and used…can do a much better job for people.” 


Written by Rich and Co.

March 15, 2011 at 2:14 pm

Posted in Uncategorized

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