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Mitchell: Well, I’m a big proponent of annuities for retirement, for at least part of your portfolio. How much you want to buy ought to depend on how much you’re relying on social security,
and how much you trust it will be there. How much you are relying on a corporate defined benefit plan.Many people may be already sufficiently annuitized, and not require additional. On the other hand, someone like me – I’m covered by social security, but never had a defined benefit plan –I ought to be thinking more about longevity protection so I have a paycheck for life, so that I don’t run out the day after I hit my life expectancy. Now, the other thing to mention is that there are fixed annuities, there are also variable annuities. We want to think about the mix there, as well.
I am a big fan of an inflation indexed annuity, of which there are very few offered in the U.S., I have to say. But the notion is, if you’re going to alive 30 years in retirement, inflation can be very corrosive. So we want to maintain some minimum consumption level and purchasing power. That, I think, is a good idea.
Forbes: This gets into the kind of crazy environment we’re in. Traditional things, like laddering your CDs, annuities and the like, get badly skewed because of lack of an interest rate. And you end up getting very little.
Mitchell: Absolutely correct. I think this interest rate environment has generated one of the biggest wealth shifts – away from savers and retirees to the groups that are benefiting from low interest rates. And it’s really very difficult. I’m trying to help my mother manage her pennies in retirement and there’s no interest to be earned.
Forbes: Even tips. They’re no good anymore.
Mitchell: The problem is there really isn’t anything that is free. So people have talked about diversifying abroad, but of course we know the benefits of that are somewhat less than we used to hope. If you still have an opportunity to keep working, to me, that’s one of the very important degrees of freedom that Boomers have. Unfortunately, my research has suggested that probably the generation of people 50 and over is just going to consume a lot less. Because their houses are worth less, their retirement accounts are worth less. And that’s going to be a belt tightening environment that we’re going to live with for a long time.
Forbes: Even if we get a repeat of the ’80s and ’90s?
Mitchell: It’s possible that we could have a repeat of the ’80s and ’90s. The world was very different then. We had a much more robust global economy, we weren’t so closely synchronized all around the world. We have an aging global environment now where everybody–
Forbes: Go to China.
Mitchell: China, all of Europe, much of Latin America, of course us. Japan leading the way and Singapore, as well. So everybody’s struggling with this problem of where to find growth opportunities. And it’s going to be a tough call.
Forbes: And yet you don’t have gray hairs.
Mitchell: Well, we do things about that.
Lessons From Britain, Chile and Singapore
Forbes: Now, one final question. In terms of looking overseas – we were discussing before we went on tape, you do consulting for areas like Chile, Singapore. I think eventually you are going to see, one way or the other with younger people, personal accounts with proper rules and diversification. What lessons can we take from Britain, Chile and Singapore? Because one of the nice things about having your own account is you choose when you retire. If you want to do it early, bless you. If you want to wait to 95, you live that long, you can do it.
Mitchell: Well, one of the things that we’ve seen from Singapore is that people have been required to save their whole lives. And so they’re able to reach retirement with a nice nest egg. However, in the past, they’ve been able to take the money as a lump sum and not, necessarily, protect it for retirement.
So the government, as of 2013, will start to mandate a deferred annuity. The idea is that at 55, you buy yourself an annuity that will kick in at 75 or 80, so it’s not that expensive since it’s so far away.
And this will merely be the amount of money you need to pay yourself a subsistence income. You don’t have to annuitize everything, just enough to cover a poverty line paycheck. This way, the government protects you and itself against people coming back later with their hand out. Singapore is not a welfare state type society, so this is something that’s taken its place. In Chile, they allow annuitization or a phased withdrawal, so you still run the risk of the longevity possibility.
In Australia, they also have a mandatory system – 9% of pay must be put in defined contribution plans in the main. You have a lot of choice where to invest the money. The downside there is they let you take the lump sum. And so, unfortunately, some people at age 55 take the money and go on their overseas experience. And then come back and ask for a bail out when they’re older.
Forbes: So if we do something like that here, we’d have to have a minimum age before you can annuitize – say, 60 for the big, targeted funds?
Mitchell: When I was on the Social Security Commission, we struggled a lot with the question of, “Should we mandate an annuity if we add a personal account?” And we ended up making a proposal somewhat like the Singaporean one. That is, it’s your money, so you should be able to access it.
On the other hand, we don’t want you to go blow it, and buy a bass boat, or what have you. Not that I have anything against bass boats. But the point was, we wanted to make sure there was a minimum level of protection. And so, we also required partial annuitization in our proposal.
Forbes: Are you going to ever retire?
Mitchell: Not if I can help it.
Forbes: Olivia, thank you.
Mitchell: Thank you very much.
source: forbes.com
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