The World Turned Upside Down

As the British surrendered at Yorktown their band played a song called "The World Turned Upside Down" in wry acknowledgment of the improbable American victory.  By underestimating the Continental Army and applying traditional tactics to a guerilla war,  King George III and his Empire unwittingly gave birth to a new superpower that would eventually surpass it in dominance.  The world had indeed been turned upside down.

Arguably, the world of retirement planning is being turned upside down as well.  Underestimating how the rules have changed and applying the wrong tactics will result in too many Americans failing to achieve their retirement goals. Scare tactics that reference cat food as a retirement staple miss the point;  few people will actually run out of money. Instead, the risk lies in dramatically reduced lifestyles due to a lack of quality and relevant planning.

Ironically, the issues and trends that have changed the rules of retirement are hiding in plain sight.  The key is to recognize them and respond accordingly:

• An aging population is straining social programs.

• Longevity is a double-edged sword.

• The onus is now on the individual to accumulate wealth and turn it into retirement income.

• The transition from growth to income planning is counter-intuitive for advisors and clients alike.

• Cognitive impairment will be the next great challenge of retirement planning.

• Home ownership is fading as a way to build retirement wealth.

• Rising taxes will undermine the buying power of retirement assets.

• Low interest rates are rewarding borrowers, not savers.

• Volatility is reducing the appetite for stocks.

• Lost jobs and market declines are causing delayed retirement.

• Income, rather than age, will trigger retirement.

• The cost of healthcare and how to save for it remains the elephant in the room.

Future posts will address these and other challenges we all face when reconsidering retirement.  In the mean time it shouldn't take a midnight ride to warn of the reality that the rules of retirement are changing and we must rally accordingly.

The Problem with Lists

The fact that lists are becoming standard fare in our sound-bite, Twitter-obsessed society is no surprise.  No doubt "Best Places for Capricorns to Retire" is in the works.  And while lists can occasionally be fun (David Letterman) and very useful (The Ten Commandments) they can also be misleading.  Or, to paraphrase Mark Twain's screed against statistics; there are lies, damn lies and lists.

Here's a short list of the problem with lists:

• Lists blur fact and opinion.

It's this distinction that got Socrates into all that trouble with his fellow Athenians, so some perspective is called for.   When you look at the American League East standings and see  the Red Sox in first, that's a fact.  When you read a list that says Hackensack University Medical Center is the best place in the Metropolitan Area to have a heart transplant, that's an opinion. It's a fact that "Unbroken" was a top selling hard back.   Stating "Reconsidering Retirement" is the best retirement blog out there." is an opinion, albeit a very good one.

The best rule of thumb is to always avoid lists and declarative sentences that contain the word "best."

• Lists are pure marketing.

US News and World Report was floundering until it began publishing numbing lists of the "best" colleges, graduate schools, hospitals and the like.  The magazine claims its rankings are based on a scientific formula (Is there any other kind?) which is proprietary. They also deflect any blame if colleges make too much of the rankings and students misuse them. Clearly, this has the same effect as the Surgeon General's warning on that carton of Marlboros.  In any event, it's remarkable how from Princeton to Pepperdine these esteemed institutions allow themselves to be compared like kitchen appliances in Consumer Reports.

Mutual fund rankings also deserve a mention (the credit rating agencies have been pilloried enough.) Many plan sponsors (and retirees) get caught up in a system where they may be reluctant to select funds without a certain number of stars. They fear criticism (and worse as plan fiduciaries) if an investment lineup doesn't have the highest ranked funds.  This over-reliance on rankings can distort the fund selection process by causing investors to overlook funds that in fact may be better suited to meet their goals in spite of "inferior" rankings.  

It's remarkable that the purveyors of lists and rankings have university presidents trembling and plan fiduciaries relying on stars. Pure marketing genius.

• Lists make you lazy.

The goal of most lists is to sell something. In spite of that, they can offer some useful information. Of course the same may be said of SportsCenter, Cliff Notes and retirement blogs.  However, watching SportsCenter's "Top Ten Plays" is no substitute for appreciating the unscripted drama of that particular game.  After slogging through Moby Dick it is tempting to recommend an abbreviated version but, needless to say, the experience won't be the same.  And blogs can be useful, but of course the most important thing is to have a well thought-out retirement plan that is unique to your needs.

If the list of top places to retire in Central America is the catalyst for creating a more serious retirement plan then mission accomplished. Just hold off on buying the banana plantation before conducting the proper research. 

The point is not to confuse information for knowledge. 

• Lists make the listed and listers do crazy things.

Clemson University acknowledged it was taking specific steps to improve its standing in the college rankings, such as manipulating class size.   Other schools have changed policy and awarded bonuses to presidents and administrators who spearhead a leap in rankings.  Football coaches run up scores to better their standings in the BCS rankings.  A number of college presidents have pledged not to participate in the US News survey to avoid being ranked. And did Standard & Poor's with their inimitable track record really have the chutzpah to downgrade the debt of the United States?  The list, if you will, goes on and on.

Clearly there is no best college just like there is no best place to retire.  College, like retirement, is not where you go but what you make of it once you're there.

Faculties Lost

Everyone knows the story of how the Dutch bought Manhattan Island from the local Native Americans for $24 in trinkets and tokens (there were no Metro Cards in 1626). Depending on your point of view, this was one of the greatest real estate deals in history or the first of innumerable financial swindles emanating from Wall Street. Interestingly, new theories suggest the "locals" who sold Manhattan were simply passing through on foot - undoubtedly the Acela had broken down - and were more than happy to part with an island they never owned in the first place. While in all likelihood apochryphal, one can only hope this version of the story to be true.

From Ponzi to Madoff, it's truly remarkable how investors in full command of their faculties are continually duped out of their money. So with an ominous nod to PT Barnum, consider the implications as millions of Americans live longer and, as a result, suffer from the insidious effects of dementia and Alzheimer's. 

This inexorable wave of the cognitively challenged will crash head on into advances in technology that will make it even easier to separate them from their retirement savings.  And more aging investors are living in social isolation given our increasingly mobile society making them especially vulnerable. You can almost sense the bad guys booking their tickets to Florida and other points south.

Addressing cognitive impairment will be the next big thing in retirement income planning.   Unfortunately, the financial services industry has been slow to respond, just as it was late to the game in recognizing longevity risk.  In fact, it's the medical community that's on the front lines of this epidemic that effects one third of Americans over the age of 71, according to a 2008 Duke University study.

Physicians are usually the first to hear about lost heirlooms, missing money or how a patient signed a confusing document.  But there's only so much a health care worker can do beyond notifying regulators, social services, friends and family.  But as seen by the mortifying trial of Brooke Astor's son, who was convicted of embezzling his mother's assets, family members aren't necessarily paragons of virtue.

Clearly this is an area screaming for innovation.  But until that time, it's easy to imagine  Barnum saying if he were alive today "There's a sucker turning 60 every minute."