February 17, 2009
What is the safest retirement asset for a 55-year old US resident?
That question was posed by Zvi Bodie, professor of finance and economics at Boston University, to an audience at the Managing Retirement Income conference in Boston on February 9. Bodie has written extensively on retirement planning and investments and is a leading expert in the field.
“We’ve got a really big problem with aging populations all over the world,” Bodie said. Retirements systems must be restructured, and the investment industry is searching for solutions.
Bodie insists on solving the problem of investing for retirement with the question posed above – what is the safest way to save? But his is not the question the investment industry wants to ask, Bodie said, and as a result the industry regards him as a “gadfly, if not an outright enemy.”
“If everyone takes the safest path, assets under management and turnover would be way too low,” Bodie said. “There would be no money to be made.”
Answering the question
Bodie used online financial planning tools to expose the inadequate advice offered by several major fund companies. He found they provided identical answers to his question: put 100% of your assets in a money market fund or certificate of deposit. Even TIAA-CREF did not suggest putting the money in their own funds or annuity products, instead opting for a money market account.
One member of the audience suggested annuity products as the answer, but Bodie rejected this, citing their lack of inflation protection.
Instead, for Bodie, the safest retirement asset is Treasury Inflation Protected Securities (TIPS), in which all of his personal retirement assets are invested.
As he converts his retirement assets to income, Bodie plans to use inflation-protected immediate annuity products. But he doesn’t plan to do so until he reaches age 70, in order to receive the maximum Social Security benefits.
“Saving is all about insuring and not about speculating,” Bodie said.
Investors should start with their Social Security benefits, which are already inflation-protected, and supplement those benefits with other inflation-protected income.
Bodie said this concept is not difficult to explain or understand. “The problem is that most people don’t know this is possible,” he said. Some in the investment industry do not grasp these concepts, Bodie said, noting that “there is a great deal of ignorance among professionals.”
He did not address whether this ignorance is innocent or deliberate.
Advisors are not the culprits in Bodie’s view. “There is a very good living to be made for financial advisors acting in the best interests of their clients,” he said. “But, when it comes to retirement income, it comes down to what I said about security and inflation protection.”Display article as PDF for printing.
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