The new year brought us two new books on retirement planning written by well-known authors – How to Retire with Enough Money (and How to Know What Enough Is) by Teresa Ghilarducci and How to Make Your Money Last (The Indispensable Retirement Guide) by Jane Bryant Quinn. Ghilarducci focuses on key steps for building retirement savings, while Quinn provides a much fuller analysis for both accumulation and de-accumulation. Both are books advisors should read and consider recommending to clients. I’ll summarize and comment on their key points.
Ghilarducci’s book is short (100 pages) but is actually two books in one: advice about retirement planning, concentrating on the accumulation phase, and a critique of America’s retirement system, which she says increasingly places the burden on individuals to deal with risk and complexity. Ghilarducci is a labor economist and the most prominent critic of the current U.S. retirement system. In addition to planning advice, this book provides a summary of her policy views, which were presented in detail in her earlier book, When I’m Sixty-Four.
Jane Bryant Quinn has had a long career as a nationally known commentator on personal finance – producing both books and columns. Her book, Making the Most of Your Money, has become a personal finance classic. In this new book, she provides in-depth advice on many of the financial aspects of retirement planning and also offers useful life-planning insights.
Teresa Ghilarducci
Ghilarducci’s book can be read in one sitting – it’s clear, concise, and entertaining. The central question is how to build sufficient savings to support a sustainable retirement. Ghilarducci proposes accumulating savings of 8- to 10-times pre-retirement earnings as sufficient to replace 70% to 80% of pre-retirement earnings when Social Security is included. Her planning recommendations focus on how to save more and spend less.
While she argues that our 401(k)-based retirement system is woefully inadequate, she makes recommendations about how individuals can best use the system by taking advantage of the employer match. She also cautions against rolling savings from 401(k)s into IRAs, citing reduced protections, but she doesn’t get into the nuances of comparing specific 401(k) versus IRA investment opportunities. She argues for low-cost passive investing and for employees to urge their employers to include low-cost index funds in their 401(k) plans.
The book recommends budgeting and expense reduction approaches that are quite standard in financial planning books, but it also makes the case of downsizing housing prior to retirement. She also makes standard arguments for avoiding high-interest debt and paying off mortgages prior to retirement. The overall theme is how to use compounding to help savings, rather than be a hindrance.
We get away from standard planning recommendations and make more use of Ghilarducci’s professional experience in Chapter 3 on “Working.” She recognizes the benefits of working longer (and delaying Social Security regardless of retirement timing), but cautions about the difference between when people plan to retire versus when they actually do. Workers often end up retiring before they had planned for reasons including changes in health, changes in their business environment, physical demands of the job or the need to care for family members. Bricklayers are more likely to be retire early than college professors. She cautions that those most likely to need late-in-life work are least likely to find it.
As to where to find advice, the book argues for avoiding conflicted advisors and brokers and instead choosing fee-only planners. However, the author does not point out that “fee-only” doesn’t guarantee quality or that skilled fee-only advisors may require high minimum account balances. Ghilarducci also make the case for DIY planning using retirement calculators. The particular products she recommends are the AARP Retirement Calculator and the variety of calculators offered by Dinkytown. These tools simplify planning by building in pre-wired assumptions about returns, asset allocations, taxation, Social Security, income replacement rates and other components. The quality of the output reflects how good a job the developers have done in this pre-wiring. I did some brief testing of both the AARP and Dinkytown offerings and found them useful for providing very general guidance only. But neither of these products are a substitute for working with an advisor to build a full financial plan.
Comments from Amazon reviewers on the financial planning recommendations in How to Retire with Enough Money range from “overly simplistic” to “a good guide for those who don’t know how to start.” As mentioned earlier, the book also provides a summary of Ghilarducci’s criticisms of America’s current retirement system and suggestions for fixing it. She argues for de-emphasizing our reliance on 401(k)s and, instead, having the federal government set up a program of guaranteed retirement accounts. For those interested in understanding the progressive case for building a better retirement system, Ghilarducci is the best-known and most articulate spokesperson, and this book provides an easy-to-read summary of her ideas.
My view is that this is a useful book to recommend to clients who are new to retirement planning, both for providing motivation and a reader-friendly introduction to ways to succeed. Given Ghilarducci’s policy views, the book will likely gain more favor from Democrats. However, all sides in the political debate can benefit from a better understanding of problems in the current retirement system.
Jane Bryant Quinn
How to Make Your Money Last is a superb book on retirement planning. The quality of the book reflects the process this author has been applying for many years in writing about financial planning. She solicits input from leading planners and researchers and consolidates what she learns. And she’s not just a reporter consolidating expert opinions; the expertise she has developed over the years puts her among the experts. After she drafts chapters, she has them read by non-professionals and crafts the material so it will be understood by a lay audience.
The list of those who helped on this book is a “Who’s Who” of retirement planning researchers, including Bill Reichenstein on Social Security strategies, Moshe Milevsky on annuities and Wade Pfau on withdrawal strategies. For each topic she received input from multiple researchers who didn’t always agree. In such cases she highlights the differences of opinion and then explains her own conclusions.
At 350 pages, this book goes into much more detail than Ghilarducci’s, although the general approaches to retirement planning are similar. Both authors favor index funds, fee-only advisors, paying off debt, careful expense management, working longer if feasible and delaying Social Security. These books add to a growing literature that favors low-cost indexing.
The Quinn book goes into considerable detail on retirement-funding strategies, with chapters that readers will want to focus on when dealing with particular retirement decisions. For example, with input from Reichenstein and economists Russell Settle and Larry Kotlikoff, Quinn provides an in-depth, yet reader-friendly, analysis of Social Security claiming strategies, including the impact of recent law changes.
Besides general topics like Social Security-claiming, she also delves into areas that may be of interest to smaller numbers of readers, an example being continuing-care retirement communities and how to perform due diligence if contemplating this option for retirement living.
The Ghilarducci book focuses on accumulation – saving enough for retirement – while Quinn’s book places equal focus on both saving for retirement and generating income after retirement. On the topic of retirement-withdrawal strategies, Quinn relies on expert advice from Wade Pfau, Michael Kitces, Jonathan Guyton, Harold Evensky and others. After sorting through the expert opinions, she develops her own recommended approach. She advises retirees to hold two years of spending in cash, which sounds like a bucket approach, but she actually recommends more of a safety-first or floor-and-upside strategy. “Ideally you’d buy an annuity that, together with Social Security and other reliable income, covered all (or most) of your basic bills.” She notes differences in safe-withdrawal strategies recommended by the experts, with Pfau being more conservative than Kitces or Guyton.
For generating retirement income, Quinn notes that she has come to have a favorable view of single-premium immediate annuities (SPIAs), while she explains her negative assessment of the best-selling annuity products – high-commission variable annuities and fixed-index annuities. She also offers specific advice for those who already own such high-priced products, including consultants who provide evaluations. Quinn provides a favorable view of using reverse mortgages in retirement income planning, including the advantages of setting up a line of credit early in retirement. She has always kept up with research, and she began recommending the use of reverse mortgages a few years ago when research was first being published.
Like Ghilarducci, Quinn endorses the use of retirement calculators for those wanting to do some rough DIY planning. Quinn recommends the Fidelity Investments’ Retirement Income Planner and the T. Rowe Price Retirement Income Calculator. Both of these utilize more detailed input than the AARP Retirement Income Calculator that Ghilarducci recommends, but they are still user-friendly. Neither author mentions the option that I personally recommend – the calculator provided by the Financial Security Project at Boston College. This product requires minimal input, like the AARP software, but the developers did more sophisticated analysis in programming the pre-wired assumptions and processing. However, all these calculators keep things relatively simple, so they lack the full transparency of commercial software packages that financial planners use.
I agreed with almost everything Quinn recommended in her book. I differed slightly with her over a few areas that are debated among researchers and advisors. For example, she has more faith in the resiliency of the U.S. stock market than I do. Her view that the stock market will always bounce back (eventually) differs from my assessment that the market will very likely bounce back, but a Japan-like performance lurks as a low probability outcome. So I’m a bit more conservative about withdrawal strategies and place more emphasis on the importance of guaranteed lifetime income. But these are minor differences rather than divergent strategic views.
Conclusion
Although these books are different in length, they make similar recommendations about retirement planning. Both are books advisors may want to recommend to clients. Ghilarducci’s book offers a “Cliff Notes” version of key strategic points for retirement accumulation. While Quinn makes similar recommendations, she goes into much more detail. Similar to Ghilarducci, the Quinn book is well written and easy to read, but she also provides useful detail that can be used for reference. Advisors will benefit by reading the Quinn book. Those who are new to retirement planning can use this book as a foundation for providing advice, while advisors with more experience may find that the book causes them to reevaluate the approaches they have been recommending.
Joe Tomlinson, an actuary and financial planner, is managing director of Tomlinson Financial Planning, LLC in Greenville, Maine. His practice focuses on retirement planning. He also does research and writing on financial planning and investment topics.
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