The Longevity Puzzle Piece
Another part of the equation when it comes to helping participants with decumulation is having an informed idea about a participant’s longevity.
“Most companies believe that everybody’s going to die at 95—no matter your health status, etc.,” Fraser said. “I love the industry, but this is the kind of stuff that drives me crazy.”
Benartzi, on the other hand, drills down quite a bit deeper to come away with a more concise expectation about individual longevity. Using a variety of studies combined with a few questions for the participant, he is able to come up with a much more individualized estimation of mortality than the “everybody’s going to die at 95” approach.
The questions include where the participant lives, if they smoke or not at age 65, and then the most impactful question: “Do you consider yourself in poor, average, good, very good or excellent health?”
The difference between “poor” and “excellent” is 7 years, Fraser noted. Armed with this information from a participant and using Benartzi’s PensionPlus strategy, an advisor can tell the participant what his or her retirement paycheck should be based on their 401(k) account balance and their ability to delay claiming Social Security.
“It’s about helping people create a personalized plan,” Benartzi said. “It’s helping you realize what the possibilities are for you.”
Fraser explained that at age 65, a participant might start getting a retirement check of $2,600 a month from their 401(k). But if they agree to wait until age 70 to begin claiming Social Security (because the longevity quiz predicted a long lifespan in retirement), that check can be increased from $2,600 to $3,000 right now.
“There’s a reason that we do this stuff, and it goes beyond pure finance and numbers. It’s about changing lives.”
George Fraser
“You’ll start getting that at age 65. But what’s going to happen is that we’re going to start to draw down your 401(k) to get you there. Which people don’t get,” Fraser said, adding that many people still mistakenly want to claim Social Security as soon as possible. “The media has talked about the fact that it may not be there for you. So we’ve scared them into taking it early.”
He told the story of “Gus,” a participant in Oregon with a heart condition who has worked at a wood manufacturing company for 47 years, never making more than $35,000 a year. But he still has a nice 401(k) balance thanks to his work over the past 20 years with Fraser. Based on Benartzi’s PensionPlus, Fraser was able to show Gus that he could retire right then if he wanted to, instead of waiting another 2 years.
“There’s a reason that we do this stuff, and it goes beyond pure finance and numbers. It’s about changing lives,” Fraser said.
Why Academics Need Advisors
The model of an advisor in the field (like Fraser) working with an academic (like Benartzi) to advance research is critical to the process, Benartzi said, because that partnership can speed up the implementation of game-changing innovations.
“People might not remember—it took one advisor to get ‘Save More Tomorrow’ to the field back in 1998,” Benartzi said. The advisor, Brian Tarbox, passed away and didn’t get to see the program’s huge success, “but without that advisor it would have taken us a few more years to get the auto-escalator to the field and it would have taken us longer to get it into [the Pension Protection Act of 2006],” Benartzi said.
“Every advisor who reads the magazine could be the next one with the big idea to transform the industry.”
Shlomo Benartzi
Save More Tomorrow, designed by Benartzi and Thaler, is now offered by more than half of the large retirement plans in the U.S.
“If there’s one big message I want to leave the readers with, it is that every advisor who reads the magazine could be the next one with the big idea to transform the industry.”
“Advisors often don’t realize the power they have if they are implementing new ideas in the field, and I think George with the pennies and our joint work also on decumulation—if he didn’t help me test the decumulation tools in the field it would have taken me a bit longer. Eventually I would have found a way to do it, but we need speed. People need help,” Benartzi said.
By the way, coming soon is Fraser’s next great idea—one he says “will change the way the average American thinks about and prepares for income and lifestyle in retirement.”
Fraser has several stories about real life scenarios he likes to share. For example, say a 401(k) participant is a 20-year-old who will never make more than $25,000 a year.
“Most people would agree that person can’t save $100,” he said. But here’s how the “Pennies on the Dollar®” approach could work for them:
“If you start by saving one penny of every dollar at age 20, increase it by a penny per year to six pennies of every dollar by age 26, and maintain that six-penny rate from age 26-65, that person will have saved $63,875 by age 65. If that were to grow at 6% on an annual basis, that person would have $296,413 by age 65. So does that make sense to providers who are looking for average account balances that are bigger?”
In retirement, that person could withdraw the equivalent to 80% of their monthly salary, or roughly $1,667. Combine that with a Social Security benefit of as little as $1,400, and that person who never made more than $25,000 per year is drawing over $3,000 per month or $36,000 per year.
SEE ALSO:
• Shlomo Benartzi’s PensionPlus to be Offered by OneAmerica
EDITOR’S NOTE: This article first appeared as the cover story of recently released 401(k) Specialist Magazine Issue #1 2023. Click here to read it as it appears in the digital edition of the magazine.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
