Worried About Retirement? PIMCO’s Plan to Help Retirement Savings Last a Lifetime
Saving sufficient assets for retirement is hard. Yet allocating and distributing retirement assets may be even more formidable. In the following Q&A, Emmanuel Roman, PIMCO’s chief executive officer, and Rene Martel, head of retirement, discuss how behavioral finance and PIMCO’s Income to Outcome framework aim to address the challenge of providing income in retirement.
Q: Richard Thaler, our senior advisor on retirement and behavioral economics, commented recently that “Retirement income is the sort of problem that would be fun to think about.” How much fun has PIMCO had thinking about these issues?
Roman: Well, we have had some fun and some headaches, too. The decumulation of assets in retirement is obviously a much more complex problem than accumulating assets before retirement. Because of its complexity, decumulation is unlikely to be solved with a single solution; we’re going to need to combine a number of good ideas from different corners of the industry to solve this problem.
Such has been the case on the accumulation side in defined contribution plans. By combining a number of elements – each of which aimed to solve only a part of the problem (e.g., auto-enrollment, auto-escalation, target date strategies, and now the SECURE Act) – we’ve been able to significantly improve the landscape for workers saving for retirement.
Similarly, we’ll need multiple solutions to solve the retirement income challenge – whether it be in employer-sponsored plans, IRAs, or other vehicles in the wealth management segment of the industry. And we believe that PIMCO can play a key role in bringing some of these solutions to market.
Q: Can you discuss how investment managers like PIMCO can make a difference?
Martel: To make a significant difference, one should start with an important problem. A big one is how to protect retirees from sequence-of-returns risk, or the risk related to the timing of retirement. A substantial body of research has demonstrated the devastation that can result from poor returns in the years just before, or just after, retirement. While episodes of poor returns may be less significant in the accumulation phase, an untimely transition to the decumulation phase risks completely derailing the retirement plan and drastically reducing the longevity of assets.
We understand that most retirees will need to allocate a certain portion of their assets to higher-octane investments to achieve long-term retirement objectives – be it longevity of assets, a desired level of sustainable income, the ability to make bequests, etc. So we asked ourselves, “How can a retirement income plan accommodate the need for higher growth potential without overexposing individuals to sequence risk?”
We think the answer lies in the application of mental accounting, or segmentation, to two portfolios, one dedicated to “paycheck replacement”2 (through a low-volatility bond portfolio or “ladder”) and the other to long-term growth.5 With this framework, we believe that investors could be largely shielded from some key risks and “nudged” toward better behaviors – giving “decumulators” some of the guidance and protections that accumulators have benefited from.