The Overlooked Risk of Regret in Retirement with David Blanchett

Summary

David is Managing Director, Portfolio Manager, and Head of Retirement Research for PGIM DC Solutions. In this role, he develops solutions to help improve retirement outcomes for investors with a specific focus on defined contribution plans. Prior to joining PGIM he was the Head of Retirement Research for Morningstar Investment Management LLC and before that the Director of Consulting and Investment Research for the Retirement Plan Consulting Group at Unified Trust Company. 

In this episode David and I discuss retirement planning and income generation. He emphasizes the importance of understanding the cost of retirement and the need to start planning early. Retirement is a complex and individualized process, and the traditional concept of retirement is evolving, David suggests using the term 'financial independence' instead.  

He also challenges the 4% rule for retirement withdrawals, suggesting that a personalized approach is necessary because flexibility in retirement income planning is crucial, as it allows for adjustments in spending based on changing circumstances. He also talks about why holding cash can provide both economic and behavioural benefits in retirement portfolios.  

Other highlights of our conversation are where we discuss the need for advisors and coaches in retirement planning, the importance of understanding and addressing regret risk, the value of spending money on experiences and giving during retirement, the impact of longevity risk on retirement confidence, the benefits of guaranteed lifetime income in retirement planning and Davids famous Retirement smile concept.  

Takeaways

• Understanding the cost of retirement and starting planning early are crucial for financial security in retirement.
• The traditional concept of retirement is changing, and 'financial independence' may be a more appropriate term.
• The 4% rule for retirement withdrawals may lead to underspending and regret, and a personalized approach is necessary.
• Flexibility in retirement income planning allows for adjustments in spending based on changing circumstances.
• Holding cash in retirement portfolios can provide both economic and behavioral benefits.
• Advisors and coaches play a crucial role in retirement planning by providing accountability and helping individuals understand their blind spots.
• Regret risk, or the regret of not doing more during retirement, is an often overlooked risk that can impact the fulfillment of the second half of life.
• The fear of spending money in retirement and the transition from a savings mindset to a spending mindset can hinder individuals from enjoying their retirement and lead to inefficient spending.
• Longevity risk, or the risk of outliving one's savings, is a significant concern in retirement planning, and there is a need for greater longevity literacy.
• Guaranteed lifetime income can help address longevity risk and provide individuals with the confidence to spend money on experiences and give during retirement.
• The retirement smile, where real-time spending falls during the early years of retirement and may increase slightly in later life, challenges the assumption that spending increases with inflation every year.

Sound Bites

"Retirement is the most expensive purchase most people will ever make."

"Retirement is radically changing for everyone, what it means to retire, what it means to keep working, how long you're gonna live, what your activity level is gonna be."

"The 4% rule will lead people into a retirement of underspending and regret."

"We are not the person that's receiving the advice or coaching, right?"

"If we create one of those [retirement plans] that's got a hundred percent success rate, i.e. we're telling you that you're never going to run out of money. That to me is a hundred percent failure on living a fulfilled second half of life."

"It's just really, really hard to spend down this pool of assets when you don't know how long you're gonna live, you know what the markets are gonna do and you don't wanna go back to work."

Chapters

00:00 Introduction and Background of David Blanchett 03:02 Understanding the Cost of Retirement 08:12 The Changing Nature of Retirement 12:33 Challenging the 4% Rule for Retirement Withdrawals 19:49 The Benefits of Holding Cash in Retirement Portfolios 26:56 The Role of Advisors and Coaches 28:19 The Overlooked Risk of Regret 30:06 Overcoming the Fear of Spending 35:28 Understanding and Addressing Longevity Risk 39:39 The Benefits of Guaranteed Lifetime Income 47:01 The Retirement Smile: Challenging Assumptions