Don’t Worry; Retire Happy – With Moshe Milevsky
Record inflation. Skyrocketing long-term care costs. The widening retirement income gap. All these things can lead would-be retirees to believe that the post-employment years are a time to fear.
But it doesn’t have to be that way.
Moshe Milevsky has researched the evolution of retirement insurance and annuity products over the centuries. He believes that advisors can relieve clients’ fears around retirement by building a portfolio that considers their biological age and their support systems as well as their financial needs. And annuities are a crucial part of the plan.
Milevsky is a finance professor at the Schulich School of Business at York University in Toronto. He also is a member of the graduate faculty in the Department of Mathematics and Statistics.
He has published 15 books and is a fintech entrepreneur with a number of U.S. patents in the retirement income space.
With one foot in the ivory tower of academia and the other in the financial world, Milevsky has a unique perspective on the science of retirement planning.
In this interview with Publisher Paul Feldman, Milevsky discusses the concept of “pensionizing” a retirement nest egg and speculates about whether the tontine could ever make a comeback.
PAUL FELDMAN: Tell us how you became a finance expert.
MOSHE MILEVSKY: My day job is teaching undergraduate and graduate students at the university. I teach finance and investments and insurance. I studied physics and mathematics at Yeshiva University in New York; then I went to graduate school. I was fascinated by gravitational physics — how gravity affects objects as they move, such as how a golf ball moves across the course in an arc. My thesis supervisor said I would never get a job anywhere with that sort of specialty. She said, “If you want a job, you want to do something more practical than modeling equations.” She said I should go to business school and apply my math skills to problems in business. That’s how I got into finance.
Twenty-five years ago, I went to business school and I learned accounting, economics and finance. I never left the business school since having earned my Ph.D. from there. I started teaching there and I became a tenured professor and a department chair. I combine finance, economics, actuarial science and accounting with the math and science I acquired during my graduate education. And I apply all these to retirement problems.
FELDMAN: What is your feeling on the economy today, and where do you see us going over the next couple of years?
MILEVSKY: I have absolutely no idea where the economy is going. But I’ve been reading a lot about where we are today. There’s talk about an impending recession, and that affects our industry and the annuity space and the retirement planning space.
I do not have a crystal ball that can predict where the economy’s going. And I personally don’t think anybody has a crystal ball to predict that unless they control the economy.
I certainly can’t predict the recession, but I will tell you that recessions are never good for any industry. If you’re trying to get people to buy financial products, a recession is even more difficult because one of the first things that people will sacrifice are these excess investments and excess payments and excess premiums. Because they’re going to say, “You know what? I just lost my job. We have to cut back. That’s not essential.” So, the short answer to your question is, it would not be good.
FELDMAN: What do you think is the most dangerous thing for retirees right now? Is it the tax increase we will need to cover our government’s expenses, or will it be inflation or will it be the stock market?
MILEVSKY: One of the things I find is this misperception that retirement is all about being scared. “Oh, I’m retired now! What should I be scared about?” Or you read about retirement guidance and it’s all about the things to worry about.
There are some great things about being retired. You have more time on your hands to do things that you enjoy. You get to spend time with family and loved ones. You no longer have the work stress.
These all are great things, but you have to rely on your nest egg and your accumulated savings to finance those years. When you are relying on a nest egg of accumulated savings, a 401(k), an individual retirement account, a 403(b) to supplement or even replace the salary that you no longer have, there are a number of things you should concern yourself with. It’s not so much the nest egg you have to take into account as it is navigating 20 or 30 years in retirement.
But we don’t want to give people a message like, “You’re retired now, so it’s time to worry.”
Obviously, we live in a time of inflation. Inflation is higher now than it has been in 40 years. It’s unclear whether the Federal Reserve will be able to get ahead of it before it gets into double digits. It’s a concern because things are getting more expensive and your standard of living has to keep up. I would say on the top of the list of things retirees must account for when they’re managing their nest egg is getting real — not nominal — returns.
Let’s say you buy an annuity. The annuity carrier is paying you an income for the rest of your life. You’re getting a thousand dollars a month and that’s going to stay constant, but inflation erodes the purchasing power and it buys less and less. So, I would say inflation is one of the things that you want to have conversations around.
Another important factor is longevity. How long will you live?
Imagine you are going on vacation. And you’re trying to figure out how many clothes to take, how much money to keep in your wallet. The first thing you ask is how long will the vacation be? Am I going for a weekend? Then I need only one suit. Am I going for a month? I need to pack more clothing. I tell you that this retirement vacation can be anywhere from five years to 40 years. That’s complicated. How will you pack for that vacation?
Another aspect is the gap between life span and health span. Life span is how long you live.
Health span is how long you live in good health. Mathematically, life span is always longer than health span. And there’s a gap between those two. Those are the years when we need help with the activities of daily living. And that span between health span and life span can be anywhere from a couple of years to 10 years. That’s where I think things such as long-term care insurance are very important. You hear a lot of discussion about annuities and of life insurance. But those don’t really address this gap between health span and life span. Advisors must get a better handle on that gap and counsel their clients on how to manage it.
But there’s another thing advisors must talk to their clients about, and it isn’t about money.
When clients think about retirement, they need to think about what support system they will have in place. Who will take care of your financial affairs when you can’t count anymore?
You don’t want to scare anyone, but I think a good financial advisor should have conversations about these topics with their clients who are planning for retirement.
FELDMAN: One thing we frequently hear is that consumers hate annuities. Do you believe the industry is responsible for that sentiment?
MILEVSKY: I think there has been an evolution in the public perception of annuities. Ken Fisher aside, if you were to take a look at the annuity critics in the media — you know, the established media, not people who are trying to sell an alternative and hate annuities because they’re selling something else — the established media, 20 or 30 years ago, all were opposed to annuities and they would write about why they didn’t think annuities were a good idea. They were opposed to any form of annuity. But I think that in the last few years — especially with the passage of the SECURE Act — there’s a growing awareness that if you have a 401(k) or a 403(b), it’s not a pension. You may have a big sum of money in your retirement account, but that’s not a pension.
The question becomes how do I pensionize some of my nest egg? Even the greatest annuity critics accept the fact that an annuity has a place there. I think it’s not so much that there’s a hatred of annuities as it is confusion about what an annuity does.
How have annuities changed? Why is my grandfather’s annuity different from today’s annuity? And why do I like today’s annuity more than I like my grandfather’s?
I believe the industry is to blame for a lot of cases where it was unsuitable or inappropriate for a particular investor to have a particular annuity. You can’t blame the media or competitors for that. I also blame the atrocious surrender charges that we saw 20 years ago. A 25-year or a 30-year surrender charge to a retiree who’s 80 years old? How do you get away with that?
These are high-commission products, very opaque. Whatever negativity is out there toward annuities, the industry brought it on themselves, and they can’t rehabilitate themselves overnight.
FELDMAN: What can the industry do better to communicate the value of an annuity?
MILEVSKY: I think that the industry should decomplexify. I know that’s not a word yet. The industry must do a little bit more to simplify these things — all these riders and bells and whistles and features. I understand they have to be competitive. They don’t want to be spreadsheeted. They don’t want to be compared against the other. But I think it’s important to make it simpler.
Another thing is the industry must do a better job of differentiating the various types of annuities. The word “annuity” means nothing anymore. The word annuity is like saying “funds.” Do you like funds? What are your thoughts on funds? Do you mean a hedge fund? A private equity fund? An exchange-traded fund?
Now talk about annuities. You can talk about an immediate annuity, an income annuity, a registered index-linked annuity with a buffer and a cap, or a variable annuity with a guaranteed minimum benefit. Or you can talk about a deferred income annuity or longevity insurance contract or tontines. The list goes on and on.
So, the industry must do a better job of explaining the different types of funds. I’ll give you an example. If you were to talk to someone with a minimum amount of financial knowledge, they should know the difference between a stock fund and a bond fund. A stock fund invests in stocks — stocks are ownership shares in the company. A bond fund — bond is debt.
We need to raise the public awareness of the distinctions between annuities, so that at the very least, it’s the same as their understanding of the distinction between different types of mutual funds. I’ll sum it up with two words: more education.
FELDMAN: What do you think about annuities with long-term care riders?
MILEVSKY: I see a lot of discussion around the fact that stand-alone long-term care is either unaffordable or has disappointed people or the premiums have gone up. I’m a big fan of combo products — whether it’s an annuity with a long-term care rider or a combo insurance product where you have life insurance but you get a multiple, an average factor, so that if you need long-term care, you can take out much more than the death benefit amount if you can’t perform the activities of daily living.
To be honest, if you asked me five years ago what I thought about long-term care insurance, I would have said, I don’t know, it’s too complicated, but there’s the tax benefit. If you pull money out for qualified long-term care expenses, it’s going to be tax free. But I do think that combo products are the way to go.
FELDMAN: You wrote the book, Pensionize Your Nest Egg. What are your thoughts on pensionizing your nest egg?
MILEVSKY: I co-authored the book with Alexandra MacQueen. About 10 years ago, we realized nobody likes the word “annuitize.” It sounds too much like “suicide,” according to financial advisors. We believed there was another word that had to capture the process of converting a sum of money into an income stream you can’t outlive.
So we coined the term “pensionize,” and now it’s a rallying cry for people to say a sum of money at retirement isn’t a pension. How do I turn this into a pension? How do I pensionize a fraction of my estate? One way is to buy an annuity.
I think annuities help you pensionize your nest egg. There are other pooling mechanisms that can be used, but, generally speaking, an annuity will help you pensionize your nest egg.
FELDMAN: Do you think tontines will ever come back?
MILEVSKY: That’s complicated. Many states in the U.S. have laws against tontine insurance. But their problem is with tontine insurance where the dividends are reinvested for the benefit of survivors. I think if you structured it differently and built it into a whole life or a universal life policy, it should be fine.
I believe the innovation on this will take place outside of the U.S. I’m involved in at least three initiatives — all outside the U.S. — where they are trying to do this. I think that once they take off, people in the U.S. will take a look at it.
I think it’s on the way, but it will never be called tontine. My family is originally from South America, and in South America, they’re trying to introduce tontine for various reasons. But the name is a no-no because in Spanish, “tonto” means “idiot.”
So, we came up with another version where we pool a bunch of people together, we guarantee absolutely nothing, and survivors end up being subsidized by those who don’t survive.
Their rate of return is higher because of mortality credits, and it is a principle that can work on any fund structure. And I would be willing to bet that five years from now, if we have this conversation again, you’ll be saying, “Hey Moshe, you were on to something.”
FELDMAN: Another one of your books is titled Longevity Insurance For Biological Age. Why should a retirement plan not be based on somebody’s chronological age?
MILEVSKY: The problem is that chronological age doesn’t really tell us much about what we really want to know, which is how long you’re going to live. The reason chronological age is important in a financial plan isn’t because we’re looking backward.
We don’t care that you went around the sun 50 times. Why is that relevant to us? The reason we want your chronological age is we want to get a sense of how long you have left to go. You only have 10 years left? You shouldn’t be investing so much in stocks. You have 40 years left? You can invest in stocks.
Chronological age isn’t the best metric out there to figure out your future. If we really want to get a sense of your future, we need to know your biological age. There are people who are 55 years old chronologically but their biological age is 75. They’re not in good health. Either they’ve done a test that tells them their telomeres are shrinking quickly, there are other biomarkers of aging that they may have looked at, or they simply might be in bad health.
There are other people whose biological ages are 10 to 15 years less than their chronological age. They’re in great shape. You look at them and say, “She does not look 65.” It’s not just that she doesn’t look 65. Her biological age is 45.
We need financial plans that are geared toward the number that really matters — biological age.
So that’s another one of those examples where now it sounds like science. Talk to me five years from now. I think you’ll have more and more financial advisors saying, “Whoa, your biological age is so low. Good for you. Get an annuity quickly. You’re going to outlive everybody else. Go get an annuity. Because an annuity is about living a long time.”
There will be people who walk into their advisor’s office and say, “My biological age is 30 years over my chronological age.” And their advisor will tell them, “Get some life insurance and get it quickly before you don’t qualify.”
This will become part of the conversation: biological versus chronological age.
FELDMAN: What are some of the exciting products in the industry now?
MILEVSKY: I sit in the ivory tower. I live around books. But what I am seeing is a greater awareness of the decumulation phase of retirement. It’s an awareness that now we have gathered our money, and we need to spend it down.
I think that’s where the action is, and there are developments in that field. Counseling 40-year-olds on stocks versus bonds, domestic funds versus international equity funds versus small-cap funds is getting boring.
FELDMAN: What else do advisors and investors need to know?
MILEVSKY: I think advisors must do a better job of managing the suitability process and get a better handle on their client’s entire balance sheet before they make recommendations. The annuity industry must do a better job of understanding who the client is and what they really need.
I also would like to see more of an emphasis on understanding the client’s family dynamics and family network. You never hear an advisor ask, “Do you have any kids who are going to take care of you when you get old, or will you basically be on your own? Do your kids like you, or are they all going to disappear and only show up for Christmas? You have a daughter who lives near you? Are you on good terms with her? How well do you get along with your child-in-law?”
If I were an advisor, this is how I would know the more people we have to take care of you, the less stress there will be on your portfolio.
We also need to look at the gender differential, racial differential. You are more than just your age. There’s a community that you’re part of, there’s an ethnicity you’re part of, there’s a religion that you’re part of — all of them have an impact on retirement.
Advisors must know all of that in order to build a suitable portfolio for a client. I believe the future is about customized portfolio construction. It’s like personalized medicine — it’s a detailed list of everything on your personal balance sheet.
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