Nobel Prize Winner Robert Merton on Fixing Retirement

Welcome to the 11th podcast for new Retirement. Today, we're going to be talking with Nobel Prize winner Robert Merton, a nationally recognized economist and professor at mit, about the retirement planning landscape, whether we face an impending crisis, and what kinds of changes could materially improve retirement outcomes for people. Professor Merton has a very big list of accomplishments, some of which include he's currently the School of Management Distinguished professor of Finance at MIT, and the John and Natty MacArthur University Professor Emeritus at Harvard University. His areas of research include life cycle and retirement finance, optimal portfolio selection, capital asset pricing, option pricing, credit risk, and dynamics of institutional changes. He received the Nobel Prize in economic sciences in 1997 for our new method to determine the value of derivative securities. He's the past president of the American Finance Association, a member of the National Academy of Sciences, and a fellow of the American Academy of Arts and Sciences. He holds honorary degrees from 18 universities. He's been recognized across the world for translating financial science into practice. And he's currently the resident scientist at Dimensional Fund Advisors, where he created Target Date retirement Solutions. And we'll be talking about Target Date funds a little bit farther down here. So with all that. Professor Merton, welcome to our show. I'm honored that you would take your time to join us.

Well, thank you. It's a great pleasure to be here.

All right, I'm going to just jump in to some quick questions first. I'd love to just learn a little bit more about your early life and your education and kind of what led you to economics, because I know that you started with applied math at Caltech.

You know, well, I studied engineering mathematics at Columbia, and then I went to do a PhD in Applied Math at Caltech. And I got through all my coursework, passed my qualifiers, and was thinking about a thesis, and I bought my first share of stock when I was 10 years old. And I've always been involved in the markets. Didn't know what I was doing, didn't know I didn't know what I was doing, but learned a lot about markets from the experience and, and traded all the way through in lots of different things. So I had a lot of experience in all different kinds of financial markets. And I found that, you know, I never thought of that as a day job, but I decided at one point when I was thinking about what to do my thesis on water waves in the tank or plasma physics didn't excite me, but I was thinking about all the economics and things, and I kind of felt I had a. A little flair for that. And it's what Intrigued me, got me interested. And then I sort of heard an economist speak in which he talked about solving the major problems of macroeconomics and how the impact of that. Of course, he was very optimistic, but as a young person, I said, wow, you know, you could do something, even a little something for so many people, that'd be really cool. And as I thought more about it, I did a crazy thing, which was I decided to change fields and I upped and applied to many economics departments, having had essentially no formal economics for PhD, everybody turned me down, except for MIT, which was probably the best department in the world at the time. And they gave me money. So it made my decision easy. So I switched to MIT to do economics, and that's where I did my PhD, and now I'm here today.

Nice. So you have been trading since you were 10 years old. Have you continued to invest as a retail person, a retail investor in the stock market all the way through your life?

No, not really. I had enough of that. I, you know, at various times, I, you know, I guess, you know, when. When I learned what I didn't know and then found out what I did know, it just didn't make a lot of sense for me. And I'd done. Done it for a long time. So I don't trade individual shares or anything like that, or I don't trade options, even though I made a big contribution there. What I do is essentially help design solutions for big institutions, for retirement plans to help people. I find it makes much more sense to use what skills I have to help large numbers of people than what I can do for myself. And I really think that there's this big disadvantage for an individual trying to do it. So if it's a hobby, well, okay, but that's not something I want to spend a lot of my time for myself.

Nice. Well, I think it's great that you've chosen to apply all of your math skills, economic skills, to help as many people as possible. And I know that, you know, a lot of people speak really highly of the solutions that you're building at dfa. So it's awesome to see that, you know, before I move on, you know, since you've got this unique experience of winning a Nobel Prize, I was just curious, you know, if you could share kind of what it was like at the moment in time when you found out, and also how it affected your life once, once you won that.

Well, I guess I could start by saying I highly recommend it, you know, but no, I mean, the call always comes very early in the morning, because this comes from Stockholm. And I had no expectations to get it, but I just actually was walking out the door to catch a plane when they called. And when I found out, I was, you know, I guess that you could say really quite surprised, shocked. And then, you know, it was pretty good. I mean, if you're a scientist in the area of your field and your field offers that prize, if you were fortunate enough to receive it, there's really nothing comparable. I mean, you know, it may not matter to other people, but, you know, if you're in the field and it happens, it's, you know, they only give one in the world every year. So, you know, that's. So, of course, it's a great recognition, and it's also, you have to be lucky. I mean, it's always good to be lucky, and you have to be to win a prize like that as well. But the recognition of your colleagues and others, that they think the work was of that quality is really incomparable in terms of what matters.

Just a quick question, you know, about kind of at the worldwide level. You know, I know that some people look at Japan because it's got kind of a more rapidly aging population than we do. Do you think that there's lessons that we can take from what's happening with their society and economy as they face a kind of a much more rapidly aging population?

Well, sure, but I don't think Japan is. I mean, Japan is special in that it has almost no immigration. And I think that people there live longer than almost anywhere else in the world. I mean, they don't even start to think about that they are retiring until at least 75. I mean, it's a different environment, and they've had, in terms of their stock market over the last generation. I think off the top of my head, In January of 1990, the Nikkei, that's the index for the Japanese stock market, was 39,000. Today it's 20,000, 21,000 28 years later. So obviously, they haven't had a lot of growth in their stock market. Interest rates are very low there. Despite that, it's still a very wealthy nation. And I think many people live well, certainly in the cities. So, you know, I think there's something to be learned, but not much. I think the bigger picture is it's happening everywhere. The aging's everywhere. And. And the other thing I would say is that while we want to look to the past to learn, best practice is not good enough. In other words, if we're going to Rebuild redesign retirement systems to deal with the future. Looking at best practice, which are legacy systems, is like driving your car, looking in the rearview mirror. If what's in front of you is the same as if what's behind you, that works. But that's not the world we're in. We know the world itself is changing very much. Asia's a whole region that is growing very fast. But even in the United States, things are changing. The way we work is changing. Technology is changing. So with all these changes, the way we should provide for retirement, what we should be learning has to be on a prospective basis, using everything we know in terms of available financial technology, in terms of computer and all the technology that we have for facilitating the management of resources and dispersion of them. We need to use all of that. And we can't just look to the past and learn from who's done the best job. That's a starting place, but it's not close to being good enough. So we have to be very careful not to just try to too much depend on looking at the different systems and then trying the best parts of them and say that's what we should do going forward.

Well, I think it's pretty interesting. We are going through this, or have been going through this transition from pensions where the risk was on the company or on some entity that was kind of taking care of the individual to define contribution, where individuals are responsible for saving and then investing properly. So all that risk has been shifted to them. But what we are seeing right now is, you know, pretty bad metrics as we go through this transition. So right today, half the population essentially has almost nothing saved. And the people that do have savings or on average, you know, the savings rates are very low given what, you know, people, you know, given the extending time horizons and lifespans people need, need to fund. You know, I know you've written a lot about kind of what's wrong, and I want to kind of introduce the idea of that. One thing you've mentioned is everything's been kind of geared around accumulating assets. But I know you believe that we're looking at the completely wrong metric. We need to be looking at lifetime income. And I just want to get your take on how you think we got here and how we go forward.

Okay, well, that's a very good question and a very important one. So from now on, at least in terms of our discussion, let's presume that we're talking about a defined contribution plan. Because as you say already, the other types of plan, the Members that really don't have much to think about anything. It's all run by the company or the sponsor, and their responsibility is one way or another to provide what they promise. So if we're talking about in the D.C. world, which is really likely to be the future almost everywhere, how do we think about what is a good retirement? I mean, that's what the system is all about. And I would say this is not original with me for sure. A good retirement is if you could sustain the standard of living that you've enjoyed in the latter part of your work life throughout your retirement for the rest of your life, that would be a good retirement. We all like more. But I'm telling you, as someone who's at that age, you don't want less. So if you accept that, if you accept that as a good goal target of what your good retirement would be is to be able to sustain your standard of living, then the question I'll ask is, how do I define a standard of living? I mean, I have to have something financial to look at in order to decide how to manage the resources and what resources are needed. And I think, you know, if I moved, you know, if I visited you in your hometown and I said, gee, this is a nice town, I'd like to move here. And I looked at how you're living and I said, well, I like the way you're living. What would it take for me to live in your town like you? I doubt you'd say to me, you need $3,637,550 in the bank. I think you'd say, well, if you want to live like me here, you have to be earning about so much a year, right? I mean, that's how people would say, you know, you got to earn about that amount. You can live like me. And what is that saying? I was describing a standard living and your response was an amount of income, not a pot of money. Now, I'll give you another example. Social Security. Around the world, when you retire, what do they give you? What do they tell you they have? Do they tell you you have a pot of money accumulated? No. They tell you they will pay you so much per month for the rest of your life and they'll inflate, you know, adjusted for inflation. Right. Once again, an income concept. Then we talk about the defined benefit plans, which most employers with the type of plan they've always had, pensions. They don't tell you what you have a pot of money. They say, you know, here's what you have the rights to for the number of years worked and we will pay you this much a month, sometimes protected for inflation, sometimes not for the rest of your life. Again, an income scheme. Now, the only place that I know of in any big place of where the amount of wealth or how much in your pot, as they say, how much you would have retirement and money is the issue or even talked about or even used to measure things is in the case of D.C. plans, it's the exception, not the norm. And why? Well, there's a bit of a historical reason. And just briefly, where did DC plans come in the United States? They grew out of ERISA, the creation of the whole pension system in the 1970s. And it was really a footnote. It was somebody slipped one of those things in the big bill and it was really designed for supplemental above your Social Security and your pension for higher paid workers who were capped out in their pensions and so forth, but wanted to save more. And it's even questionable whether it was really for retirement or whether it was really more almost a nice savings account which had they got tax benefits, tax benefited saving. And because it was supplemental for higher income people, nobody paid much attention to it. There wasn't much regulatory, I mean there's regulation, but nobody spent a lot of time worrying about it. And because people already had lots of income in retirement from their Social Security and their pension plan, some said, look, I don't need to take income, I've already got plenty there. I want to have the cash. Maybe I'll just use it to save or get a boat, give, give some money to people or whatever. And that's the history. And that was fine. But now that it's being used for core retirement for working middle class people who are fine, they're not poor or anything, they're fine, they just don't have a lot extra. That's a very different use of that D.C. and now it needs a lot more attention because if this doesn't work out, it's going to be very painful for four people. And so you know, that's that focus on money rather than income partly comes from that. And if you have any doubt about income, I'll tell you this. If you look at a corporate plan, big corporation, if you're the cfo, the chief financial officer is usually the most senior person who reports about the pension to the board and the CEO. I'll give you two stories that you could have to go in and ask what do you think the CFO would choose? Story number one, we made a 20% return on our pension assets, but our funded ratio, and that's nothing more than a jargon for saying the amount of retirement income we could buy with that money has gone down. So assets up 20%, but the amount of retirement income that we had planned we could get has gone down, or we made 4% on assets, and the amount of retirement income that we'll be able to have has gone up. I promise you, they always take the second one. Why? Because if it's the first one, then he has to say, or she has to say to the board and the CEO, the $100 million that you were planning to spend on expanding the business, you're going to need it for the pension plan. That's not a good story. The second one, they can say, hey, you know, the $100 million that you budgeted for the pension, we don't need it this year. Go spend it on developing the company. I say that as a shorthand, not getting debates whether or not people want income or not. Sure, people want some cash for some things, but by and large, people like pensions. They always like pen. I've known of no employee group in the world who's marched on their employers, say, get rid of the DB plan. I mean, so overwhelmingly, I'm trying to make the case the thing that matters for retirement is the amount of income you get and not how big your pot is. And those are very different. Now, sometimes people say, well, if I have enough money, I'll get the income. It'll be fine. That's not reality. You want a quick reality? Let me just give you a simple case. I think everybody can imagine, you know, 10, 12 years ago in the United States, you could walk into any bank in the United States and get a fully insured certificate of deposit. You get 4%, 5% on your money. So if you had a million dollars, you get four, you know, 40 or $50,000 a year interest. Right? Okay. And now someone says, well, I want to keep you very conservative, so just keep your money in the safe. CDs, your principal, you know, your million dollars is absolutely safe, insured. So, say, three, four years ago, just to keep it away from Today, you go into the bank, what would you get? Not 4%. No, no, no. You get a tenth of 1%. Today you can get it up there, but you would have gotten a tenth of 1%. Now, to put that for you, that's $1,000 per million. So my million has been absolutely safe. No risk. Right. What happened to my income? It went from 40 or $50,000 a year to $1,000 a year, you're in total trouble. And you know that's you've lost 98% of your income. If I lost 98% of your retirement wealth, you'd hang me. First you'd sue me, then you'd hang me. So my point is that there's a big difference between wealth and income. Knowing I have a million dollars doesn't tell me the lifestyle that I can enjoy from that million. And what we care about is the lifestyle. So let's be clear. The goal, the purpose for retirement, not for necessarily other things, but for retirement, is to a stream of income sufficient to sustain standard of living. And that standard of living is measured by income. So what matters for retirement is income, not the value of the pot of money. And if you measure the wrong thing, let's say if, as we are in DC plans, I'm required, if I'm a provider, I have to show all the members the value of their pot. And you know, every time you go on your account or quarterly or whenever you get a report, it shows a green if the pot's bigger and it shows you a red if the pot's smaller. And if you see it go way up, you're smiling. If you see it go way down, you're frowning. But in fact, that's not really telling you how you're doing for retirement. Because what you really want to know is how much income could I get in retirement from what I have in my account? And how far am I from where I would like to be? How far am I from my goal? And that's the thing that really matters. Just like that cfo, he wants to know, or she, how close are they to funding what they've promised people in income? And so we're showing people, and we're required to show people, you know, that the wrong number, we're showing them what's happening to the value of their pot and what they should be, you know, and really are worried, should be worried about or is what is the amount? How close am I to my goal? If I need a replacement of, you know, $56,000 a year to sustain my standard of living after I retire where I don't have to save anymore? I say I was making 80,000 or something and I, you know, and now I need about 56,000 because I'm not saving. What I want to know is how am I on track to getting that? How close am I in terms of the amount of income? Risk free income, not hope for income, but risk free Income, guaranteed income, could I buy with what I have? And if that's, you know, 50,000, then I'm 6,000 short. If it's 40,000, I'm 16,000 short, and if it's 20,000, I'm 36,000 short. And whatever amount of pot it takes to buy that is irrelevant. It's where I am and how much I can actually buy. And as you heard from my example, that depends on where interest rates are. And if you look at the real world, the world we're in, I can tell you that they vary a great deal. The difference between the high, low and long term interest rates in the United States in the last 10 years. If you retired with a given pot of money, if you retired and you got an income of 100, whatever that means at the peak of interest rate, when they're high and you get 100 at the trough, at the low end of interest rate, same amount of money, you'd only get 74. In other words, you'd be 26% lower. Now think about that. 26% less of income. That's a big hit, especially for working middle class people, but for any of us. So just knowing the amount of money you have doesn't tell you how you can live. And that's the message. And we have to get that clear, both so that it's savers and people in plans who are trying to figure out how they're doing. We need to tell them the amount they can, they can buy as an indicator of how close to where they are. I mean, the number of people when they see the pot and they say, I have $500,000, that's more money I've ever seen in one place. I'm rich. Until you find out that the amount of money that you can get from that to live on is like, you know, $18,000 or $20,000 a year. And they say, whoa, that doesn't sound too rich to me. I mean, that's the kind of things that we have to get. So it's at many, many levels. We have to have people to know where they are and therefore, if they don't like where they are, to be able to take action to improve it, they need to have the right information. So we need to show them the amount of information, income they can buy and they can relate to that. So like I just got back from South Africa where we do something like this and you know, now they passed a law there that you got to have to show the amount of income that you could buy with your pot to people on a regular basis. And just think of this. You know, let's say you were living on 10,000 rand a month, which. That's about 1,000 US dollars at 10,000 rand a month. And then you see you have a pot of, I don't know, 500,000 random, and you say, oh, I'm rich. But when you show the amount of income, it's 2,000 rand a month. Now, it doesn't take anybody. Anybody can understand. They don't need any education. They just have to have lived that if they're living on 10,000 and they're making 10,000amonth and that's how they're living, and someone shows them that the amount they have in their pot will buy them retirement income of 2000, they realize that they've got a long way to go. They can. No, very few people can convert $500,000 or any amount of pot money into that relevant number, which is, how am I to where I need to be? I know I'm emphasizing this very strongly because it's really very important. And it's had some very unfortunate effects by looking at the wrong number. Therefore, how we define risk is wrong. And if we don't measure risk correctly, we can't possibly manage for people. Now that's. That's a core thing that has to change. And the only thing I would say is not the only thing the thing I would say. So I don't sound like a, you know, Mr. Naysayer. Doomsday is slowly, but we are as an industry and people, we're moving from the no attention to this, that now more and more you see the discussion of income, the discussion of how much income, discussion of when people get to retirement, how can they convert this to income, and what's the ways to do that and so forth. So in effect, I think we are slowly moving in that direction, as is are the systems elsewhere in the world. But it's moving pretty slowly and we need to help it to pick up a little bit. And so that's, I think, where we are.

Yeah, well, it's great. It's great to get that context and the history. And you know, it's interesting when you step back and look at it. Yeah, we're all focused on wealth and building that number and you know, and how that focus has changed the entire ecosystem. So now you have wealth managers and their whole job is to make that $500,000, 2 million bucks. And then the way that most of them are paid is a strip of assets. So if they can earn, you know, or you know, get 1% of your million dollars, they make 10,000 a year. If you go, if they, if you together grow it to 2 million, then they're making $20,000 a year. But they're not having that discussion, you know, their title itself, wealth manager, you know, it's, it's not like income manager, you know, shows you how ingrained this, this focus is on just growing that top line number. So you're saying basically we should just to finish, you know, we should refocus, you know, completely in terms of defining risk around the risk of not being able to achieve this income.

Yes. I think, I don't see it as inherently a conflict that people are getting paid on aum. I think your is right that we're measuring the wrong thing. But if we measured instead of measuring in dollars, you know, how much is your account worth in dollars, if we just measured in the amount of retirement income you could buy with your account using market prices, okay, not income earned in the account, but how much, you know, if I took the money in the account and bought U.S. treasury spots that started paying and you know, when I retire and paid the cash out throughout or we bought an annuity or something, we can look at those prices. If we measure things in terms of how much retirement income and you paid me a percentage of retirement income, then we could do that. And if I increase your retirement income, you pay me more and then I'd be very happy too as a provider. So it isn't an inherent conflict so much as it's the we're show. I believe is we're showing people the wrong number and that has a bad effect. So for example, if I do the right thing for you, you know, you're 62, you've done well in your retirement account. And I say to you, hey, you've got enough money to basically lock in your goal. You know, I can buy you inflation protected US Treasuries with funding that will take care of you throughout retirement, guaranteed full faith and credit. The government protected for inflation at this level of income. And you, you know, that's your goal, you know, and then I say to you, do you want to increase your goal? He said, no, I'm, I'm happy with that. That's my lifestyle. And you know, if I have some extra money, I'll do something with it. But basically that's, I'm, I'm happy with that. I don't need, you know, that's what I want to live on and safety and security of that is what matters. So then the rational thing for me, the right thing for me to do is to buy you those bonds now your income is absolutely for sure safe. But if I buy you those bonds and interest rates go up, the price of those bonds will go down. That's how bonds work. Interest rates go up, prices go down, the income stays the same. Yes, the bond price is lower, but because the interest rate is higher, you get more dollars of income for each dollar of your bond value. And so that's the whole point. Income is absolutely stable in a bond. Its value will fluctuate with interest rates. So if interest rate, especially long term bonds, which is what you would need for retirement, if the interest rates go up and let's say your bonds go from 100 to 85 and I send you put it on your account that your account's gone down 15% in your 62, you see that you'll go berserk. You're going to say you told me you were being safe for me and I've lost 15% of my retirement. Now in fact, that's not correct statement. Your retirement is defined by how much income you get for life. That hasn't changed, the value of that has. That example is the problem at the core. It's misinformation because we show them the wrong number, they get happy when it goes up, but they're actually no better off because if interest rates fall, the bond price will go up, they're richer in terms of money, but the bond doesn't earn as much, so their income doesn't go up. Therefore they don't have any better retirement. But they see it as, oh, I'm richer or I'm poor or you've lost my retirement. That, you know, from my experience is the biggest problem. It's not, it's not a conflict between the asset managers or anything. It's just we're showing them the wrong number. And we've taught people they didn't ask for that number, you didn't ask for that number to see it. When you put your money in, you didn't think most people didn't even know. But it's the number we show them, so they get used to doing it. If you've been in a D.C. plan for 30 years, you keep getting the account, you figure they must be, you know, they're showing the thing with the green or the thing with the red. They're showing it to you for a reason. So that must be what you should look at. And green means good and red means Bad. And you know, we're all that way. This is nothing, you know, this is not anything to do with IQ or training or anything else. This is just common sense, you know. And so we've taught all the members in D.C. plans that that's what they should look at and that they're better off if that number is up green and they're worse off if it's red down. And the reality is that isn't true. It's like showing people numbers that aren't relevant and teaching them to look at them. And that creates all kinds of complexity in then the management of the money. Not because there's a conflict in making money, but because we're measuring risk. Wrong rules are being written which are to supposedly reduce risk. All of them are written with the idea of risk volatility of the value of the account rather than volatility of the income. Again, if you bought certificates of deposits or 90 day treasury bills for the last 12 years, your million dollars is still worth a million dollars. And I'm not talking about inflation, but the amount of income you got has gone from 4 or 5% down to practically nothing. And that is the message. And we have to fix it in several levels. But starting with we have to agree that this is what we should be doing. We should change the way we're required to present things. And even if you're required to show them the account balance, I would put it on page seven. You know, by the way, if you want to liquidate your retirement account, it would be worth $100,000 today. You know, like, of course that's not what you're going to do. So it's not relevant. What's relevant is how close are you to your goal of how much income you need to have a good retirement.

Got it.

And that's how it should be.

Right? So we have to kind of retrain a few generations of people about what the right thing to focus on is. It's interesting listening to you describe this. And on the one hand you compare how people talk about pensions, which is in many cases they're talking about, hey, pensions have all these unfunded liabilities. And that's probably because lo and behold, maybe they're measuring things the right way. They're measuring what's their ability to make good on their obligations to pay a stream of payments. So they're actually measuring the right stuff and saying, oh, looks like we're underfunded. Meanwhile you've got all these people saving money and they're like, I'm Saving big piles of cash. But I'm looking at the wrong metric. I don't really know, like how does that translate into me actually having enough income for life? We're not really saying, you know, exactly how big is that problem. People, I think, are obviously concerned about it. But it's kind of interesting comparing how we look at these pension plans through one lens and the DC plans as you're describing it, through another lens.

Yes. And again, I underscore for pensions with professional managers, CFOs or overseas. That CFO is asking for the right number. He's asking for how much income will the plan assets be able to, you know, buy. That's what he looks at as she looks at. So this is not about. When you say retraining people. This is not about retraining people who are professionally in the pensions. If they understand that, they understand that's what matters is the income. Believe me, the problem in the DC world is for you and I and my 150 IQ, brilliant MIT colleagues, three PhDs, nanotechnology designs, and they don't know what to do with their account either. No, that's true. Why would we expect them to be able to do that? You know, I give them, I'll give you an example. I give. They have, I have to give them the past history of all the mutual funds that they can invest in. Okay? I'm required to give them that. Now remember, these are some of the smartest, most curious people on the planet, okay? These are. You won't find any better educated, smarter, more curious people. I give them that. They don't know what to do with it. I don't know what to tell them to do with it. What are they supposed to do with it? I'm required to give it. What are they supposed to do with that? How are they supposed to look at the past? Pick a good manager for the future. You know, if you're in this industry, if you're in the financial service industry, if you have the skill set to look at the past history, which is available to everyone, of mutual funds returns and predict who's going to have good returns in the future, you will get paid millions of dollars a year for that skill. And people are okay now, is it reasonable to expect even my super smart MIT people in their spare time to be able to look at these things and figure out which managers are going to do well from that data, those data and do anything meaningful? Of course not. I mean, it's just, it is so absurd to even suggest that. And yet that's what we do. But we create frustration because then my colleagues say, well, you know, why are they giving it to me? These are serious people. This is the retirement system. I must have to do something with it. And the answer is that they. Some of them just get frustrated. They say, I think I'm a pretty smart guy, gal, but I don't know what to do with it. And they're just frustrated. And then others say, oh, I'm smart. I guess what I should do is find whichever funds were up the Most the last 10 years, investing all my money in them. What else could I take to do? And of course, we all know as professionals, and that's called return chasing. That's a terrible investment strategy. Chasing after whoever did best last time. We know that whatever's right, that's not a good one. And yet what are they supposed to do? And some part of it, without overbearing. This is some part of it is we have to sit down and just use common sense. What do we expect people, even very, very smart, educated people, very curious people, what do we expect them to be able to do with this? What decisions are meaningful and what are not? What choices are meaningful and what are not? I think if you investigate, you'll find most of what we ask people what asset allocation they want, how much Thai real estate do they want. A conservative fund. All of that stuff is meaningless to people. They don't know what to do with it, they don't know how to calibrate it, and they get frustrated with it. So one of the things we can do in connection with getting the right information to people, mainly its income, is to have a rule. A rule says only give people in plans meaningful information and actionable choices. Don't ask them to make decisions about things that they don't understand, can't understand, don't have the data and don't have the experience and don't have the time to evaluate and the skills. You know, it's like if your doctor, if you're going to surgery, says, Mr. Jones, would you rather have 12 or 16 sutures? That's a choice, right? Do you have any idea? No. I say to the doctor, that's what you're supposed to do. I had to find you and I have to trust you to do it right? I can't make that decision. If you look at most of the financial decisions that we ask people to make in D.C. plans, choices of funds, risk aversion, all these kinds of things, most of it. Most of it is of that nature. It's really not meaningful. And in fact, if you just go after the meaningful information, I believe you can put the meaningful information and the meaningful or actionable choices on one page. Not a lot of complexity, not a lot of investigating funds and so forth and, you know, all that sort of things. It's a little bit like if somebody gave you all the parts lists for your car and said, okay, here's everything here, all the information, you know, here's all the parts and now you assemble your own car. How do you think that would work?

Yeah, not too well. Do you see. Right. Do you see any organizations or, you know. Well, I guess you mentioned South Africa, but organization or countries kind of making a lot more progress in moving down this path of kind of helping people. Well, one, measuring the right things and focusing on the right metrics, income and then making it simpler for people to actually have successful outcomes.

Yes, we're talking about it a lot in the United States. Whether we'll implement it well and how long it will take to implement it, I'm not sure. But there is no question in my mind here. And in the UK for example, and actually in most countries in Hong Kong, Singapore, they're all talking about that we should be thinking of income. And you know, South Africa's taken this step. Others are doing it. But by the way, if you're a provider today, you could put that number up if you wanted to. You still have to show the other, you know, the aum. But the. But you could put that number up. The problem is you won't train people right. You know, look, the way to train people is if you start putting that number, you have some explanation. But people, it's pretty intuitive to know, look, you need income to live in retirement. And here's the level of income you can buy. That's not a hard one. You know, you don't have to do any translating. You know, if it's 2,000 rand you can buy and you're living on 10,000 rand, you know, you've got a long way to go and you don't need a whole bunch of other analysis. And so I think if we start doing that as a rule and we actually de emphasize the value of the account, you put that on page two or three and call it the liquidation value. That's what I would say. Liquidation value is X dollars. So if you liquidate your retirement account, this is what you'll get. But that's not what a retirement account is there for. It's not there to be liquidated. It's there to support you in retirement. So you put this other number. I think it won't take long for people to get very used to it because they'll start to, you know, you. They'll see their income go up, they'll see a green arrow and they'll be happy, and they should be. If they see their income go down, they'll get on the phone and call up and say, why did my income go down? You know, and they'll get an answer. I mean, they may not like the answer, but they'll get it. I mean, in other words, they will look at things in the right way. I don't think it would take that long. If it's uniform, if one provider does it, it's not going to have the impact. But if it became the law, the regulation, and everybody had to do it and it was done properly, it's no different from saying you mark portfolio assets properly. You don't put them on a wish. There are rules for it, and you have rules for how you would mark the income. So that's just a detail. I think it wouldn't take very long at all. Especially if we have little green and reds. People will see, and I think they'll find it more intu. I think, you know, just think about it, you know, you know what you're living on and you know what this will buy. And that's about the easiest thing for you to figure. It's like someone says, I give you a raise. You understand that, right? You know that you don't need to have to have a financial engineer or a technician or advisor spell that one out to you. So. So that's what I'm trying to, you know, we can do it. I think we will get there. I hope we could do it better and sooner. And this is absolutely a necessity. We can't keep running a system on the wrong metrics.

Yeah. So. And I mean, I think the reality is that it's already been tested. I mean, people that had pensions, you know, were easily able to assess, oh, I'm going to get, you know, for $40,000 a year starting at age 60, from my, you know, pension as being a firefighter. They. They completely understand it, they can plan for it, and that's all they. And they. They can kind of know where they stand. So what I see a lot in our business is people are kind of thinking about safe withdrawal rates. So they're still focused on piling up a bunch of money, and then they're starting to think, okay, here's how I'm going to take this money down. What's my sick, you know, how do I draw it down? You know, what's my safe withdrawal rate? What's my sequence of return going to look like? Which assets will I tap at which time? And then they're basically managing the drawdown. You know, how do you, do you think that's realistic for people to do, for a lot of people to do, or how do you see that unfolding?

Look, you know, let me start with first of all, the answers are at some level the same for everyone. No matter whether they're working class, middle class, upper middle class, mass affluent, you know, the super wealthy or the very, very wealthy. This is not an issue, period. Okay? I mean, you know, their retirement is just not a thing. But for the rest of us, but it is different. I mean, if you're a working middle class person, you're fine, but you don't have a lot of extra. Then you're focusing on, you know, it's very, you don't have a lot extra. Therefore if something goes wrong, you know, on your income or you know, like you put your money in stocks and the stock market goes down, you know, that's going to be very painful. If you're upper middle class, you probably have more reserves than if you're mass affluent, you probably have other reserves. You have various goals. Maybe you have bequests, you know, you want to do some wealth management, intergenerational transfers, you may want to do some philanthropy, modest, I'm not talking about, you know, zillion dollars. But you have other goals besides a good retirement and that's fine. And that you can and people have that money. So you have to be careful. I'm talking only my job is to get you a good retirement. I'm not your financial planner. And it's a very bad thing to integrate into a financial, into a retirement solution like a pension or retirement integrate that it your other desires. Do you understand what I mean? In other words, I, if you want me to be your financial advisor and if you're affluent or mass affluent, you have an advisor, great, then their job is to look at your whole package of everything. All the things you want, all the things you want to, you're hoping to achieve all of that stuff and integrate it, that's great. But if it's retirement that you're focused on, and as I say, for working middle class people, there really isn't an awful lot extra beyond that. Okay? So it depends who you are, but in every case, what you want to be Looking at is drawdowns are risky. They'll say, oh, you could take 4% out of the year, and 96% of the time you'll be fine. Well, you think that's pretty safe, actually. What's the penalty? The other 4%, you run out of money. You're living. You're there, and you literally have run out of money. And the 4%, is it a rolling 4%? If your portfolio goes down, do you mean 4% of the lower value? And that's like having a. Having a floor, which is the floor of an elevator. And if you mean literally 4%, so you retire with a million dollars. You say, I'm going to take $40,000 out every year, no matter what. Well, you could outlive that. I mean, if you put it in stocks, your million could become 600,000. That's what happened between September of 2008, March of 2009. Less than a year, six months. Markets around the world more or less decline about 40%. Do you now take. Now you're taking 40% out of 600,000? 40,000 out of 600,000. That's not 4%. That's 7%. Do you see what I'm saying? And so, you know, there's lots of nice rules of thumb, and if you've got extra things, so, you know, I say, look, if it doesn't work out, I won't give that gift to my favorite charity. I'm sorry. I was going to do it, but if you got that kind of wiggle room, that's a very different situation. When you say, you know, if my retirement income isn't there, I'm gonna have to move in with the kids or I'm gonna have to do something maybe not quite so radical, but I'm not gonna be happy. And so to answer your question, you know, the way I like to look at it is a little bit like, you know, when you get on a plane and they tell you all the things to do. Seat belts. Do you remember when that, that, those, those masks dropped down? You know, and they always have a picture of a sweet little girl next to you, and your natural inclination is to put the mask on her first. Right? Is the. And what do they tell you? No, put the mask on yourself first. What's the message? First, take care of yourself. Because if you don't take care of yourself, you can't help anybody else. You're going to end up having them having to help you. You're going to be a burden. And that's the message that's my message on retirement. So you asked me about retirement. I say, first, focus, make sure you got your retirement. Now one way to do that is if you have a standard of living which you're happy with or pleased with. I mean, we'd all like more and you say that's good enough for that. Then one way to do it is to lock that in by buying a life annuity. Now, life annuity will pay and you can get ones that are indexed to inflation if you want to keep your standard living. And you know you can if you live to 120, is all the good books, promises or wishes, okay? And maybe the next generation or two will start living that long. But you know, even if you live to 120, you get paid every month. So there's no chance you can run out. Any drawdown policy has a risk that you'll run down unless your drawdown is interest. The problem is that's very expensive. You know, you have to be very, very well off. And that's not the case to do that. So let me explain to you that once you have a certain, once you get to retirement, you have a certain amount of money. I mean, that's the fact. Now if you just say I'm going to live on interest because I can't, I don't know how long I'm going to live. And so I can't spend down on principal because if I spend down on principal, I might outlive my money. And people were, everybody worries at retirement. I don't care what your IQ is, everybody worries that they're going to outlive their money. And that's why so many people, when they request something, they request it by saying, you can have my house and you can have all my money if there is any. When I die, I'm really saying I'm going to hang on to everything because I may need it. And if I don't need it, you can have it. That's not a bequest function. That's just an inefficient market because certainly your beneficiaries, you know, if I your beneficiaries, that's not a good deal for them. They could use the money when they need it, not, not when you die. And those are usually not the same time. But anyway, to go back to the point, so if I just live on interest, let's say it's, I'm going to give you numbers so you get an idea. So I'm earning 2%. Now, if I'm willing to buy an annuity with my money. Not. You don't have to put everything in that. But let's say you did everything. What happens? Well, when I buy the annuity of the money, it agrees to pay me every month for the rest of my life. And in return, so they'll pay me money for as long as I need money. And then when I no longer need money, I'm going someplace where I don't need money. Someplace better, I hope. Okay, I give up my money because I don't need it. That seems to me a pretty good deal. I'll give you all your money for as long as you need money, and in return, you give up your money when you don't need it. And if you think of it that way, what's the amount that you get? Instead of 2%, you get 5%. So the deal says if you hold your bonds, you just spend the 2% interest, whatever, you get 2% if you give up your money when you don't need it, which could be tomorrow or 35 years from now. Okay, I'll pay you 5% as long as you need it. So do you see, for the same amount of money, by moving from just living off your portfolio interest to accepting that if I don't need the money, when I don't need the money, I give it up in return, I can increase my benefit for the rest of my life, even If I live 40 years by 5%. That's a way to improve benefits without having more money. And that's the. That's what's powerful about that.

Right. I think what's happening is you're kind of running it, you know, theory is running into practice. The reality is a lot of people are uncomfortable giving up their liquidity. They want to have access, for psychological reasons, that chunk of cash, and they don't want to give it over to an insurance company to get that higher stream of payments, you know?

Yeah, well, let. Okay, but let me just quickly say on that, if it's expensive to buy a lousy product, a lousy version of a product doesn't mean the products bad. You had a car that only stops, starts one in four times, and I ask you, how do you like the car? You'd say, I hate it. So I don't know whether they're saying they don't like it because it's expensive. If they say they want liquidity, fine. So you keep 10% of your accumulation for liquidity. You don't need 100% for liquidity. That's my point. And if you remember what your choice is, you can live on 2% a year or you can live on 5% a year. Now, sometimes, you know, liquidity is nice, but that's pretty expensive to have liquidity and be able to play in your sandbox with the money. I mean, you know, that's what I'm trying to say. If you're working in middle class, the difference of getting two or five is huge. It's the difference of, you know, and that's the way you've got to look at these things. It's not like I've got so much money. I would like to have this, and I like liquidity, and I like to have a boat. And I'd like to be able to give money away. I'd like all those things, too. But the reality is, that's why it's a crisis. If people had that much extra money and was easy to get there, we wouldn't be having a crisis. We wouldn't be talking about this. So let's deal with the real world. And in the real world, we're going to have to have people in the wood ties just the same way. They got a pension, and they may not like it. They wish they had more money, but when they're faced with the choice of having a very small fraction. I did some analysis using real numbers from groups that work on that. Here, work at Dimensional on this. I said for someone in the 75th percentile income in the United States, you know, it's like $86,000. Whatever it is, I forget the number. Precisely. And if they have a replacement ratio, it's like, you know, 56,000. And if they have accumulation of, you know, 300,000 in their DC plan and they have a house that they buy a reverse mortgage on. All right, I'll just give you some quick numbers. Just living on the interest on their accumulation, plus Social Security, you always get Social Security. They would get to about roughly 50% of their goal. In other words, they would have only half what they need to have a good retirement. Half of the standard of living that they. The replacement ratio they would like. Now, if you annuitize, you get about another 20. You get from half to about 75%. Okay, now remember, it's not up as much because we have Social Security, which is actually annuity to begin with. So you already. Everybody starts with the Social Security annuity to begin with. So that's why it's not just proportional, as I said before. But I'm giving you numbers. So 50%, then you annuitize. Now you're 75%. If you do a reverse mortgage on your house and let's say, you know you're living in the Boston area and you're that income bracket, you have a five or six hundred thousand dollars house or apartment, you do a reverse mortgage on that, you can get enough to buy an annuity, not to earn interest or buy an annuity so that you get the other 25% you can go from to 100% coverage. So the difference of just living, as you say, a drawdown. This is a drawdown when you're not taking anything down, just interest. So that's zero withdrawal. You're living on interest, that would give you 50, add the annuity plus a reverse mortgage on your house and annuity. Use that money from your house to buy an annuity, which is safe to do because the annuity will pay you for the rest of your life. And you don't have to pay anything on the reverse mortgage until you leave the house, which is at the end of your life. And so it all works out. That's a way to move the needle from 50% to 100% coverage. I'm saying as a practical matter, and this isn't just for the United States, because it turns out that the saving patterns around the world are very, very similar for working middle class people. The only personal saving they do, I'm not talking about retirement accounts, personal saving, it's their house and a bank account. And the house is usually the biggest asset that a family has at retirement, often bigger than their pension and that house. This is true in China, it's true in Hong Kong, Singapore, you name it, Mexico, even, believe it or not, that is such a big asset and it's a perfect asset to do this with because it's an asset that people have. It's an asset that gives them an annuity itself because they live in it and it's the house they want to live in, so it covers it. And if you do a reverse mortgage on it and you do this, you can move yourself that far. Anything that big, in my view, has to be looked at. I don't say everyone should get a reverse mortgage. I'm not saying that. I'm saying you need to look at these two things because these are the only two things. The annuity and the reverse mortgage are the only two things for working in middle class that will move the needle other than mandatory, increasing mandatory contributions. You know, if the government, United States says everybody has to contribute, like in Singapore, 31% of their salary, we could do it that way, too. But I'm saying under the conditions we are now, as a practical matter, you're not going to get there with the kinds of saving rates we have. And we're not going to change people's saving behavior. We can mandate it. You understand? The law says you have to. But if you think you're going to psychologically prepare people, educate them to do it, forget it. That's going to take a long, long time. And it's extremely hard to change behavior of that kind. That's what their parents did. That's what their friends did. I mean, you know, we have to be practical here. So, you know, they may not like annuities. Actually, I, you know, I'm saying, you know, it's just like bequest. Bequest is a rich person's consumption. Good. If I'm rich enough to give up a quest, then I don't have a retirement problem.

Well, I also. Yeah, I also think that, you know, like, for instance, with, with annuities, you've got misalignment in the system where you may have. If you have a wealth manager who's making, you know, a percent of your assets, and then you go to them and say, hey, I want to take half my assets, save a million bucks. I want to take 500,000 bucks and buy an annuity. And then they're going to stop being paid on that money because it's going to be parked with an insurance company. They may dissuade you from doing that because they're gonna. It's gonna drop their income. And I also think with the house, you know, a lot of people, a lot of children are probably interested in, like, do I want my parents to get a reverse on the house when that means it's gonna be less money coming to me at the end? You know, I just wonder now, but you see.

All right, well, let me respond to that, because you've asked. This is a longer conversation, but I think I need to deal with it. I've actually worked a lot on, first of all, how the proper way to sign a reverse mortgage. That's a longer story. But even with the existing, you know, everybody always says this first. If you were. Let's just start the beginning. Suppose you're a retiree with no beneficiaries, no children. It's great, right? Because anything you leave is wasted. You leave the house, it's wasted. There's not. It goes to the state or it goes to your 14th cousin. You don't even know. Okay, so this is great, because what you want to do is get the most money you can from the house because you never have to pay anything on it. And then you can put the money in annuities for the rest of your life, live better. So that's a pretty easy decision. So now they say, oh yeah, but with the children, they don't like it. All right, let me ask you this. If I'm 65, retiring, you're my son, you're probably 38, you've got a 9 year old and 11 year old, you're at your peak spending for your house, you're moving in, your children double digit, they get much more expensive. And you also have college in front of you. So you have the most housing you need and you have the biggest expenses you probably need in your life cycle. Now I say to you son, when I die, you can have the house. In fact, I'm going to give you a house. And that could be 30 days from now or 30 years if I live to be 95. You will get it when you're 68. That's going to be really helpful for you, right? Getting this house at 68. Yeah, I mean you're not going to move into it, you're just going to sell it. And so how about this one? Suppose you say, dad, don't buy, don't do a reverse mortgage because it's bad for you. And I'll find plenty of literature to say that. Then I, you know how I would talk? I say to you, okay, if I, if I'm the person trying to convince your dad, I say, dad, if you do what your son says, you have no interest in this, so leave the room. And now I'm going to talk to you. I'm going to say, okay, if, if we did a reverse mortgage, if your dad did the reverse mortgage, he would get $500,000 in cash. I'm just picking a number. Let's say a million dollar house, $500,000 in cash. Well, if he does what you do, he won't get any of that, right? So he'll be no worse off. Why don't we give the 500,000 cash to you right now. You're 38 with two kids, 9 and 11 living in this house. So here's the deal for you. You get the house when your father dies in your father and mother in 30 years or 30 days. And by the way, to win this lottery you got to have something bad happen to your parents. And people don't like to wish for that. So it's not psychologically Much fun, but let's follow it through. So here's your choice, son. Your dad's out of the room. Here's your choice, son. You can do what you told your dad and you'll have this lottery. You'll get this house someday. Or I'll give you $500,000 now, today. And you have a call option that when you get the house you can either choose to pay principal and accumulated interest because remember, there's no interest paid on the, on the mortgage while it's out. So no one. There's no way that you can default on the mortgage by not making a payment because there's no payment to make. Okay, so 500,000 now plus when the house comes to you, Whether it's in 30 days or 30 years, you have the option. You have the option to say to the banker, whoever did this, keep the house, forget it. You do that if the house is worth less than you owe, right? Okay. And you get nothing more. You have your 500,000. But what if the house goes up like Southern California houses grew 20 years ago or Singapore houses the last 10 years. So it goes from a million dollar house to a $10 million house. Okay, what happens? You pay, you pay, you pay the mortgage, principal and interest and you have all the upside. So I'm offering a choice of $500,000 now never has to be repaid. Yours do whatever you want with it no matter what happens. You got it. Plus if there's any big upside, the house, you'll get it versus just getting the full upside in the house someday. I'll bet you there are an awful lot of 38 year olds. And now we're not talking about wealthy, we're talking about 38 year olds and middle or even upper middle income families. If you chose, I think there'd be a lot of 38 year olds who would like to get the 500,000 now when they need it and still have the upside. They're not selling the house. And then they're going to regret it when they say, gee, we sold the house back there at a million and now it's worth 10 because they get the upside. But now they have the 500 grand now. Now of course once if you, as my 38 year old person says, oh well, I like that, I'll do that. Now what have I done? I moved you away from your original statement to your parents, don't do it right, because now you think it's a good idea to do. And then I say to you, well, you know, it's like old joke. Once you establish the principal, we'll haggle the price. Once I got you say that you'll do the reverse mortgage. I say, you know, how about giving dad 100 grand of the 500 you're still getting 400 and the upside. How about giving 100 to your dad? That's how. How far I go, I don't know. It's that mix. But I know that if your dad gets 100, he's better off, right? Than if he did what his son said. You agree? And he's happy because he's got 400 grand plus the upside, which is he choses to do it. That means he liked that better than so do you see? I'm just trying to tell you by showing you that the bequest function that everybody says, oh, that's normal, is so crummy. I know I can get a deal. I don't want to sound like our president, but I know I can make a deal between the beneficiaries and the retiree where both of them will be better off. And by the way, for more affluent people, you know, this is great. Think about what would you call, I don't know if you call mass affluent people. They're well off. They're not super rich, but they're well off. Typically a big chunk of their net worth is a house that they live in. It's a very nice house. It's the one they want to live in the rest of their life. I know it's on Florida coast or wherever in your part of the world, west coast, whatever. Okay. But house is a big thing now. They're looking at the new tax law, estate taxes and gift taxing, and they say, hey, we can give away now, you know, an extra $5 million if they had that much. Okay. But you know, we can give away a lot of money tax free. And by the way, it was probably a good idea, not just because the money will then appreciate outside of our state, but, you know, if the other political party get in, they're liable to reverse it as happened before. You know, if you died in 2009, you paid a big estate tax. If you died in 2010, you paid no estate tax. If you died in 2011, you paid estate tax. So plenty of people who have extra money now are saying it's going to be a wise idea to take advantage of this new higher amount that you can give away. Because if you give it away, they don't claw it back if they change the law. So a lot of people are going to want to give it away. You're sitting there and say, but I can't give away that much money because while I'm quite well off, a big chunk of my wealth is in the house. I can't give them half the house. I can't change the ownership. It'll get capital gains. I mean, it's just a nightmare. Okay, Instead, I get a reverse mortgage. I give the money to my children now. So now I've done the estate planning. I've gotten it out of my state. If the law changes, I'm okay. But what's about me? I don't have to make any payment on that. It's not like borrowing on the house and then having to pay interest and principal. What happens if I lose my job? What happens if the market goes south? You know, now I'm making a leveraged bet when I borrow. But this thing, I never have to pay anything as long as I stay in the house. And if this is the house I'm going to live in, I'm trying to get you to see how powerful it just be. And this is far better than getting an extra 50 basis points or 100 basis points or, you know, an alpha or what you call superior performance on your portfolio in terms of outcomes. This is the thing that this kind of using the tools are out there effectively and efficiently is going to add so much more to the experience of people getting to a good place than getting a manager who can add. You know, you're killing yourself to get an extra 1% by having a really sharp manager, you know, and so forth. So I just try and get you to see this in a frame that you know. And if you don't get all the lyrics of this, you know, it's like a good song. If you ever heard a good song that you know, if you don't like the song, you don't care. Suppose you just a song you like. I don't buy you, but me, I hear a good song. I say, oh, I really like that. That she's singing, she's gone. I have no idea what she's saying. She's talking. But I like the song. So I put it on replay on my machine and I hear it 10, 20, 30 times. I listen to it quite often. Guess what? By the end, I know every lyric. Well, if everything I've said to you, you didn't get all the lyrics. I hope you got the melody. That there are many things we can do. They are feasible. With things that we have today, we can improve them and we Should. But what we have today, if we do it right, if we, you know, do the things, all kinds of things, and don't just sit there and say the same old, same old, same story, same reason, can't do it, can't do it. This is the way they used to do it in the past. Okay. It's that luxury. I'm just trying to point out to you, if you get the ability that we can solve this problem. I don't consider solving the retirement problem a science problem. It's an engineering problem. We know how to do it. We can get people to good places. We can't do magic. You know, people save 1%, they're not going to get there. But if they, if people, you know, do things, we can get them there. We have the tools to do it. We can design things, we can do things we can use, but we have to do it. And so it's a big task, but it's doable. So I guess you could call that overall for a crisis. It's a crisis where I think we have a way to solve it.

Right. Well, no, I appreciate that and let me, you know, just reiterate. So, you know, well, 1 65% of people are worried about retirement and how to pay for it. It's the number one worry for, from a financial perspective for people. And I'm just going to try and play back to you my takeaway from our conversation here. So one is, you know, first, measure the right thing. Instead of measuring assets, focus on income and what will your lifetime income be? The second thing is give people simpler controls. So give them more, you know, actionable choices. Don't kind of clutter up, you know, their heads with like every little detail about all the different fun choices and whatnot. But it's more like, hey, what do you need from an income perspective? How much risk are you willing to take? How much are you willing to save? What are those big levers that they can pull and kind of illustrate for them what their future looks like based on those simple controls? I think the third thing is make the whole mechanics of how the investing is done not necessarily hidden, but just a lot more abstracted from the person. Don't make them get involved with every detail, but, but kind of have it make sure that it's being done in an efficient way that is focused on this income at the end. And the last thing would be really focus on or be open to using different or existing tools that are out there today, like annuitization, like accessing home equity through a Reverse mortgage, Target Date funds, whatever it is, use the products that are available today to actually realize income versus kind of of pulling your hair out trying to manage your portfolio in a perfect way for all these unknowns around inflation, life expectancy, volatility in the market and interest rate changes and everything else. Did I get that right?

I think so. I think the only thing I would want to underscore, you mentioned Target Day funds that I don't think target Danish funds satisfy a solution. I think they, because they have no goal and because they don't update information about the person you know, the only thing that they do is give you a glide path based on your age. And I know you. If I know your age today, I know what your age will be a year from now or 40 years from now. So that means they have an investment strategy for you that is designed to manage your money with no updates because you learn nothing. The Target Date Fund, the only thing it uses is age. And I know in advance exactly what your age will be. So would you really think that you could. That the best or approximately best strategy could be something, that something is complex, that you're starting out at 28 and you're working, doing one thing, and you're going to retire at 68 and you don't even know where you're going to be at, who you're responsible for and all the things that will happen in between and somehow that I don't need to use any information about you. Such as, for example, you know, you and your twin start out exactly the same. Same firm, same everything, the same income, the same job. And one day you get called in by the, by the. Your boss and he says, you doing a really great job. We think you're very good. We're promoting you. We're going to bump Your income up 20,000 a year from 35,000 or 40. Big, big jump, right? 50% income. Your twin didn't get that. You and your twin were identical just before this, right? You're getting everything the same now. You're a 20%, you're 50% higher standard of living than your twin. Do you need the same amount of retirement money as your twin? No. Do you have the same investment profile? No. Does the target Date fund differentiate? No. You're the same age, you were born 20 minutes apart. The target date funds don't use any new information. It is not conceivable in a world that we're in that something that simple could solve the problem even closely. Is it better than other things? Oh, yeah. I could find lots of things that are worse. Trading forex on your screen after work in your retirement account probably would not do very well. You know, putting all your money in collectibles. I mean, I can find an infinite number of ways to poorly perform. So the fact that it's better than some of the things we used to do, I give credit to, but not much. The thing you need is, and I, you know, there are various versions, I'm not going to advertise any, but you need a system that adjusts to both market and personal information and adjusts what is best for you. And if your goal changes because you get a big income increase, because now you need to have a higher standard of living, you're going to have to do catch up. Why? Because you've been saving for one standard living. Now you're going to have to save for a higher standard of living. You'd have to make up for, you know, for a while to catch up where your twin didn't. Target day funds don't do that. So I'm sorry, I won't sign on to Target day funds are good enough. They're not now a target income fund. Target date income fund is better than a target day fund because at least the target date income fund recognizes that income is the goal and puts your fixed income part in appropriate maturity. Bonds or annuities to match. But let me be very clear. I do not think that target day funds qualify as a proper retirement solution. We can do much better than that. And so I just want to make clear I'm not endorsing as good enough by a long shot from what we can do. And one last thing, we all hear about fintech and robos. Well, I've been doing fintech for almost a half century using computers and other things. So it's not new in that sense. But what it will do is it's going to accelerate all of this because no, you know, we can now do much more complicated things than just look at your age, which requires nothing. And therefore, you know, people are going to get just by competition, you're going to find people providing, you know, things that allow you to adjust to changing circumstances and they're going to put it on computers and I'm going to make these services available eventually with trust created by whoever does it. And that's important, they're going to have it. And you're sitting there telling people it's good enough. I knew you when you were 28. I know your age when you're 68. And that's good enough to manage your money for the next 40 years. I don't think you're going to find yourself competitive. So I think that it's not that fintech is going to be the thing fintech is going to probably is certainly a part of the enabler. And my guess is that this is going to accelerate the process in which management of money takes place. And I think if you're a professional on the management side, you better start to realize that life as usual isn't going to stay that way. And, you know, which is to me, just fine because I think we can build much better things. All right. Sorry to run off.

No, no, no, no, no.

I wanted to make sure.

Yeah, no, I appreciate that. And you know what? I'll have to. In another 30 days, I'm going to have to ask you. I'll send you what we're doing with our planning tool because it does let people, you know, build a kind of a high fidelity or a pretty precise picture of where they are today. And then the idea is that it's a living plan and it does let them kind of model different switches. Like, okay, what if I delay Social Security? What if I work longer? What if I annuitize half of my assets at a certain point? What if I sell my house and downsize or get a reverse mortgage or there's all kinds of things they can model in our tool. And I think we totally agree, technology is going to enable, hopefully better decision making, simplify this for people, make it more efficient, lower costs, you know, which I think everybody wants, and hopefully lead to much better outcomes, which is, you know, what you're trying to solve. And we're working towards that as well.

Yeah. Now just also the, you know, on what you sent me, I had written, I had created Target Retirement Solution and. But somehow it was referred to as target.

Income funds. Right. Is that not correct?

No, we dimensional does have target date income funds. And yes, because I brought income, I concept and everything to dimensional and so forth in that sense, I am also at least part creator of that. But I have no, I do not say that's a solution. I say it's better than a target day fund. But Target Retirement solution is the thing that, you know, a version of what, you know, because you did all the programming, I mean, so. So you know that it does adjust to changing goals, person, you know, change personal situations as well as market conditions. So I just want to, you know, be clear on that because sometimes if something gets in print or put on a podcast, it never Goes away and then someone pulls a clip and says, he said, target date funds are fine and I don't want that ever on the record. No, well, that's not true.

Yeah, we'll definitely be clear about. Okay, we'll make sure. And is the target, you know, the target retirement system is that live?

Well, we just put. Well, when I say we. I just got back from South Africa where it was a version, it's a South African version, but was just launched by Alexander Forbes, which is the largest institution for DC in the country. I think it has 25% of the market and DC is the entire retirement system in South Africa. In other words, the safety net is so small you can't see it. And there is no, you know, there is in that sense no Social Security except what you put in your DC plan. So in that sense, it's kind of similar to Australia but without the sort of safety net. So. And I think the name of their product version of this is called Clarity. And it does all, it does all the things that I said. Now can you improve it? Yes. Does it have to satisfy South Africa law today? Yes, but in fact, it does adjust to both personal and as well as market conditions. It does focus on income. It does put people's income, part of their portfolio into indexed, proper maturity. Done. It's essentially immunized based on their retirement dates. And you know, so they're doing it and South Africa is, you know, I don't know if you've looked at it, but it's actually got a fairly sophisticated financial system. It has linkers out to 2050. It's got a very well developed annuity market. Alexander Forbes is a huge full service thing. I mean, it has annuities, it has everything. It has platforms, it has custodian, you know, it's, it's a full, it's a very, you know, it's a very big entity in South Africa and they've launched it so.

Well, I'm glad to see it getting, getting used out there.

Yeah, no, it's going to launch in some other countries too. It's, it's a little slower in the US we got it here, but it's a little slower in the US partly because of regulation, but any case.

Okay, well, hopefully it gets fully realized because I think that would be awesome. So thanks, Professor Merton, for being on our show. Thanks, Dado Robeson for being our sound engineer. Anyone listening? Thanks for listening. Hopefully you found this useful. Our goal at New Retirement is to help anyone plan and manage their retirement so they can make the most of their money and time. We offer a powerful retirement planning tool and educational content that you can access@newretirement.com and we've been recognized as Best of the Web by groups like the American association of Of Individual Investors.