The Retirement Problem No One Can Solve? Not So Fast.

Financial planning expert Rob Berger says the biggest challenge in retirement planning is one that no one can solve, since nobody knows how long retirement will last.

David McKnight shares his disagreement, and explains why a financial product designed for exactly this problem – annuities – may be the answer.

Show Notes

In this episode, David McKnight responds to Rob Berger’s video The Retirement Problem No One Can Solve.
Rob compares retirement to entering a race without knowing how long it is, how fast you can safely run, or when someone will tell you that you’ve reached the finish line.
David thinks Rob did an excellent job of identifying the problem, but he strongly disagrees with the premise that no one can solve it.
The fundamental challenge for every retiree is that you don’t know whether your savings will need to support you for five, twenty-five years, or longer than that.
David shares a different analogy, inspired by retirement economist Michael Finke: a birthday party with one large cake and no idea how many children will show up.
The cake is the pool of money you’ve accumulated, the children are the years you’ll live after retiring, and the slices are your annual retirement income.
If you cut the cake into thirty tiny pieces just in case, and only five children show up, everyone gets an unnecessarily small piece and most of the cake goes uneaten – that’s traditional retirement planning.
You ration your savings as though you might live to 95, 100, or beyond, and if you die earlier than expected, you leave behind a very large portfolio because you were afraid to spend your money.
According to David, Rob is wrong in saying that no one can solve this problem, as annuities were literally invented to solve it.
Imagine a bakery promising to keep delivering more cake if you run out. You’ve transferred your longevity risk to the bakery, which is what an insurance company does.
An insurance company doesn’t need to know how long you personally will live, it only needs to estimate, with reasonable actuarial accuracy, how long a large group of people will live.
An annuity doesn’t tell you how many children are coming to the party, it guarantees that you won’t run out of birthday cake.
This isn’t a new or controversial concept, economists have been studying it for at least six decades, including in Menahem Yaari’s 1965 paper.
Annuities can support more retirement income than a portfolio alone because of risk pooling and mortality credits.
If you rely exclusively on a stock and bond portfolio, you have to self-insure against the possibility of living to a hundred.
Ernst & Young compared investment-only retirement strategies with strategies that integrated permanent life insurance and deferred income annuities, using 1,000 Monte Carlo scenarios.
They found that strategies combining investments with deferred income annuities produced more retirement income than investment-only approaches.
One integrated strategy produced 5% more retirement income and 19% more projected legacy than the investment-only strategy.
Critics often assume an annuity must reduce what you leave to your heirs, but if guaranteed income prevents you from selling investments at the wrong time, you can end up passing more to your children and grandchildren.
Sounds interesting? Start by identifying your essential retirement expenses (housing, food, etc.), then subtract reliable income like Social Security and pensions.
If a gap remains, use an annuity to fill it with guaranteed lifetime income, and the remainder of your assets can stay invested for growth, discretionary spending, emergencies, and legacy.
The 4% Rule tries to solve the same problem without transferring longevity risk.
In other words, you may live 10 years and could have enjoyed larger pieces, or you may live 35 or 40 years and the framework becomes increasingly uncertain.
That’s why retirees with portfolio-only strategies often underspend: they experience their portfolio as one finite cake instead of spendable income, while an annuity gives them permission to spend because another check is coming.
Ken Fisher has argued that whatever an annuity can do, a conventional portfolio can do better.
David disagrees, asking: “Really? Then why are we calling longevity an unsolvable problem?”.
A portfolio can provide growth, liquidity, dividends, and legacy, but it can’t guarantee that your income will continue for the rest of your life, regardless of market performance and how long you live.
You don’t solve longevity risk by predicting how long the birthday party will last… you solve it by guaranteeing that the cake never runs out.