Financial advisers need to encourage their clients to make retirement the most important savings goal, beyond college, recreation or any other goal.
That's the bottom line message from Richard Marston, professor of finance at University of Pennsylvania's Wharton School, who spoke Tuesday in Detroit at an Investment Management Consultants Association gathering.
“The main objective of saving should be to build wealth for retirement,” he said.
Once the savings foundation is established and firmly in place, Mr. Marston stressed that the next steps include embracing an equity-heavy asset allocation, saving at least 15% of income and sticking to a 4% spending rule in retirement.
“Most people now have to fund their own retirement, although there are some lucky people who still have defined-benefit retirement plans,” he said. “If we could be born again, we'd be born as a government civil servants, where somebody else is going to pay our retirement for the rest of our lives.”
Mr. Marston said financial advisers need to impress upon their clients the importance of delaying Social Security payments until 66 in order to earn higher payments and sock away more retirement savings.
MESSAGE NOT GETTING ACROSS
“Retiring at 62 means your Social Security payments are 25% lower, but more importantly, you're cutting off four years of saving,” he said. “I don't think you guys are getting that across to your clients.”
On the asset allocation model, he said advisers should be exposing clients to 75% equities until clients reach their early 50s, at which point the equity exposure should be gradually reduced to 50% until the client reaches at 66.
Mr. Marston said he supports an even larger allocation to equities during the prime savings years but the key is to keep equity exposure low enough that it doesn't tempt investors to sell in a panic during a market downturn.
“Choose an asset allocation not based on your feelings, because your feelings are much less relevant than your needs,” he said. “The way to screw up a portfolio is to panic during a financial crisis, because the retirement portfolio will never be the same.”
A breakdown of Mr. Marston's model portfolio includes 25% in diversified bonds, 40% in domestic equities, 10% in emerging-markets stocks, 15% in foreign developed-markets stocks, and 10% in real estate.
Even though he recognizes the limits and recent underperformance of many of the global markets, he said diversification is key.
“The government finance problem in Europe is here to stay, and a case could be made that over the next 20 years, growth in Europe will not be as high has it has been,” he said. “If they settle the Greek problem, the euro is not going to stay down and I think it could really rally.”
JAPAN IS 'OVER'
He described Japan as “over.”
“We've known that for 25 years,” he said. “Japan has an aging society and they don't want any foreigner to move there, but that doesn't mean we can't make money in Japan.”
Regarding Bill Gross' declaration that the world is in a 'new normal' of tepid global economic growth, Mr. Marston said he would exempt America from that description.
“Longer term, growth will slow down in industrial countries, but I'm not so sure that's the case for the United States,” Mr. Marston said. “Just think about how much innovation we have here. We're going to have cheap energy indefinitely, and that's a huge boom. Long term, this is a wonderful thing for this country.”
Mr. Marston added he is not worried about deflation, but is worried about the “uncharted territory” of Federal Reserve policy.
“If I were on the Fed board, I would not have voted for [quantitative easing] 2 or 3, and I'm sure my term would not have been renewed, because [President Barack Obama] has made sure every board member has supported quantitative easing, and there has been very little dissent,” he said. “It is definitely the case that is has been an enormous help to investors to have interest rates this low, but it will cost taxpayers a lot of money if rates go back to normal levels, and that's scary.”