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Fixing the Wealth Depletion Phase of the Private Retirement System

Working paper #824
Jack Guttentag and Allan Redstone

Retirement planning has two phases: a wealth accumulation phase followed by a wealth depletion phase. Considerable attention currently is being paid to phase 1 issues, with a focus on developing methods to encourage retirees-to-be to accumulate greater wealth. This is an important issue that deserves the attention it is receiving. But phase 2 is equally important, and has been neglected. It is the subject of this article. The wealth depletion segment of the retirement system has three components: financial asset management, annuities and HECM reverse mortgages. All three have important dysfunctional features. Because they operate independently of each other, furthermore, potential synergies between them that could benefit retirees do not exist. This article describes each of the systemic dysfunctions that now characterize the phase 2 retirement system. In each case we describe the modifications of the system that are needed to eliminate the dysfunction, how the modified system would work, and how it would benefit retirees. We place special emphasis on the now-absent synergies that would arise between the different components of the system. The modified system we describe would be of little interest to billionaires or street people. The target retirees have wealth but not enough to assure that they won’t run out if they live long enough. The typical retiree we use in our simulations is 63, has $1 million of financial assets and a paid-for house worth $500,000.

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