S&Co. & WJCT Present: Guest Speaker Dr. David Babbel, Professor Emeritus at the Wharton School of Finance
Professor Babbel will speak with us about his personal retirement strategy, which he wrote about in NAFA magazine. Portions of that article are excerpted below.
- 5:30PM – Registration & Reception
- 6:15 – 7:15PM – Program
- Light Refreshments Provided
Unprecedented Retirement Challenges
“We live in an era that is unprecedented since 1950 in terms of the extraordinary economic challenges that face a person preparing for retirement. For the vast majority of us, there will be no pensions similar to those that have provided income throughout the remaining lifetime of past retirees. Instead, we have defined contribution plans whose returns can be positive or negative, depending on our investment prowess or (mostly) sheer luck (or lack thereof).”
Fixed Income Uncertain
“The safety net we have backing us is shredded. We have an overburdened social security system that thrived in past decades on the backs of an ever-increasing working population. My generation (the “boomers”) spent much of its resources on funding the previous generation, who were provided huge social security benefits relative to their payments into the system. We also had to fund our own benefits, yet our payments have been diverted for general federal expenditures and left us with little more than an unfunded promise. The next generation is unlikely to be willing or able to fund us, as they are much smaller relative to the number of people who will be entering retirement. (There used to be 8 workers for each retiree, but shortly we will have only 2.5 workers per retiree.)”
How Professor Babbel Himself has Planned for the Challenges
“In this talk, I will explain my own approach to dealing with the approaching challenges. I recognize that it reflects my own risk tolerance (which is low) and my own circumstances. It is not a perfect plan, nor is it a foolproof plan, yet it is the best that I could come up with for my wife and me and it might have some applicability for others who face similar circumstances.”
What are Professor Babbel’s Qualifications?
“My own background might provide a useful backdrop to understand my choices. I received a B.A. in economics, an MBA in international finance and a PhD in finance. I have taught investments courses, fixed income, portfolio management and insurance courses since 1978, when I began my academic career at the university of California at Berkeley. After serving on that faculty for six years, I completed a postdoctoral fellowship in risk and insurance at the Wharton School of the University of Pennsylvania and became a professor there, where I taught courses both in finance and insurance. I have published over 100 books and articles on investment and insurance topics, most of which were peer reviewed. I consulted with some of the largest financial institutions in the world, and have also consulted various government organizations, including the Treasury, Federal Reserve, Office of the Comptroller of the Currency, Commodity Futures Trading Commission, Department of Labor, Pension Benefit Guaranty Corporation, and others. I took a leave of absence from Wharton beginning in 1987 and worked on Wall street at Goldman Sachs. My time there was divided across several departments, including the Financial Strategies Group, the Fixed Income Division, the Pension and Insurance Department, and Goldman Sachs Asset Management. Later, in the 90’s, I took a second leave of absence and worked as a Senior Financial Economist at the World Bank, where I helped developing countries strengthen their capital and retirement markets. I returned to Wharton and continued there until I became a Professor Emeritus a few years ago (although I still teach there occasionally) and entered the consulting world, where I continue to conduct research and advise financial firms. My specialty is helping financial firms invest in such a way that their economic risk is minimized in the face of volatile market conditions. This is accomplished through the creation of asset-liability matching and dynamic hedging strategies such that their assets and liabilities move in value in the same direction and by the same amounts under various economic scenarios. My point in rehearsing this background is that I should be reasonably equipped to manage my own investments during retirement, yet I choose not to, for reasons I will discuss in this talk.”
Creating a Simple, Conservative Solution to a Complex, Risky Problem
“The situation I faced a couple of years ago was that I was rapidly approaching retirement age, and the investment world was undergoing a transformation that made it most difficult to plan for retirement. I had only a small pension from Berkeley ($900/month, complete with the full faith and credit of California standing behind it!) as well as the university equivalent of a 401(k) from Wharton. And, of course, I have social security, which is a system that has been skewed to subsidize the poor. Although I had built up a reasonably gracious lifestyle, I recognized that to maintain it in retirement, I would have to supplement those resources. As I turned to my academic colleagues from Berkeley, Wharton and elsewhere, and my Wall Street colleagues, it quickly became apparent that there was no consensus among those who specialize in investments about what should be done. Indeed, I found that many were just as bewildered as I was. I consulted with other investment professionals as well, but found their suggestions often did not address the main problems that I faced in a manner consistent with my low tolerance for risk. Many had no ideas at all regarding how to deal with the mess that we face. Among those who did have suggestions, they amounted to risky bets on continued low interest rates, spiking interest rates, deflation, hyperinflation, precious metals, real estate, junk bonds, hedge funds, private equity, stock market bubbles, bursting bubbles, foreign exchange rates, and so forth. I felt that I had accumulated sufficient savings that I shouldn’t need to take risky bets and relegate their outcome to luck.
“IN THIS TALK, I WILL FIRST DISCUSS 10 OF THE MOST IMPORTANT FINANCIAL CHALLENGES TO FUNDING RETIREMENT:”
- Longevity – not knowing how long you will live, hence, how many years you must fund
- Inflation/deflation – protecting the value of your future income
- Personal cost of living – this does not closely track the general rate of inflation, but ultimately it matters
- Liquidity sufficient to cover extraordinary events (e.g., new auto, roof, uncovered disease, etc.)
- Tax – confiscation of wealth
- Litigation risk
- Insolvency of firm standing behind securities/insurance
- Diminished investment capacity
- Protection from the kids!
“THEN, I WILL DISCUSS MY PERSONAL STRATEGY TO ADDRESS THESE CHALLENGES”
“None of the traditional retirement strategies covers all of these (10 challenges) and some simply amount to dubious bets on the direction of interest rates, inflation, benevolence of kids, no litigation, etc. My personal approach to addressing and balancing these risks includes deferred and immediate annuities in an innovative and responsive, albeit simple way. I will not be able to cover it fully in this limited time. I will not discuss long-term care insurance, uncovered medical expenses, trusts and life insurance. However, I will describe the essence of my strategy in a manner that should help you see whether or not it offers elements that might be useful for your own situation. My approach is prone to leaving some money on the table, but it allows me to sleep at night. I have no interest in keeping up with the Joneses, who might well surpass me if their stock or precious metals bets turn out right; rather, I have an interest in maintaining my lifestyle as long as practically possible. Nothing more, nothing less. I should disclose here that I have no products to sell and never have. I don’t endorse any particular investment or insurance companies, brokers, agents, or specific products. I do not engage in any personal consulting on these issues.” (Note from Stratton & Company: Dr. Babbel is our guest speaker and not affiliated with our company. Attendees will be invited to meet with us to discuss your own personal retirement strategy, and insurance and annuity products are offered at these one-to-one meetings. No obligation.)
A Strategy for Conservative-Minded Retirees
“Our personal strategy is to get on base, not swing for the fences. (Too many of my colleagues have done the latter and are back in the dugout, or worse.) It addresses each of the aforementioned retirement risks in various ways. None of our approaches is without at least some risk, but in most cases, we are avoiding substantial risks that face most people in my age cohort. Now some naysayers will undoubtedly berate our retirement strategy. These naysayers will come in several flavors. Some will be true experts and be able to enhance our strategy with some excellent ideas. We welcome any suggestions, as long as they are not too complex, costly or difficult to implement, because we want to be able to fully understand and oversee our assets as long as possible. Other naysayers will criticize our strategy because we are leaving too much potential money on the table by not undertaking greater equity exposure. Let them criticize, and let us sleep.”
There is no cost to attend, but reservations are required and space is limited. RSVP requested by June 5th by 5PM. Call 904.358.6322 or or click the button below.
5:30 pm - 7:15 pm
100 Festival Park Ave.
Jacksonville, Florida 32202