Page 3 Profile
Moshe Milevsky
Human Capital
by Carolyn S. Ellis
Moshe Milevsky is Associate Professor of Finance at the Schulich School of Business at York University, Toronto, Canada. His areas of expertise include investment strategies for retiring individuals and alternative paradigms for risk quantification and measurement of long term financial market investment returns. His publications include "The Calculus of Retirement Income", and for consumers, "Are You a Stock or a Bond?" "Create Your Own Pension Plan for a Secure Financial Future" and "Your Money Milestones: A Guide to Making the Nine Most Important Financial Decisions of Your Life." Milevsky is Executive Director of The IFID Centre. He recently gave the keynote address on new technologies at the 2010 Retirement Income Industry Association (RIIA) conference.
L&HA: How did you become interested in the interplay of financial risk management and personal wealth management?
MM: In the early 1990s I was in a PhD program in mathematical physics. About a year before I was to defend, my father, who was 48 years old, developed colon cancer. He passed away just shy of his 50th birthday. I am the oldest son and I have a number of siblings under me. My family was thrown into financial turmoil, and I had to learn about estate planning, wills, insurance, and pensions. I ended dropping out of the program in mathematical physics. I went across campus to the business school to enroll in courses on personal finance, economics, accounting, and financial planning. I stayed and earned a PhD. I am a tenured professor and the department chair now.
L&HA: It seems that it's often true for medical doctors that something that happened in their lives made them commit themselves to healing. Financial advisors also have often experienced or witnessed a situation like yours.
MM: To keep the passion going, you have to be driven. If your work is just an academic exercise, maybe something you got thrown into by a thesis advisor, at some point you burn out. If it is something that has affected you personally, you spend more time on it.
L&HA:Your work is so creative, and yet your subject is one that many assume is dry and boring, even while it is so essential to our well-being.
MM: The biggest challenge to getting people to listen is the preconceived notion that money talk is going to be boring. The biggest compliment I can get is when people say after a one-hour lecture, "Wow, that was interesting!" I know that it's important, and they know it's important. The question is, "Can we make it interesting?"
L&HA: How did you get involved with the Retirement Income Industry Association (RIIA)?
MM: Francois Gadenne, chairman of RIIA, asked me if I would provide some informal input into some things they were doing. I was impressed with the well-known academics who were involved and with RIIA's objectives. They were very gracious to give me a lifetime achievement award two years ago for my research.
L&HA: Is there a North American or international slant to RIIA's work?
MM: Security during retirement isn't just an issue in the U.S. or Canada; it's an international issue. Having enough income during retirement and making sure people understand the implications of retirement are global phenomena.
L&HA: It sounds like this is lifetime learning; it's not enough for people to start figuring out retirement planning when they turn 55.
MM: Absolutely, and the tools that are going to be used to help people manage these challenges are changing as well. Twenty years ago the process of retirement planning looked very different from what it is today, and I can only imagine what it is going to look like 20 to 40 years from now.
L&HA: Sometimes I wonder if the problem is retirement or if we need to find other ways to work during this 20 to 40 year segment of life.
MM: I really don't like the word retirement. I see the phenomena as, at what point will you no longer be able to produce human capital? Many of us do a phenomenal job of working and converting time and effort into money in the early and middle periods of life, but as we edge into the advanced years it becomes more difficult. There comes an age, possibly 70 or 75, where we really can't do it anymore. By the time we are 80, honestly speaking, you can't get any more human capital, but you have 20 or 30 years of life ahead of you. How do you finance that?
L&HA: Many agents and advisors are in the enviable position of being able to work through the later stages of life, with reduced time commitment and client list.
MM: More and more people are coming to realize that picking a date and saying that is when I retire may not fit today. Retirement is a slow process that never ends. I like to look at retirement as a biological phenomenon as opposed to a vacation.
L&HA: What kinds of vehicles do you foresee to generate pension-like income for retired or, shall we call them, post-working people?
MM: With the trend of defined benefit plans declining and 401ks and defined contributions increasing, we have to think about what we can do to 401ks, IRAs, and 403bs to make them more pension-like. This is where the plan sponsors, government, and insurance companies need to get together and figure out a way to make this work.
L&HA: Is it still true that most people who have annuities don't annuitize?
MM: That was true of your old annuity. However, the distinction between people who have and have not annuitized is not very clear any more. Twenty years ago you bought an annuity for tax shelter. Now annuities are becoming instruments with guarantees, living benefits, withdrawal features, nursing home riders, and long term care. People are or will be drawing income from them. The crisis of the last year was an unbelievable shock to the industry. Carriers were giving away quite a lot in guarantees and income. Suddenly they realized this could be really expensive when the market turns down, so some of them have scaled back. I can't predict what the annuity of 20 years from now is going to look like, but it definitely isn't the annuity of 20 years ago.
L&HA: It's very difficult for people to plan ahead, when life, the economy, and our needs don't stay the same.
MM: One of the biggest challenges for Mom and Pop is what are things going to cost 10, 20, or 30 years from now? Someone with a paycheck knows intuitively whether or not there will be anything left at the end of the month. Ask someone to estimate that for 20 years from now, and they really don't know. What will inflation be? What about their income, needs, and lifestyle? All the fancy products, software, and tools that the industry is coming up with, all are secondary to the biggest issue for individuals of knowing what living is going to cost.
L&HA: What principles do you think advisors should keep in mind when working with clients?
MM: There are two competing issues that advisors need to balance. One is flexibility. Leave some liquidity, some ability to adapt to what's going to happen down the line. At the opposite end is the recognition that as we get older, living into our late 80s, early 90s, and possibly beyond, our ability to make financial decisions will deteriorate. Research shows that even before you get dementia or Alzheimer's your ability to count change and recognize that a quarter is five nickels deteriorates with age. By your mid 90s, you certainly will not be able to compute your asset allocation and whether you should have more value versus growth in your stock portfolio and whether it's more tax-efficient to pull funds out of the IRA or the Roth. You have to make decisions now that will be best for you 30 years from now.
L&HA: How do you personally deal with that reality?
MM: I want my investments on auto-pilot at some point. Now in my early 40s, I enjoy handling my investments myself. But I can tell you that if and when I get to age 80 I don't trust that I will be able to do it as I do now. That's why I like pensions so much, true defined benefit pensions that pay inflation-adjusted income for the rest of your life. Research studies show that people who have that guaranteed source of income have higher quality of life. On the other hand we want flexibility. How do we balance the two? That is the challenge for the advisor.
L&HA: What is most important for advisors to take away from this discussion?
MM: Early in life the most valuable asset we have isn't our 401k, our house, or our bank account, it's our human capital. You have to protect your human capital, so you buy life insurance and disability income insurance. When we get to the advanced stage of life, it's extremely important to protect what we have left, our financial capital. On a slightly more technical level, there is a shift from going long on mortality to going short. It's the exact opposite of life insurance. As the industry becomes aware that the bulk of Baby Boomers are moving from their long mortality years to their short mortality years, products and strategies will adjust and certainly advisors are going to have to adjust by explaining this clearly to their clients.