Mandatory Contributions Should Be a Retirement Priority

Former Vanguard CEO and author of Straight Talk on Investing, Jack Brennan discussed the current investment landscape--including recent developments in portfolio customization, the falling cost of investing, and the comprehensive benefits of target-date funds--on Morningstar's The Long View podcast.

Brennan also offered his thoughts on tackling the retirement puzzle, from accumulation to deaccumulation. Calling for more innovation in the retirement income product space, Brennan asked: How might our retirement system better serve all Americans, low-income workers included?

Here are a few excerpts on navigating and improving retirement from Brennan's conversation with Morningstar's Christine Benz and Jeff Ptak:

Navigating Retirement Amid Low Yields and High Valuations

Ptak: How would you recommend that new retirees make retirement work in this era of very low yields and arguably lofty valuations?

Brennan: This is the question of the decade, really, with all the baby boomers retiring. The best thing I think you can do is, first, get your spending in line at a level that is comfortable for you. Think about a 4% draw but plan for 2% or 3%, for a couple of reasons. It's important to conceptualize what a realistic draw off your assets looks like combined with other sources, whether it's a pension or Social Security, or both. I would suggest setting that draw as low as you can.

This is even more important in today’s low-yield environment because you get nothing on cash, which is difficult. You take a lot of risk if you go out in maturity. I recommend taking a look at a high-quality basket of stocks that will give you a yield potentially higher than a 10-year Treasury bond and a call on growth. Then, close your eyes to the volatility.

If you can do that--and then add some fixed income as ballasts--you’re in great shape. The question then becomes: How much diversification value will you get from these yields out of fixed income? Spending is the key and spending relative to your asset base is critical. If you’re 52, you should be thinking about setting yourself up for a specific retirement year where you can be in a financial entrepreneur mode living off your assets.

Improving the Retirement System for Everyone

Benz: When we look at the data, it appears that a healthy share of workers are well situated on the retirement savings rate, while other workers are dramatically undersaved or have quite literally nothing saved. Do you have any thoughts on how our retirement system might better serve all workers, including lower-income ones?

Brennan: I've actually served on a couple of task forces looking at this issue over the years. I don't know if you're familiar with Australia's mandatory superannuation system, but it's a great program. As a result of the mandatory contributions, Australian citizens are almost over saved when they get to retirement. I hope we can implement something similar. We have mandatory Social Security contributions. Ideally, we could take two points from that and put it into investment accounts, even if we said there would be a mandatory deduction into the Thrift Savings Plan unavailable until retirement. Maybe we also include a match. I think a match would be a great use of governmental dollars up to some income level. Not a high number, but for the people who don't work at a company with a rich 401(k) plan.

Mandatory contributions aren’t prioritized today, but I hope that changes because we have a crisis of equity. This is one way of closing that equity gap for people in underserved communities, people working hourly jobs where it's expensive for the employer to run a plan. I hope that sometime in the next few years we can fully address this issue.

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.