Spencer Look and Jack VanDerhei: The Assumptions That Can Put Your Retirement at Risk

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Amy Arnott (0:36)

Hi, and welcome to The Long View. I'm Amy Arnott, Portfolio Strategist for Morningstar.

Christine Benz (0:41)

And I'm Christine Benz, Director of Personal Finance and Retirement Planning for Morningstar.

Amy Arnott (0:46)

Today, we're happy to welcome two guests from Morningstar Center for Retirement and Policy Studies. Spencer Look is Associate Director of Retirement Studies for Morningstar. And Jack VanDerhei is Director of Retirement Studies for the Center and previously worked as the Research Director at the Employee Benefit Research Institute from 1996 through 2022

So Christine, Spencer and Jack both produce a lot of really helpful research on retirement outcomes, social security reform and retirement policy. So we'll get into all of those topics in our discussion. And one of the highlights was their more balanced take on whether there's really a retirement crisis in the US. We hear a lot of really dire warnings about that. And so I appreciated their take on where there's room for improvement, as well as some data on maybe things aren't quite as bad as some people might have us believe.

Christine Benz (1:57)

You won't be surprised to hear that I really liked the discussion about long-term care. And Spencer and Jack have both concluded that the retirement planning community has underrated long-term care as a risk factor for people's retirement plans. So I like delving into that.

Amy Arnott (2:14)

All right, so let's get into the discussion. Jack and Spencer, welcome to The Long View.

Spencer Look (2:22)

Happy to be here. Thank you so much for having us.

Amy Arnott (2:25)

Well, thank you so much for joining us. Maybe you could start by giving us some quick background on the Morningstar Center for Retirement and Policy Studies. How did the center first get started? And what's the mission you're trying to accomplish?

Jack VanDerhei (2:40)

I'll jump in first if you don't mind, Spencer. The Morningstar Center for Retirement and Policy Studies actually started about four and a half years ago.

And what it is, is a center that allows us to provide empirical evidence that lets policymakers, plan sponsors and other stakeholders understand the trade-offs in terms of proposed legislation, proposed regulation and different types of plan designs. So instead of just coming up with a single headline number, we provide very, very detailed information.

Christine Benz (3:22)

Spencer, I'm wondering if you can talk about one of the linchpins of the work that you need to do at the Center, the Morningstar Model of US Retirement Outcomes. Can you talk about how it works and what makes it different from more traditional retirement analyses?

Spencer Look (3:38)

Yes, I love this question. The model that you just referenced, that's our flagship model for the Center, powers a lot of the work that we do.

It is a household level micro-simulation model. Think a Monaco type of approach for the audience out there. We built this on top of a government survey, the Survey of Consumer Finances, which is a representative sample of the US population. Then we model, project as people go forward and work, do their career, go into retirement. We are very granular with what we're doing, kind of echoing what Jack was saying with the mission and kind of goal of the center. We incorporate people's wages, savings, job changes. You know, upon job change, do they cash out their retirement plan? We reflect pre-retirement withdrawals. Of course, moving into retirement, we incorporate social security, spending models, longevity, long-term care. It's a very detailed model that goes through a lot of this really messiness in reality to produce a distribution of outcomes on retirement and income adequacy. So the goal here is to analyze retirement income adequacy.

We don't just stop at a wealth balance or a replacement rate. We use that approach to look at how likely it is people can run short of money in retirement. The really big differentiator for us is leaning into the behavior. So instead of assuming people follow a set schedule, they always save 5%, 6% just as a simple example. Our frameworks are going to be dynamic. They change and reflect as people have a new job, a new type of plan, as they make more money, get older. Very clearly the empirical data shows that people's behaviors can change. So we're reflecting that in our framework and I think that's what really differentiates us with our modeling approach.