Low-cost ways to build a retirement plan amid market uncertainty

David Blanchett, head of retirement research at Morningstar, joined The Final Round to discuss ways to build a retirement plan that won't break the bank.

Video Transcript

SEANA SMITH: Welcome back to "The Final Round." I'm Seana Smith. Now, the economic downturn from the coronavirus pandemic is causing many Americans to rethink their savings plans for retirements, and also, the best way to go about it. So for more on this, we want to bring in David Blanchett. He's head of retirement research at Morningstar.

And David, let's just start with the fact that we're in the midst of a pandemic. We've been talking about, here on the program, how there's so much uncertainty right now in the markets. So I think there's a little bit of confusion out there, just about what people should be doing with their retirement savings. What's the best way to save for retirement at this point? So what are you telling your clients right now?

DAVID BLANCHETT: Sure. So, it's obviously a very difficult time. And individuals that can save for retirement-- my advice is actually to save more. And I know that sounds a little bit crazy, but we've got yields on government bonds at 50 basis points. And we're not sure how long this will last.

But what it means is that if we can't expect to earn a high rate of return in the markets, you've got to save more for retirement. And so, if you want a low cost way to get there, I'm a big fan of 401(k)s and saving in targeted funds. But savings is going to become a bigger drive for retirement success for most Americans in the future.

SEANA SMITH: And David, I want to open up the notes that you recently pointed out in the papers that you've worked on in the past-- is the value of allocating to annuities, which I thought was interesting. So just talk to us about the benefit of this and why you think this, specifically, makes sense right now.

DAVID BLANCHETT: Sure. So annuities is, kind of, a dirty word. People have very different perceptions on annuities. And I think if you want more guaranteed income, the best place to start is usually just delaying social security.

And it's a complicated effect, but the value of buying an annuity actually increases the lower that interest rates are. And so if you're a retiree who's going to invest in fixed income, as opposed to earning 0.5% or 1% on a bond, you can actually earn equivalent of like 3% or 4% by buying an annuity. So if you're someone that likes safety, annuities are actually a much better yield today than they were, say, three or four years ago.

SEANA SMITH: Just broadly speaking-- because I think so many people struggle with this when they're trying to figure out how much they should save. And I know you were saying that if you're in the position right now, you should be allocating more to your retirement funds. But what do you need to retire? What should the target be?

DAVID BLANCHETT: So there's really no one number for everyone. I think a decent rule of thumb is to make sure you're saving at least 15% of your pay. And that's a combination of your contributions and the employer contributions.

But here's the thing, a lot of the math we use to figure that out uses long term historical averages. Again, it's not clear how long rates today will last. But if they last for five or 10 or 15 years, to be honest, 20% plus is the number. But that's not realistic.

And so I think that there really are important questions, right now. If we have this low rate environment for a long time, what it means for retirement success.

SEANA SMITH: All right. David Blanchett, head of retirement research for Morningstar. Great to have you on the show. Thanks so much for taking the time today.

DAVID BLANCHETT: Thank you.