In the late ’90s and early ’00s, corporations changed the retirement landscape for everyday working Americans. Due to shifts in the economy and underfunded pension liabilities, corporations got rid of the pension plan. They shifted workers to a defined contribution system where the worker must save for their retirement. This massive change shifted the responsibility for retirement from the corporation to you, the individual.

Living longer than ever, many Baby Boomers and Generation Xers are entering retirement unprepared and underfunded. Some academics are worried, predicting a soon-to-be retirement crisis, and some are looking for solutions.

Who Is Robert C. Merton?

Robert C. Merton won a Nobel Prize in Economics in 1997, he is a Distinguished Professor of Finance at MIT Sloan School of Management, and he almost blew up the financial system in 1998 with fellow academic Myron Scholes and legendary bond trader John Meriwether.

Today, Mr. Merton is working with Dimensional Fund Advisors as a research scientist, focusing on strategies for funding what he calls “a good retirement for working and middle-class people.”

Our team was lucky enough to spend time listening to Mr. Merton speak in beautiful Santa Monica, California. Below we will sort through some of his ideas and research for helping people live a good retirement.

Understanding Your Retirement Goal

In retirement, we have many micro goals. Those might be taking a trip, spending time with grandchildren, or working on a passion project. But everyone’s primary goal should be to make it through retirement (also known as to death) without running out of money.

According to Mr. Merton, to fund a good retirement, you will need “an inflation-protected income for life that allows you to sustain the standard of living you enjoyed in the latter part of your working life.”

In non-finance speak, this means that your retirement goal should be to have your retirement income closely match your working income in the last few years of your career while enjoying standard-of-living increases as prices rise (this would be like the 1–2% merit increases that are popular in corporate America).

Generating a Retirement Income

The big problem is that the majority of corporations no longer offer pension funds (aka defined benefit plans). Instead, they provide individual retirement savings accounts like a 401(k) (aka defined contribution plans). So now, when people are going to retire, instead of having a steady stream of income as they did in their working years, they will have a small Social Security check (usually covers about 20–30% of working income) and a pot of money in an employer-sponsored DC plan.

Professor Merton believes people should look at their pot of money as a potential stream of income for retirement and not as an account with wealth.

For example, instead of saying to yourself, “I have a retirement account with a balance of $1,000,000,” say: “I have a retirement account with $40,000 of annual income that will last me for 25 years.” (Note: Inflation not included. Math is $40,000 * 25 = $1,000,000.)

The funny thing is, most people dream of having one million dollars. The sad part is, it won’t buy you much over a 25-year retirement!

Strategies to Improve Your Retirement

Let’s say you don’t have a pension plan or a large pool of money in a defined contribution plan. What are your options to improve your probability of funding a good retirement?

  1. Save more: This would involve cutting consumption (spending) to save more. Most financial planners recommend clients should be saving between 10 and 20% of their income.
  2. Work longer: The longer you work, the shorter your retirement timeline will be. You will also continue to make money, so you won’t be as reliant on your pot of money.
  3. Increase investment risk: Taking more risk with your retirement money could lead to higher expected returns—but it could also lead to financial ruin if not done correctly.

A fourth option is what we like to call the “ace in the hole” for our clients: equity extraction from a house or, as we call it, a home pension. This is infamously referred to as a reverse mortgage, which received negative press in the early 2000s after certain lenders took advantage of unsuspecting seniors. That said, a home pension could provide a decent stream of income for retirees. Learn more about reverse mortgages here.


Retirement for baby boomers, Generation Xers, and millennials will look way different from our parents’ or grandparents’ generation because corporations started shifting retirement risks to individuals in the early 1990s.

Start planning for your retirement now by saving and being mindful of spending. Think of your 401(k) (or other retirement savings account) as the way you will replace your working income in retirement and not as a pot of money. And consider other strategies to improve your retirement savings.