Be Wise With Your Retirement

Retirement-income strategies are big business. Financial advisers and online advice services will help you transform your savings into a steady retirement paycheck—for a fee. Some mutual funds also promise to deliver a stream of retirement income—for a fee. And all manner of annuities will guarantee you lifetime income—for fees, fees and more fees. But what if the best retirement-income strategy didn’t require you to pay anyone for advice or fancy financial products, and you could actually implement it yourself while channel-surfing and ordering pizza?

New research concludes that the best way to produce a retirement paycheck really is that simple. The Stanford Center on Longevity, in collaboration with the Society of Actuaries, conducted a study comparing hundreds of retirement-income strategies, including various combinations of variable and fixed annuities, systematic portfolio withdrawals, reverse mortgages and delaying Social Security.

One approach, which the researchers dubbed the “Spend Safely in Retirement Strategy,” works well for a broad swath of middle-income retirees, the study finds. And it’s not exactly rocket science: It involves delaying Social Security and using the IRS required minimum distribution tables to draw down your nest egg.

Generating retirement income has become a major issue for retirees, says Steve Vernon, research scholar at the Stanford Center on Longevity and co-author of the study. Traditional pension plans that guaranteed lifetime income are disappearing, replaced by 401(k)s and other defined-contribution plans that rarely offer guaranteed-income options.

All retirement-income strategies involve trade-offs. If you want to maximize your lifetime income, you’ll reduce the amount that will be left over for heirs. And if you want to boost your guaranteed income by buying an annuity, you lose the flexibility to access your savings in a pinch.

To help retirees make smarter trade-offs, the Stanford study looks at hypothetical retirees with varying amounts of savings and compares retirement-income strategies based on eight different measures. Those metrics include the change in inflation-adjusted income expected during retirement; liquidity, or the average amount of money that is accessible during retirement; and the average amount that is left over for heirs.

For middle-income retirees—those with $100,000 to $1 million in savings—the Spend Safely strategy stands out, the study found. The combination of delaying Social Security and using the RMD rules to draw down the nest egg ties together two highly efficient retirement-income strategies, says Jamie Hopkins, co-director of the New York Life Center for Retirement Income at the American College. Social Security offers some protection against major retirement risks—such as inflation, outliving your savings and the death of a spouse—and part or all of it is excluded from taxation. And the RMD strategy automatically adjusts your portfolio withdrawals to reflect your remaining life expectancy and investment gains and losses.

Although the Spend Safely strategy does not produce the highest level of initial retirement income, it generates inflation-adjusted income that grows moderately during retirement, whereas many other strategies that were studied didn’t keep up with inflation. And because Social Security provides such a solid foundation, the strategy has a relatively low level of downside risk, with potential future spending reductions generally well under 3%, the study found.

All retirement-income strategies involve trade-offs. If you want to maximize your lifetime income, you’ll reduce the amount that will be left over for heirs. And if you want to boost your guaranteed income by buying an annuity, you lose the flexibility to access your savings in a pinch.

To help retirees make smarter trade-offs, the Stanford study looks at hypothetical retirees with varying amounts of savings and compares retirement-income strategies based on eight different measures. Those metrics include the change in inflation-adjusted income expected during retirement; liquidity, or the average amount of money that is accessible during retirement; and the average amount that is left over for heirs.

For middle-income retirees—those with $100,000 to $1 million in savings—the Spend Safely strategy stands out, the study found. The combination of delaying Social Security and using the RMD rules to draw down the nest egg ties together two highly efficient retirement-income strategies, says Jamie Hopkins, co-director of the New York Life Center for Retirement Income at the American College. Social Security offers some protection against major retirement risks—such as inflation, outliving your savings and the death of a spouse—and part or all of it is excluded from taxation. And the RMD strategy automatically adjusts your portfolio withdrawals to reflect your remaining life expectancy and investment gains and losses.

Although the Spend Safely strategy does not produce the highest level of initial retirement income, it generates inflation-adjusted income that grows moderately during retirement, whereas many other strategies that were studied didn’t keep up with inflation. And because Social Security provides such a solid foundation, the strategy has a relatively low level of downside risk, with potential future spending reductions generally well under 3%, the study found.

Vernon acknowledges, however, that most people won’t feel comfortable with 100% in stocks. A target-date fund that automatically adjusts its investment mix as you age or a balanced fund with 40% to 60% in stocks, he says, “could be a good compromise.” Spend Safely isn’t set in stone, Vernon says. If you can only wait until 67 or 68 to take Social Security, “you still get a lot of benefit,” he says.

source: kiplinger.com