There is not a single perfect income retirement solution. The tradeoffs are what is the amount of income you expect to get throughout the rest of your life, how much wealth or liquidity you have — some people want to have bequests they can offer at the end of their lives — and implementation, simplicity, and costs. All of these involve tradeoffs.
These key retirement tradeoff decisions may include:
- Maximizing lifetime income
- Providing access to savings (liquidity)
- Planning for bequests
- Minimizing implementation complexity and costs
- Minimizing income taxes
- Political/regulatory issues (changes in laws or regulations on retirement plans or Social Security, or the taxation of these benefits)
- Protecting against common risks:
- Death of their spouse
- Cognitive decline and mistakes
We are not saying that there is a one-size-fits-all solution.
For example, if the goal is to maximize the amount of income, that might be at the expense of reducing your accessible wealth or liquidity or reducing your bequests.
- Make sure the money lasts for the rest of your life — inflation, investment risk, also known as sequence of return risk, and death of a spouse — you want to make sure the money keeps going after one spouse dies, which means accepting less monthly income now from lifetime sources while both spouses are alive.
- Protect against cognitive decline or making mistakes or fraud in later years by converting liquid assets into illiquid annuitized income.
- Minimize income taxes might mean reducing income and focus on capital gains.
These are all the common risks that people might face.
It is a lot to juggle, but people are resilient. Moreover, if we can get simple solutions that address many of these risks and get people close to financial security, then it is reasonable they can adjust their living expenses budget from there. That is really the point of the Spend Safely in Retirement Strategy.
Visit Retirement Insight and Trends, InFRE’s quarterly newsletter for retirement professionals, for a summary article of this presentation.
This presentation introduces the Spend Safely in Retirement Strategy, which is a straightforward method for middle-income workers to generate reliable, lifetime retirement income from any IRA or 401(k) plan. This strategy was one outcome of a substantial research project conducted by the Stanford Center on Longevity, in collaboration with the Society of Actuaries.
This project analyzed and compared 292 retirement income strategies, using stochastic forecasts and efficient frontiers, powerful analytical techniques that large defined benefit plans use to devise funding and investment strategies. It then developed eight metrics to fine-tune comparisons of 21 of the most promising strategies. Using these analyses and metrics, the Spend Safely in Retirement Strategy compared favorably to the many strategies analyzed in the project.
This webinar course is available as one of more than sixty Retirement Resource Center recorded webinar online courses for which you may receive 1 hour CFP®, CRC®, CLU®, ChFC®, RICP®, CASL, ASPPA, and other certifications continuing education (CE) credit. Courses are available individually, or become a member to have full access to all courses at a savings.
Steve Vernon, FSA, MAAA, Research Scholar, Stanford Center on Longevity, President of Rest-of-Life Communications:
In both of his roles as Research Scholar at the Stanford Center on Longevity and as the President of Rest-of-Life Communications, Steve is active with research, writing, and speaking on the most challenging issues facing retirees today, including finance, health, and lifestyle.
We make it easy for you to stay on top of retirement and earn relevant CE.
Read the Key Retirement Takeaways by Steve Vernon from “How to “Pensionize” Any IRA or 401(k) Plan”:
- Takeaway #1 for Advisors: Key tradeoff decisions are required in retirement income planning.
Choosing a specific solution to generate retirement income requires making informed tradeoffs between potentially competing goals.
- Takeaway #2 for Advisors: We compared 292 potential retirement solutions.
See an efficiant frontier for potential retirement income solutions that shows their tradeoff between income and remaining wealth.
- Takeaway #3 for Advisors: For most middle-income retirees, Social Security represents a substantial portion of their retirement income.
Social Security is the near-perfect retirement income generator for most middle-income retirees, from two-thirds to more than 80 percent of their income.
- Takeaway #4 for Advisors: The Spend Safely in Retirement Strategy delivers equal or greater income throughout the life of a retiree.
The Spend Safely in Retirement Strategy delivers equal or greater income throughout the life of a retiree compared to 292 other strategies.
©2018, Steve Vernon. All rights reserved. Used with permission.