We believe that applying the language and concepts from modern portfolio theory, that has worked so well in accumulating money, those same concepts should apply in the retirement period. This has been a major focus of work at the Stanford Center of Longevity, and we have been collaborating with the Society of Actuaries.
Our 2017 study, “Optimizing Retirement Income by Utilizing IRAs, Retirement Plans, and Home Equity”, is the culmination of several other projects that we have done jointly with the Society of Actuaries.
If you look at the statistics, roughly there is the same amount of money in employer-sponsored retirement plans as in IRAs. Then there is about as much money in retirement savings as there is in home equity. Everybody is a little different in that mix, but we think that Americans are going to need to learn how to integrate all three of these sources as they approach the retirement years. In this study we have taken a portfolio approach toward combining these different sources.
We put together a systematic comparison of different retirement income strategies and looked at viable solutions that are currently available in the DC marketplace, the IRA marketplace, and reverse mortgages. We did not dream up new solutions that are not yet available.
We compared 292 different retirement solutions in our study.
We looked at three hypothetical employees who are age 65: a single woman with $250,000 in savings, a married couple with $400,000 and a married couple with one million. Now, let us say right here that these statistics are above the median for older workers; these are a more affluent group in the workforce. We acknowledge that there are many, many, people with savings less than this amount, and they are going to be challenged in their retirement years.
The 292 solutions we looked at included starting Social Security right away at 65 and delaying Social Security until age 70. We looked at single premium immediate annuities (SPIA), systematic withdrawal plans (SWP), including the required minimum distribution (RMD) from the IRS, and guaranteed lifetime withdrawal benefits, which is a hybrid annuity. We looked at fixed index annuities (FIA), which is another hybrid annuity. We looked at combinations of SPIAs and SWPs and FIAs and SWPS. Finally, we included reverse mortgages. We looked at lots of different types of retirement income solutions. That was the point of this study, particularly to address the “what about” objections.
This chart shows the average annual retirement income expected per solution compared to the potential remaining wealth.
Every one of these different retirement income solutions has different shortcomings that some other method might address better.
Then some other method might have its own shortcomings. In our analysis, we used stochastic forecasts of income and accessible wealth. From that, we developed an efficient frontier showing the amount of income versus liquidity. These are powerful tools that defined benefit plans used to define funding and investment strategies. Our assumptions reflected the current low-interest rate environment. We also compared institutional pricing that you might get through an employer or a plan sponsor.
In a nutshell, optimizing Social Security and utilizing the RMD distribution, the key components of the easy-to-implement Spend Safely in Retirement Strategy, compared favorably to other more complicated approaches.
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.