Takeaway #3: For most middle-income retirees, Social Security represents a substantial portion of their retirement income.
Recent research by the Stanford Center on Longevity (SCL), collaborating with the Society of Actuaries (SOA), identifies a straightforward retirement strategy that can work for most middle-income retirees and be implemented in virtually any traditional IRA or 401(k) plan.
This research provides a framework for assessing different retirement income generators (RIGs) and navigating the many tradeoffs that older workers face when making retirement income decisions.
Anywhere from two-thirds to more than 80 percent of their income might be represented by Social Security.
This is why it is important to optimize Social Security income.
When you think about it, Social Security is nearly a perfect retirement income generator. If you optimize it through a delay strategy, it helps optimize your total retirement income. It protects against most common risks: longevity risk — it is paid for the rest of your life. It is indexed for inflation. It does not go down when the stock market goes down, and there is a survivor’s benefit. Because it is paid automatically and goes into your account, it helps avoid cognitive decline mistakes and fraud. A large amount of Social Security is exempt from income tax for many people. No other retirement income generator has all of these advantages.
This is why we think optimizing Social Security for middle-income people is important.
Our conclusion from our study was that optimizing Social Security before you purchase annuities or invest in fixed income systematic withdrawal plan (SWP) is best. You want to optimize your Social Security first because the return in optimizing Social Security expressed as an amount of retirement income is greater than if you purchase an annuity or invest in a fixed income SWP. Once you have optimized Social Security and you want more guaranteed income, then you want to consider buying an annuity or investing in bonds.
We are not saying to not buy annuities and to not buy bonds.
We are just saying do not do that until you optimize Social Security. For middle-income folks, Social Security might be all the lifetime retirement income they need – anywhere from 60 to 80 percent of their total income is this Social Security portion – and it becomes the “bond” part of the retirement income portfolio. If you have 80 percent or 70 percent of your retirement income portfolio in guaranteed income, then the remaining could be invested in an easy to implement and systematic withdrawal plan with an aggressive asset allocation.
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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.