“Spend Safely in Retirement Strategy” by Steve Vernon
Takeaway #2: What are Options for Spending Down Retirement Savings?

For most middle-income retirees, Social Security represents a substantial portion of their retirement income. What we are seeing is that anywhere from two-thirds to more than 80 percent of your income might be represented by Social Security. This is why it is important to optimize your Social Security income.

It is also smart to adjust your withdrawals from savings to reflect your investment gains and losses so that if the stock market goes up you can increase your withdrawal and if the stock market goes down you decrease your withdrawal. That helps mitigate the sequence of return rate with which we are all familiar.

If you optimize Social Security through a delay strategy, it helps optimize your total retirement income.

When you think about it, Social Security is nearly a perfect retirement income generator. 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.

We are not saying do not buy annuities and do 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 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. Even though it is an aggressive asset allocation, you still have 60, 70, 80 percent in what I can “bond” parts in your retirement income portfolio.

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 SWP (Systematic Withdrawal Plans) 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.

Most middle-income workers are going to be generating income from Social Security, pensions, spend-down from savings and possibly continued work.

These are the mechanisms that employers can influence. However, people also have assets outside of employer-sponsored plans. They may be interested in reverse mortgages, small businesses, rental real estate, personal assets, such as life insurance, and other IRAs. We are just acknowledging that the first group is resources that employers can sponsor, but everybody is potentially going to draw from these other resources as well.

Spend-down methods that are common: you can have annuities with insurance companies, or you can have withdrawals from invested savings or some combinations. You also can take out just the investment income only and keep principle intact. That is a very conservative method that might work for someone who wants to leave a bequest and leave that income for a bequest. You can do a systematic withdrawal plan where you have some method that is withdrawing interest and principle systematically. Finally, you can do a payout just for a limited period.

The challenge really is having a decision framework that will deploy all these retirement income solutions so that your savings and your income last the rest of your life.

We think the answer to this challenge is to apply modern portfolio theory concepts that we are so familiar with in the accumulation period to the payout period. We talk about asset allocation in the accumulation period, and now we talk about retirement income allocation. We want to, in the payout period, minimize the risk of income losses.

This Key Retirement Takeaway is excerpted from a recent webinar presented by 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.


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©2018, Steve Vernon. All rights reserved. Used with permission.