Retiring in the defined benefit –or “pension” – era of yesteryear seems simpler than today’s retirement: Work, retire, collect pension check, and spend.
But in today’s “defined contribution” environment (think 401(k) and IRA), you may need help planning for a retirement that may last longer than you imagine, according to a university study.
The Stanford Center on Longevity at Stanford University reviewed the tangle of issues facing today’s retirees – and those who hope to retire – and tackled the retirement income puzzle in a comprehensive report, Optimizing Retirement Income Solutions in Defined Contribution Retirement Plans.
The in-depth study was developed by researchers looking for a better way to help people get ready for retirement in a time when few have a pension. In fact, in 1979, 87% American workers had access to an employer-sponsored pension. But by 2015, that number was down to 15%.
Bottom line: Workers have been left largely on their own when it comes time to spend retirement savings. Spend too fast and they run out of money. Spend too slowly and they deprive themselves of some things in retirement.
A better way?
Researchers sought the best ways for retirees to use their savings to generate retirement income and still prepare for emergency expenses, big one-time expenses, and just buying the little things that make them happy.
Turns out, there may be no single answer, and going it alone may not quite be the right way to prepare.
“Deciding how to deploy savings to generate retirement income, and estimating the amount of savings that is needed to generate target amounts of retirement income, is a task that is beyond the interest or skill of many retirees,” the study found.
Left to their own, retirees may spend savings too quickly or do the opposite, conserve too much, the report found. “Neither strategy seems optimal,” the study noted.
The findings were built on a complex set of forecasts, projections, and scenarios that incorporate variables such as continued increases of American life spans. Just call it “science.” But what it did was examine the potential tradeoffs between investing savings – which may not last a lifetime – and purchasing some type of plan that provides guaranteed lifetime income but limits access to those funds.
It may come down to what each individual wants, the study found. Increase retirement income, or leave an inheritance? Give up control of savings in exchange for guarantees, or hang on to a lump sum that can be spent at a variable rate?
The report also discusses Social Security and using savings to delay claiming benefits, as well as a mention of reverse mortgages, and insurance or investments outside of tax-qualified plans.
Where do financial professionals fit?
The study’s authors are Professor of Retirement Income Wade Pfau, Ph.D, of The American College of Financial Services; actuary and financial planner, Joe Tomlinson, FSA, CFP®; and Steve Vernon, FSA, with assistance from the Society of Actuaries.
In its concluding thoughts to financial professionals, the study suggests financial professionals help their clients diversify savings, understand Social Security, investments, and annuities.
Left on their own, many workers fail to understand how long they may live in retirement, the study found.
“Advisors can add value to their clients by using concepts in this report to develop retirement income portfolios that deliver retirement income throughout their clients’ lives, no matter how long they live,” the study reported.
The full report is online and available for download.
For a better understanding of Social Security and its role in retirement, check out Transamerica’s Field Guide to Social Security, an overview of benefits, claiming strategies, and survivor’s benefits.
Things to Consider:
• Consider talking with a financial professional to help develop a retirement spending plan.
• Understand your options.
• Learn how Social Security, retirement savings, reverse mortgages, and other forms of guaranteed lifetime income may fit into a well-rounded retirement plan.