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Jonathan Clements

FORGET BUYING a home or paying for college. In terms of complexity and cost, nothing comes close to retirement—a topic that encompasses saving, investing, taxes, Social Security, health care expenses and countless other financial issues.

Fortunately, there’s a growing body of research to guide us, and some of the best studies come from Boston College’s Center for Retirement Research (CRR). Here are just some of the insights I’ve lately garnered from CRR studies:

Valuing annuities. Many retirees question the value of immediate fixed annuities that pay lifetime income and, in one sense, they’re right. The present value of these annuities works out to about 80 cents for every $1 invested, meaning the typical retiree wouldn’t recoup the full amount of his or her investment plus interest. On top of that, of course, there’s also the risk that you’ll lose the life expectancy lottery and recoup far less than 80 cents.

Still, for affluent individuals who have looked after their health, the payback will likely be well above 80 cents. Moreover, as a recent CRR study notes, the value of income annuities goes beyond raw dollars. There’s also an insurance component. The notion: Retirees can generate more income from their nest egg if they buy income annuities because they don’t have to worry so much about outliving their money. This is one reason I plan to stash a significant portion of my retirement savings in immediate fixed annuities. An added reason: The resulting stream of large, predictable income will allow me to invest much of my remaining money in stocks—and, fingers crossed, that should result in greater long-run wealth.

Claiming Social Security. Like many others, I’ve lamented how many retirees claim Social Security benefits at age 62, which is the earliest possible age, rather than delaying benefits so they get a larger monthly check. But it seems retirees are wising up.

There are two key ways to look at the data. The usual way: Calculate what percentage of those claiming benefits each year are age 62. That number has been trending lower since 2005 and, as of 2019, stood at 34% of female claimants and 31% for men.

But as CRR researchers note, the number of folks turning age 62 each year has been growing rapidly in recent decades and that distorts the data. Why? There are more 62-year-olds than, say, 68-year-olds. That’s why CRR researchers offer an alternative way of looking at the issue: They calculate the percentage of those turning age 62 each year who opt to claim Social Security at that age. That number is even lower, with just a quarter of 2019’s 62-year-olds opting to claim right away.

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In a separate study, the CRR examined whether Social Security’s actuarial adjustments are correct. In other words, based on current life expectancies and interest rates, are you—on average—likely to do equally well whether you claim benefits at, say, age 62, 66 or 70? It seems not.

CRR researchers concluded that the reduction in benefits for claiming at age 62 rather than 65 is too large given today’s greater life expectancy and lower interest rates. (Those lower interest rates also mean you’re less likely to come out ahead by claiming benefits early and then investing the money in bonds.) The implication: For the typical retiree, it makes financial sense to delay benefits, and that’s especially true for high-income earners, who tend to live longer than average.

Needing care. Many retirees end up needing help with daily living, but the amount varies greatly. Some might need assistance with routine tasks like shopping or preparing meals, while others might need help because they have dementia or have trouble, say, dressing and bathing themselves.

CRR researchers looked at what percentage of 65-year-olds end up needing help with at least one activity of daily living (think bathing, dressing, toileting and so on) for three years or more. That came to 24%. At the other end of the spectrum, 17% of retirees needed no help at all. The remainder fell somewhere in between—their need for care during retirement was modest or it lasted less than three years.

If that sounds like a mixed bag, it is. But here’s an intriguing data point: Among those ages 65 to 70 who describe their health as “excellent” or “very good,” the probability of not needing any help was 30%, versus 5% for those who said their health was “fair” or “poor.”

Working longer. We know that working longer is financially beneficial: It gives us more time to save and collect investment returns, leading to a larger nest egg. It also allows us to postpone Social Security and any annuity purchases, resulting in more retirement income.

According to a 2021 CRR study, there’s an added bonus: It seems those who work longer also tend to live longer. The study in question looked at men in the Netherlands who opted to stay in the workforce in response to what proved to be a temporary tax law change. The upshot: Those who worked between ages 62 and 65 were less likely to die over the next five years than those who didn’t work. The long-term impact isn’t yet known, but the researchers suggest that the improvement in life expectancy might be as much as two years.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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Rick Thompson
Rick Thompson
2 months ago

The most difficult part of facing the realm of retirement for me is making the uncomfortable transition from a lifetime of accumulating savings to the start of the dispersal phase of my life. Even if I’m not retired from work, looming RMDs in two years means the clock is ticking. I am grateful for the Qualified Charitable Distribution (QCD) option to do double duty by allowing me to fulfill philanthropic goals and avoid any tax liabilities for the amount donated.

John Elway
John Elway
2 months ago

“Like many others, I’ve lamented how many retirees claim Social Security benefits at age 62”

I’ve gone thru this:

https://opensocialsecurity.com/

It says:

The strategy that maximizes the total dollars you can be expected to receive over your lifetimes is as follows:

  • Your spouse files for his/her retirement benefit to begin at age 62 and 7 months.
  • You file for your retirement benefit to begin at age 70 and 0 months.

So would you recommend ignoring this since it
says my spouse should claim at 62?

Last edited 2 months ago by John Elway
Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  John Elway

Mike Piper’s calculator is great, and I certainly wouldn’t ignore the results. For single individuals and for the highest earner in a couple, delaying is often the best strategy. But for spouses with lower lifetime earnings, claiming early can often make sense. You can read about that here:

https://humbledollar.com/money-guide/claiming-strategies-for-couples/

John McHugh
John McHugh
2 months ago

Another one scarred by 1970s inflation here, and terrified by annuities.

It made me wonder, what do backtests of annuity yields over various 20 or 30 year periods show? (Perhaps they would have to be hypothetical, I don’t know.)

Who was the “unluckiest man in America,” retiring on SPIAs maybe when the Beatles went on Ed Sullivan in January 1964, and 15 years later no longer able to pay bills with the previously adequate income.

Maybe I’m missing something. My tax-deferred fixed income has been in two year treasury funds for several years, because they can’t badly hurt you. But for the last 18 months or so that has been punishing.

It seems there’s no way out though. Either take your licks with underwater yields for now, or “capitulate” and chain yourself to tiny yields come inflaton-hell or high water.

Denise Clark
Denise Clark
2 months ago

I agree with Jonathan. Having SPIAs to cover essential expenses frees us up to invest more aggressively than we otherwise would have, to hopefully pace inflation. Getting a SPIA to bridge to Social Security didn’t make sense. In 4 years, when I take Social Security at age 70, I will take a look at whether or not to get an additional SPIA to cover expenses at that point. I think layering SPIAs over time can help mitigate inflationary increases in essential expenses. I view these as longevity insurance. Also, just having the guaranteed income really eased our minds in that we can at least pay for our essentials and ignore the market volatility as those funds are earmarked for discretionary expenses.

Thomas Barrett
Thomas Barrett
2 months ago

This article was an eye opener in determining how and what to plan for in long term care. The statistics seem to counter the scary articles elsewhere:
https://www.morningstar.com/articles/1013929/100-must-know-statistics-about-long-term-care-pandemic-edition?utm_medium=referral&utm_campaign=linkshare&utm_source=link
Tom

parkslope
parkslope
2 months ago
Reply to  Thomas Barrett

The Morningstar percentages reflect the fact that Medicaid picks up the LTC costs for the large number of Americans who qualify. This means that the odds of incurring high LTC costs are substantially higher for those who don’t qualify for Medicaid than they are for all Americans.

Last edited 2 months ago by parkslope
Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  Thomas Barrett

Needing LTC isn’t a certainty, though some insurance agents try to make it seem that way. Instead, as with most things for which we can buy insurance, there’s an unfortunate minority who incur very high costs and the vast majority who incur very little. Indeed, a significant portion of the LTC costs incurred aren’t especially long term. In fact, they’re less than three months and involve post-hospital rehabilitation — which means Medicare should pick up much or all of the cost. That doesn’t mean we shouldn’t all have some plan for LTC costs. But most seniors don’t end up incurring LTC costs that run into the six figures.

Ormode
Ormode
2 months ago

This is very good advice for those with modest wealth. But if you have been highly successful, then you need to turn everything upside-down, and look at strategies to minimize your income instead of maximizing it. The last thing you need is $45K a year in SS and an annuity paying $150K to go along with your $200K RMD. The IRS will love you, yes, and your Medicare tax will be supporting several other retirees.
What you should do instead is maximize wealth while minimizing income. There is little you can do about RMDs, since a Roth conversion would be prohibitively expensive, but you can invest your after-tax wealth in stocks that pay qualified dividends at a lower rate, but offer good growth. Taking SS early will also help by spreading your income out over more years, allowing you to stay under the $200/250K Medicare tax line. If you need LTC, you can just pay with capital, money that would otherwise go to estate tax when you die, but is tax-deductible while you’re still alive.

Last edited 2 months ago by Ormode
mytimetotravel
mytimetotravel
2 months ago

I recently read Wade Pfau’s “Safety First Retirement Planning” which makes the case for SPIAs and a couple of other things. However, as I have posted elsewhere on this site, I already have a pension with no COLA, and I remain unconvinced that a SPIA with no inflation protection is a good option. Especially in the current environment. I am in my 70s, but I have good prospects of lasting another quarter century: even mild inflation over that time span is worrying.

Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  mytimetotravel

Your concerns about inflation are valid. But, of course, inflation is also a major issue with bonds, except those that are inflation-linked, and I view the immediate annuity portion of someone’s retirement strategy as a substitute for bonds. At least with an immediate annuity you can opt for payments that increase by, say, 2% or 3% per year. For long-term inflation protection, the best bet — I believe — is stocks, which is why I think retirees should continue to keep a minimum 30% in stocks and preferably much more.

mytimetotravel
mytimetotravel
2 months ago

I currently have 50% of my portfolio in stocks, and a significant percentage of my bond holdings are in TIPs. I am currently working with a fee-for-service financial planner to reposition my portfolio for withdrawals, which I will need to start when I move to a CCRC in a couple of years. I will be interested to see his recommendations. Adding a SPIA with a 2% inflation rider, if I can find one with a reputable company, will be of little help if inflation is 5%, as it is right now, never mind higher. I have not forgotten the 70s.

PAUL ADLER
PAUL ADLER
2 months ago

Jonathan enjoyed your comments on SPIA.
My questions:
At what age do you plan on buying the SPIA?
What percent of your total portfolio would you use to buy a SPIA?
Would you buy a SPIA with a term certain, like 20 years?
Thanks

Last edited 2 months ago by PAUL ADLER
Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  PAUL ADLER

Here are two articles I wrote on the topic last year:

https://humbledollar.com/2020/08/risking-my-life/
https://humbledollar.com/2020/07/my-four-goals/

I know folks buy term-certain income annuities to bridge the income gap between retirement and starting Social Security at age 70. That’s a fine strategy, but I don’t find it that compelling — because the reason you buy an insurance product is for insurance, and the insurance reason to buy an immediate annuity is to protect against outliving your money. You could buy a lifetime income annuity that guarantees payments for, say, a minimum 10 or 20 years. But I would look closely at the price you pay in reduced income. I prefer to buy “pure” insurance — and I figure that, if I don’t live long enough to get a lot of value out of my immediate annuity purchase, I’m not going to spend eternity regretting it.

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