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IT’S HARD TO OVERSTATE how challenging it is to generate retirement income: We need our money to last at least as long as we do, and yet we don’t know how financial markets will perform, what the inflation rate will be, whether we’ll get hit with hefty long-term-care costs and how long we’ll live.
Moreover, the generic advice offered inevitably doesn’t work for many—and perhaps most—folks because we all start retirement with different attitudes, goals and financial resources. For proof, consider seven issues.
1. About the kids. If our retirement needs and wants were relatively modest, and hence we could cover all expenses with our monthly Social Security check, we’d be in great financial shape. After all, we’d have a government-backed inflation-indexed stream of income that’s paid until the day we die—and that, arguably, is as good as it gets.
Yes, even Social Security has drawbacks. First, Congress could cut benefits, though I can’t imagine that ever happening, given that politicians have a fondness for reelection. Second, the national standard of living rises not with inflation, but slightly faster, with per-capita GDP. That’s why many retirees feel financially pinched, especially later in retirement.
But there’s also a third key drawback: Even if Social Security could cover our entire retirement costs, there’d be nothing left for our children, nieces, nephews and charity—and bequeathing money is an important goal for many. Where we position ourselves on the spectrum from “strong bequest motive” to “die broke” can make a huge difference to how we manage our retirement finances.
2. How optimistic we are. If we knew our end date, managing our retirement finances would be a cinch. The reality: Unless we’ve lived a life of total debauchery or our current health is downright awful, it’s hard to know how long we’ll live. What about family longevity as an indicator of our own life expectancy? We might imagine our parents and grandparents are a great guide to our longevity, and yet genetics might explain just 25% of the variation in lifespans—and perhaps as little as 7%.
The bottom line: It’s awfully hard to know how long our retirement will last. Like saving too much for retirement, there’s no financial harm in assuming we’ll live to a ripe old age. By contrast, there’s great risk in assuming a short retirement. What if we do just that? Before we start spending merrily, we should at least have a backup plan in case we live longer than imagined. Did anybody say “reverse mortgage”?
3. Risks we hate. The biggest risk in retirement is running out of money before we run out of breath. But that’s hardly the only financial danger. Every key financial decision in retirement involves risk. The question is, which risks are we willing to take?
For instance, if we delay Social Security, buy income annuities and take any pension as a monthly payment, we run the risk of dying early in retirement and leaving big money on the table. Meanwhile, if we claim Social Security early and take our pension as a lump sum, we’ll have a fatter nest egg, at least in the initial retirement years. But there are also dueling risks—the risk of sharp short-term losses if we favor stocks and riskier bonds, and the risk we’ll lose ground to inflation if we’re too conservative.
4. Income we want. The popular 4% withdrawal rate is based on withdrawing 4% of our nest egg in the first year of retirement, and thereafter stepping up the sum withdrawn each year with inflation. Is 4% the right number? Those of us without a crystal ball have no idea.
More important, we should be skeptical of the notion that steadily growing lifetime income can be generated from volatile investments. And even if it’s doable, most retirees won’t do it. Instead, faced with a market crash and accelerating inflation, their instinct will be to spend less—and that’s a good instinct, I’d argue. My advice: Treat the 4% rule as a guideline and not a withdrawal strategy to be followed robotically.
But what if folks loathe the idea that their spending will need to fluctuate from one year to the next? That’s a vote in favor of predictable income, and hence a vote in favor of delaying Social Security and buying immediate-fixed annuities. Indeed, research suggests that retirees with predictable income tend to be happier.
5. Whether to work. I know that, for some, retirement means never working again and, indeed, earning any money somehow violates the very notion of retirement. For others, even if they wanted to work part-time, it’s hard to find a position they’d enjoy at a pay rate they’d consider acceptable.
Still, let me offer this contention: Working a handful of hours each week for money is perhaps the smartest strategy, financially and otherwise, for those in their initial retirement years. Think about it: That work could provide us with a sense of purpose, ensure we regularly engage with others, give us an identity beyond “I’m a retiree,” limit withdrawals from our portfolio, and allow us to delay both Social Security and any immediate annuity purchases. In short, a handful of years of part-time work could be the difference between a happy and financially successful retirement, and one that’s marked by money worries, loneliness and a lack of direction.
6. When to spend. Many retirees spend heavily in their first decade of retirement, figuring this is their chance to enjoy life before the slow-go and no-go years arrive. I wouldn’t discourage anybody from doing so—but I also fear that those in their 60s aren’t very good at anticipating the needs of their octogenarian selves. Are we sure we’ll be content to spend our 80s and beyond sitting at home, watching the TV? Do we really have enough savings and long-term-care insurance to cover long-term-care costs? If not, perhaps we should spend a little less freely in our 60s.
7. When we start to slip. Overseeing a portfolio of stocks and bonds, and calculating how much we can safely withdraw each year, might seem easy enough in our 60s. But will we be up to the task in our 80s?
This might again sound like a vote for annuitizing and delaying Social Security. But instead, it could be a reason to keep our finances as simple as possible, and perhaps also identify a family member or younger financial planner who could help us manage our money as we age.
Where do I stand on these various issues? I intend to work part-time for as long as it’s enjoyable, and I plan to do that work from all over the world, as I strive to make the most of my go-go retirement years. But I concede that I’m lucky: With a laptop and an internet connection, I can work from all manner of wonderful places.
What about the 4% rule? I might use it as a guideline to make sure I’m not overspending. But I’m going to be flexible about how much I spend each year, taking my cues from my portfolio’s performance. At the same time, as a cushion, I plan to keep five years’ worth of expected portfolio withdrawals in high-quality short-term bond funds, so there’s scant risk I’d ever need to sell stocks during a market downturn.
Meanwhile, I’m planning to delay Social Security until age 70 and I intend to use part of my nest egg to purchase immediate-fixed annuities from a variety of insurers. My goal: have enough predictable income to cover at least my fixed living costs. That’ll free me up to invest more of my remaining money in stocks and hence go for growth—because I’d like to leave a healthy sum to my kids, grandkids and charity. Indeed, I believe annuitizing and delaying Social Security are the key to greater wealth later in retirement. That predictable income stream should also make managing my finances later in retirement far less mentally taxing.
What if I’m wrong, and I don’t live long enough to break even on my delayed Social Security benefits and my annuity purchases? No doubt I’ll die with some regrets—but, when the end comes, I can’t imagine I’ll be fretting over my financial choices.
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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Great article and leaves quite a bit for one to ponder. The biggest takeaway being there are many ways to skin a retirement income cat.
The other comment I have is this general advice to delay Social Security until age 70. I am not sure my math agrees it is the best step for me. While you do get the 8% increase guaranteed on your payment for life, I’d love to get input on not delaying but taking it at FRA or there about. Take a scenario of a 66 year old projected to get $35k a year from social security but decides to defer it and instead takes that $35K from their retirement accounts. They would pull 35k x 4 or $140k out of their assets to delay taking social security payments. This would allow them to have a SS check of about $45k per year or roughly $10k more per year than at FRA. It would take them 14 years to break even from pulling those funds from retirement assets not counting the compound growth potential. Assuming the individual lives 30 years they would end up with an extra $300k in social security payments which isn’t bad at all. I could argue if they didn’t withdraw the $140k but conservatively invested it say 6.5% for 30 years, they would end up with $978,852! That is significantly more that the $300k from social security and when the die that can be passed on to their heirs. By drawing social security at FRA or close to it instead of other retirement assets the individual claiming at FRA comes out ahead… significantly! I welcome divergent points of views. Assuming the retirement assets are not needed to fund your lifestyle, and they are remain invested.
I plan on retiring early… mid 50s and will take Social Security probably at aged 65 in order to preserve and not touch my IRAs and 401k(s) a bit later on. That my friends feels best to me.
Two quick comments. First, I’d encourage you to play around with Mike Piper’s Social Security calculator:
https://opensocialsecurity.com/
Second, your 6.5% assumption is far from conservative. Remember, Social Security rises with inflation, so you’re effectively assuming you can earn 6.5% a year more than inflation. A 100% no-cost stock portfolio may have earned that historically, but that was during a period of rising valuations — and, of course, there was considerable risk involved.
Thank you so much for this. Well after much research as this really got the wheels racing. I have decided that my wife will claim earlier than me, possibly at around 66-67, but as the higher earner, I will wait until age 70 to claim. According to opensocialsecurity.com we could probably start her claiming at aged 62, but this is the time I want to be doing Roth conversions and want to show as little income as passible.
We do however want to show a small income between $24k and $59k so that we can qualify for credits on the ACA marketplace. We will need insurance since we cannot get Medicare until 65. Any thoughts on that strategy would be appreciated.
This ‘splitting of the baby’ seems to give the best outcome. She can switch to my higher benefit should I predecease her and we d let my higher benefit amount grow to its maximum. Because she is claiming at 66-67 this will reduce the amount income we will need to pull from our retirement accounts.
You’re ignoring the stepped up basis for future cost of living increases. SS is the best annuity going and I wanted the biggest initial payout I could get. (As far as I know it’s the only one currently available that will let you keep up with inflation.) You’re also assuming no other income sources. I am completely uninterested in whether I “break even”, if I’m dead I won’t care.
Even if I factor in the COLA, you still don’t get close to the balance you would gain by leaving those funds in your retirement account. I for one don’t care about breaking even either, we just don’t have that control, I really was trying to consider the benefits of the bigger checks vs the benefit of having more in your retirement accounts that you have full control of. Based on my calculations, I might split the difference and not take it at 62 but not at 70 either. 66 feels like it is right in the middle. If you wanted to give kids some money for a down payment on a home or pay for college, it is much easier to pull that from a retirement account than wait to accumulate from SS. Full disclosure, I plan to retire at 56-57 and fund my lifestyle through savings until aged 65. I need to find ways to eat after that, so it is either take Social Security then, or tap retirement accounts. I could also work some… just a plan as no one knows the future. Using just math and a 30 year lifespan from the time you claim social security, it feels like not waiting until 70 is best for me but I wanted to see if others had considerations I hadn’t thought off.
I retired at 53 and waited to 70, but I had a pension, (divorced) spousal SS at FRA, and no kids. I’m finally getting ready to draw on my portfolio at 76. See: https://humbledollar.com/2023/06/better-things-to-do/
One other consideration not mentioned so far is the risk of cognitive decline. You talk about having more capital under your control, but consider how good your control might or might not be as you age. This is one reason to delay SS until 70. You may not have those larger payments in your hands until later, but that means that also constitute a portion of your worth/income that’s harder to mess up.
Would anyone be a buyer of 10yr brokered cds in retirement?
I’ll make two observations. The first is that we planned our retirement and wills when our sons were in grade school. We educated and equipped them over the years so that when we were gone they wouldn’t need any inheritance from our estates. That has worked very well for us and for them. They are both established in well-paying careers with excellent benefits. I call what we did “investing in their human capital.”
My second observation is that when we become very old and vulnerable it is important to have a younger relative who is business capable and has our best interests at heart and willing to manage our affairs. Both our sons and our daughters-in-law fit this requirement. I call this “an investment in social capital.” We do not anticipate leaving any of our estate to charity unless we decide to place funds into a charitable remainder trust when we are in our mid to late 80’s. For now, we are having the satisfaction of contributing to churches and charities that need our contributions right now. When we are gone we believe it is the character and financial circumstances of our children that they will receive the remainder of our estates on a step-up basis, contribute them to suitable charities in our memories, and use their contributions to reduce their taxes.
I hope this different take on retirement and estate planning is useful.
Dave Baese
I’m just curious that if you ensured that they have no expectation of an inheritance from you, have you also ensured that you have no expectation of help from them when you are old and infirm?
Of course, there is never a guarantee that your children will be your caretaker if you need one in your old age….
Our children are the heirs of our estates. When we are gone our assets will become their assets. Even if one of us lives to 100 there will probably be assets and money left over for both. Part of “equipping” them has been paying for college and grad school so they both finished with easily manageable debt. We also gifted them with downpayment money for their first homes, and have also gifted money to pay for each of our four grandchildren to attend their first year at a good public university. While our children were still in college and grad school we also funded Roth IRAs for them which have compounded handsomely. We are also gifting to Roth IRAs as our grandchildren begin to earn reportable income. We don’t expect any help from our children in our vulnerable old age. I just know it will be there because they love us. Neither of us have any intensions of structuring our estates to enable us to reach out from our graves to manage our children’s affairs. Richard Quinn, our children have already experienced misfortunes in their lives and we have been with them to share in their sadness and disappointments. So have their in-laws. Does this help in understanding?
Now I know how you define equipped, you simply paid their way and in effect gave them an early inheritance. Not many children are so lucky. I thought you defined equipped as teaching them about finances, work ethic, saving, investing, etc.
Richard, I’m also guilty of teaching them about finances, work ethic, saving, investing, etc. In my opinion I did a reasonably good job. So far, it seems to have worked out ok. They may have learned a lot more from my wife than me.
This statement really bothers me. “We educated and equipped them over the years so that when we were gone they wouldn’t need any inheritance from our estates.”
It sounds like you were dealing with robots and in addition can predict the course of their entire futures.
What does “equipped” mean?
I’m guessing like the rest of this you can’t see misfortune in the future – illness, a sour marriage, job loss and who knows what else?
I don’t understand the down votes. For sure, no one can guarantee calamities won’t happen.
I enjoyed reading this article since it seemed to go along the line of what we’ve done. I am 10 years into retirement (age 73) and many of the issues you mention hit home with me.
In the past, I used Monte Carlo simulations with two outcomes to gauge the future: significantly below market average (10th percentile) and average market conditions (50th percentile). I plan using the 10th percentile outcome but estimate my future RMDs using the 50th percentile. Even using the 10th percentile outcome, we don’t appear to have a longevity risk in that our portfolio continues to grow (even at significantly below average market conditions). Over the past 10 years, I entered our actual spending in the budget worksheet rather than an estimated withdrawal amount. As such, I also have a history of expenses/spending and can establish our personal rate of inflation. While we don’t know our end date, I can, at least, plan for a given end date in our mid-90s. In order to reduce risk, I waited to age 70 to start my SS benefit while my wife claimed her benefit at 63. We decided early on that we wanted to create our own self-funded “pension” since we did not have that option from work. When I retired, we purchased a series of single premium immediate annuities (SPIAs) to create this lifetime retirement paycheck (using one-third of our portfolio to fund this “pension”). The combination of the SPIA income and my SS benefits would cover our essential expenses for many years. We could then invest the remaining two-thirds of our portfolio fairly aggressively.
I also worked part-time as a cybersecurity consultant soon after retiring. While it was supposed to be a six-month task to address a single topic, I wound up working for five years (one day per week from home for the first four years and one day per month during the last year). I was also very lucky in this part-time work since I could do it from anywhere and had no project responsibilities.
Creating this lifetime income has given us peace of mind. Since retiring, we have traveled to 28 more countries and have only six more states to visit (to complete vacationing at all 50 states). While we started out withdrawing 6% for the first few years, much of those early year expenses have disappeared such as mortgage and new house expenses. Our Roth conversion taxes also constituted a large chunk of those withdrawals. Those Roth conversions have diminished significantly, reducing our withdrawals as well.
Today, our savings withdrawal rate is very close to 3%. Our portfolio is larger today than when we retired (after the SPIA purchases) due to maintaining a 70/30 average asset allocation. To simplify matters further, I am seriously considering making some adjustments to our portfolio such that we can create an income stream strictly from dividends/interest. Our current portfolio generates close to 2% dividends/interest (according to Fidelity). While we have always reinvested such assets, I am hoping that with the above adjustments I can create a steady income stream (from dividends, interest, and distributed gains) that can satisfy our planned discretionary expenses of roughly 3.5%. This should simplify our income generation process in that I may be able to stop rebalancing, not worry about replenishment, or decide what to sell or buy. This would definitely make matters less mentally taxing especially as cognitive decline should come into play.
We took our SS at full retirement age, figuring we will be more likely to use it now rather than when we are much older. The break even age for us would be over 80, when we wouldn’t be spending as much as when younger. My wife didn’t work once we had kids so her SS is half of mine. I don’t like fixed annuities but maybe that’s because we accumulated a lot of money and outliving it is not a concern. I was in the financial services industry so we don’t worry about our portfolio, which is 60/40 now. We have no pension but our combined SS and money market funds provide more than we spend each year. Got rid of our short and ultra term bond ETF’s before they went down way more than expected. If we start to slip nothing has to be done and our kids will inherit our assets as is. Maybe we are just fortunate, but we do not have most of the concerns listed here.
One great potential source of retirement income is through alternative investments like real estate funds (mostly multifamily rentals but also self-storage, industrial, retail, office, etc) or syndications, debt funds, private equity funds, cannabis funds, litigation finance funds, etc. Now usually you do need to be an “accredited investor” meaing a $1 M net worth or income of $200,000 (single) or $300,000 (joint). You will average out MUCH more than the 4% withdrawal rate often used as he (very rough) withdrawal guesstimate (more like 9% cash on cash returns). You receive quarterly or sometimes even monthly distributions and by diversifying it will give a nice margin of safety even in this more difficult higher interest rate environment. I belong to such 2 online investment groups with daily, deep dives into these investments. I could never do the necessary due diligence otherwise. It has taken all of my SORR (sequence of returns risk) worry out of the retirement equation.
Well that wasn’t what I expected from the title! Ha, ha…
When it comes to generating retirement income, I’ve come to view “picking” a retirement year as a form of Russian roulette. As Micheal Kitces has demonstrated so clearly, there is a huge variation in sustainable withdrawal rates depending upon the year each individual investor retires. Sometimes a large variation shows up from just one year to the next. What was it, 1980 or so when a brand new retiree, as we know now, could have spent at an inflation adjusted rate of 9% or more without having to worry about running out of money?
The trouble with that risk is that it can only be determined in retrospect, after many years — or a couple of decades — into retirement.
But while a sustainable withdrawal rate is indeed addressed as one of seven major issues retirees must contend with, the article has a much broader focus.
As always, Jonathan, your perspective on these issues is helpful and clarifying.
I’m seriously considering rolling my traditional IRA into a Deferred Income Annuity (DIA) or setting up a QLAC for the next nine years and take withdrawals at 73 or up to 85 with the QLAC. Both are contractual guarantees and pay a fixed compounded interest rate over a fixed term. As required by Federal law, every state must set up a guaranty association to take over the contract if something were to happen to the insurance company. My state has a very good guaranty association and covers more than most other states. Either annuity will function like a third pension alongside SS at 65 with Traditional Medicare and a pension from my former employer. The older I get, I understand the prevailing concern of running out of money in the later years of retirement. I think either of the annuities mentioned are worth investigating.
Excellent summary of a solid retirement plan. Even thought circumstances and events will change, and plans will need to be adjusted, having a coherent foundation helps you stick to the plan. Having several users of cash equivalents helps me not worry (at least not too much!) about market volatility. Thanks, Jonathan
Having spent my working career in the investment business, it comes as no surprise that #7 is my primary worry. On hand, basic investment management is not all that hard if you stick ETF’s and avoid the lure of individual stocks and bonds. On the other hand, knowing exactly when to hand over the reins and to whom is complicated. There is no “best” way to do this, but I heartly recommend planning ahead and making sure whoever will take over knows where your are assets are held, how to access your accounts and how you would like your money managed (if you still have any at that point!) after you pass the baton. I would also encourage adding your future financial caretaker to your accounts on a “view only” basis and have periodic conversations with them about any changes you might make. If yoou have no one who can take over when needed, your planning will need to consider either a robo-investment solution, or a full service asset manager.
Great insights again! Wondering why you are waiting to purchase the immediate fixed annuity with interest rates high now and likely to decline over the next couple of years. Is the benefit of waiting a calculated trade off between hoping to increase your nest egg with average market returns over the next few years versus setting up the guaranteed income now that will be there for you later in life?
thanks,
Joel F.
Some annuity interest rates are considerably higher right now and are listed from A and A+ companies. As of yesterday, rates I saw were up to 6% for five and seven year Multi-Year Guaranteed Annuity contracts and that’s compounded. Here’s the website I’ve been reviewing, https://www.stantheannuityman.com/annuity-calculators/myga
From the drop down menu, select calculators and you can run free up to the minute quotes for various types of annuities.
Thanks William. Another question for you or Jonathan is since rates are still currently high and are predicted to fall in the next couples of years, would it be a good potential strategy if one wants longevity insurance to lock in the rates now for example for insurance that kicks in when you reach 85 years old. With the secure 2.0 act of 2022, up to $200,000 can be moved from a qualified retirement plan or IRA to a qualified longevity annuity contract which allows for deferred taxes so you would not get hit with additional taxes until many years in the future. Thanks.
In theory, I think deferred income annuities are an interesting idea. But I’d try to unpack the assumptions involved before you buy. What are the odds you’ll live to, say, age 85? What would you pay today, assuming you’re 85, to buy the promised income stream, and hence what sort of return are you getting between now and age 85 on the money you pony up now? When I’ve looked at the numbers in the past, I’ve ended up deciding I’d rather simply wait to buy an immediate-fixed annuity at a later age.
Thanks Jonathan
I simply don’t need the income right now, and I certainly don’t need to pay more in taxes. Yes, interest rates could decline. But the longer I wait, the more mortality credits I’ll collect (i.e. my life expectancy will be shorter) and thus the higher the starting income will potentially be.
That’s what I thought, makes sense. As I’m nearing 60 I have been contemplating this as well. Have not been a fan of annuities during my career due to their complexity and high fees, but have come to the realization that these are one of only a few types of annuities that can make sense to take the guesswork out of longevity.
Jonathan,
Another great posting!
Everyone has different needs and preferences. There is no “one size fits all” rule. So thanks for your viewpoint.
One of the best things about Humble Dollar is that all points of view are represented without editorializing.
It was definitely more fun being a kid… (smile). Something that my wife and I have factored in is our ability to change direction on our spending. The so-called “controllables.” I think we could reduce our expenses 50% or more if we had to hunker down. That kind of flexibility with a reasonable amount of income and withdrawals with hopefully allow us to fully fund a retirement to age 100.
Crystal clear and very helpful – thank you!
The only thing I find surprising is that you’re still planning on investing in annuities rather than a TIPS ladder (or a mixture of TIPS ETFs of appropriate duration). Since you wrote the introduction to the revised edition of William Bernstein’s “Four Pillars” I’m sure you’re familiar with his view that a TIPS ladder has nothing but advantages over an annuity, given that unlike the latter it’s both inflation-protected and backed by the full faith and credit of the U.S. government. So I guess that’s my question: why annuities when TIPS at today’s rates support a ~4.6% spending rate for up to 30 years?
Have you looked at the complexity involved in building a TIPS ladder? Are you sure you’d want to be dealing with that when you’re 80 — or bequeathing that collection of securities to your spouse or children? And what if you live longer than 30 years?
Buying TIPs isn’t any more complex than buying stocks. And you have inflation protection and liquidity. And there are new products out now that make it even simpler if you don’t want to mess with individual bonds. A Case for BlackRock’s New Defined-Maturity TIPS ETFs | etf.com
It isn’t the buying itself. It’s purchasing the right quantity of individual bonds to pay for each year of retirement, especially given that there aren’t TIPS that mature every year, making the construction of a liability-matching ladder tricky.
Yes I’ve looked into it and thanks to readily-available tools (tipsladder.com especially) it takes all of about 45 minutes to set up a 30 year ladder.
Bernstein himself answers your question (from his October Bogleheads interview):
“So, there’s basically two ways to defease your retirement expenses with TIPS. One is simply to buy TIPS that mature in every single year that you’re going to be retired. That’s not quite possible because there’s a gap between 2034 and 2039. There are no TIPS that mature then.
Now, you can buy an excess amount of them in 2033 and in 2040, which pretty much does the same trick. And of course, you really don’t have to own TIPS for all 25 of those years. You can skip years a couple of years in between the TIPS so you only have to own maybe six or seven or eight of them, but that’s still a lot of work.
The other way to do this is to buy a mix of TIPS funds. So, let’s say you think that your retirement is going to last 30 years. Well, you want the average maturity of your TIPS funds to average out to about 15 years. Half of that, alright. So, you would buy a bit of a 20-year fund and there’s only one and unfortunately that’s offered by PIMCO, and it’s got a 20-basis point expense. So that’s just a little steep.
Then you could buy a short-term TIPS fund for a couple of basis points – there are a couple of ETFs that do that – and you mix and match those two and you try to average out, weight out the maturities to 15 years. And then of course you have to rebalance that once every couple of years to keep the maturity right. So, neither way is perfect. Either way requires a little bit of work.
I prefer the ladder because that’s fire and forget. You buy it, you lay it in, and even if you develop dementia, you can tell your executors and your kids, “hey, this is how you pay my expenses when these TIPS mature.” And they don’t have to do anything except collect the principal when they mature.”
I don’t see any way that this solution isn’t vastly superior to a collection of non-inflation adjusted annuities whose value erodes over time due to inflation while one has to worry about the solvency of the issuers as long as you live. As for the “what if you live more than 30 years” question, you’re just covering essential living expenses with TIPS, which frees you up to take plenty of risk with equities, as John Rekenthaler has shown:
https://www.morningstar.com/bonds/high-tips-yields-are-retirees-best-friend
Nice article. I have a few comments:
I’m now three years into a self-funded (IRA/401k plus investments) retirement that started at age 67, and started drawing Social Security at 70. I went through all the possible “what-if’s” & “coulda/shoulda” evaluations, talked (at length) with my financial advisor, and imagined as many scenarios as I could. My wife is five years younger and retired with a pension from the local school system, but is not yet drawing Social Security. We’re having a blast if retirement. It seems we’re doing fine financially, too, perhaps better than I imagined. But all the potential unknowns that Jonathan addresses here are real and possible outcomes that might knock us back a bit. We have will/trust paperwork, POA, medical POA, and talked to our respective kids about our wishes.
My overriding concern is for my wife. Since I’m five years older and I’m a guy it is very reasonable to expect her to be on her own for a good while after I croak. I expect her daughters and my sons to help, but the reality is they have lives of their own and support will likely be limited. Our marriage has been teamwork, and I don’t like the thought of leaving her on her own. So with every year that goes by, I think I need to consider not only how we navigate retirement in real-time, but also how my wife manages in the future without me.
I read Die with Zero after Rick Connor reviewed it here and am still thinking about its arguments. The author is not anti-bequests to family and/or charity—rather, he argues that you should give the money away before you die, after, of course, estimating what you’ll need for yourself. (That latter point, of course, is the rub.) I then started reading The Next Millionaire Next Door, which I also read about here, and the Stanleys of course laud people who make money, live well below their means their whole lives, and leave huge legacies. It’s an interesting contrast of approaches.
My mom, who just turned 83, was recently telling my brother that she thinks she’ll work on dying “broke”—she feels that all three of her kids are fine without a bequest, and she should enjoy what she has while she can.
I’m very dubious of Annuities. Why not buy T-bills paying 5%? You’ll protect your capital that way.
That 5% T-bill rate could disappear in the blink of an eye if the Fed cuts rates. Nobody should assume cash investments will continue to pay more than the inflation rate over the long haul. Meanwhile, depending on your age and gender, an immediate-fixed annuity should pay you more than 5% — and you’ll get the monthly income until your death. And if you’re dubious of income annuities, would you advise folks to quit their job if it includes pension benefits? After all, that’s an income annuity — and many folks labor decades to earn that income stream. Is that a bad idea?
The other benefit of annuities is simplicity. Many value that feature as a way to simplify their finances as much as possible in preparation for their elder years. Especially if one does not have reliable family/others to assist them with their finances in late retirement. One gets a deposit every month, no worry about cashing in or buying new bonds, or dealing with the god awful treasury web site:)
When do you think you will buy?
I’ll consider my first immediate annuity purchase when I no longer have enough earned income to cover my expenses. Not sure when that’ll be.
If you’re looking at that kind of duration, it’s a Treasury bond, not a Treasury bill.
“And with an annuity your capital is no longer yours. It belongs to the policy issuers.” Yes, and in turn, the annuity belongs to the policy owner. Your argument amounts to saying we should never buy anything because when we do, we’ll no longer own the “capital” we spent.
Both pensions and immediate annuities are streams of income. One is purchased with years of work, the other with money amassed from years of work. If it’s worth working 20 years to get a pension, it would be absurd to argue that it isn’t worth using income from those 20 years of work to buy a comparable stream of income.
youre going to make an annuities salesman very happy Jonathan. I hope there’s some Newtonian physics involved and you’re equally happy.
Have you ever heard of an insurance salesman pitching immediate fixed annuities? It doesn’t happen — because the commissions are tiny, often just 1%. People hear the word “annuity” and they freak out, because they think an immediate fixed annuity is somehow comparable to a variable annuity or an equity-indexed annuity. And yet an immediate fixed annuity is a completely different animal, with far, far lower costs. Refusing to consider immediate fixed annuities is like refusing to buy stocks because you heard of this thing called Enron.
Yup, those pensions are earned and an unseen part of a workers compensation. Staying with a company to earn that future pension often means forgoing higher current pay in other employment. A pension is a valuable investment with more rewards than risk.
I experienced workers taking a lump sum in lieu of a pension under special programs and succeeding in losing it all within a year.
If you’re happy with the risks you took, and didn’t take, then I’m happy for you. Survive & flourish.
Why is that your view about immediate annuities? Afterall that basically what a pension is. IBM bought $16 billion in annuities to pay its retirees a pension.
because your capital is no longer yours with an annuity. That’s okay for IBM paying pensions, but not for your own savings.
“[Y]our capital is no longer yours with an annuity.” So what? Most people who purchase income annuities have significant investments in the capital markets. When they also invest in an annuity, they’re essentially buying a guaranteed income stream — something that’s not available in the capital markets. Income annuities are a sensible way to diversify one’s retirement portfolio.
As a 14 year retiree who has been collecting SS since full retirement age and an octogenarian all I can say is amen. You hit the buttons Jonathan.
A predictable steady income stream is the holy grail of stress minimized retirement.
But you can’t imagine how many people think they have it solved just accumulating investments and claiming using the 4% rule they can’t run out of money because the AVERAGES say so. Then they say they would never buy an immediate annuity.
Some folks in their fifties think they have it all figured out because some software program tells them so. Expenses will always decline in retirement they believe and my favorite, they plan to die with exactly zero money left.
And many take delight in telling me to mind my own business I know nothing about the retirement process.
I hope those know it all’s have something close to my enjoyable retirement.
Oh, Dick, I will never tell you to mind your own business! Your advice and retirement experience is very helpful.
Have you read Morgan Housel’s The Psychology of Money? Or read anything by Nassim Taleb? Both would tell ya that money and risk go hand in hand. Sometimes we take too much risk. And often we don’t take enough.
Other than you are a much better writer, I feel like I could have written that. It’s the same path I’ve followed, due to the same concerns. But they are very manageable.
LTC expenses scare me. LTC insurance scares me almost as much. To begin, it’s pretty difficult to get through underwriting in order to buy the insurance. For those who do buy, I’ve witnessed the insurance work as planned for a couple of my tax clients. I’ve also seen the premiums become too much of a burden for others. When that happens, usually in their later 70’s or beyond people tend to abandon the policy, losing the years of premiums they have paid.
Regarding income annuities. I only mention this because there are readers that don’t realize there are options such as certain periods, return of premium, and inflation adjuster riders that eliminate the problem of not outliving your investment in the annuity. Also, it was smart for you to buy from multiple insurance companies in order to avoid exceeding your states limits for insurance and annuity purchases.
Regarding SS at age 70. If I don’t live long enough to break even on my age 70 decision, my wife will inherit my benefit and it’s likely that she will benefit by my decision to wait. For that reason I have no regrets for postponing.
I bought LTC at 45, that was 35 years ago. The benefit is not great and they have been raising premiums 40-50% a year the last few years even offering a deal to buy out the insurance. Not sure what I will do at the next increase. If it weren’t for the goal to preserve assets for our children, I would drop it.
The thing is that while LTC is a risk, the numbers are in our favor and the number of people using LTC is not that high and only about 4% in a nursing home.
I didn’t know about the 4%. Smaller than I would have thought. As I saw this year’s LTC premium jump just like yours did, I was tempted to reduce my benefits, as Genworth is begging me to do, but my financial planner suggested I keep paying if I can afford it (I can) and that it’s lower than some she’s seen.
Most LTC is nit in a facility.
Be aware that riders = fees
My husband also planned to delay Social Security until 70, while he drew from my smaller account. Unfortunately, he died at 69 1/2, but he was so close to maxing out that it didn’t really matter: Switching to my survivor’s benefits from his account increased my income. Although the LTC premiums we paid for him were a wash, we had a rider that, if one of us died without any claims, eliminated premiums for one of the two policies for the surviving spouse, so I went from paying four premiums for the two of us to just one. I would relinquish any of these financial benefits to still have him by my side, but I know he’s with me in spirit and glad for the financial security he gave me. Regarding annuities, I switched two fixed rate annuities that he had purchased to one with a variable rate but a guaranteed minimum, and purchased a second one with a different company, as Jonathan suggests. I plan to begin drawing from those in a few more years, around age 78-80.
Another great article….you nailed it.
What do you think of the idea to take social security early and invest the proceeds in the vanguard total market index every month?
I actually did that, only I invest in dividend growth stocks. I can’t really say how I did, but I have bought a ton of stock, and my income is much higher than it was when I took SS five years ago. All the dividends are taxed at either 15% or 18.3%.
Now my problem is RMDs starting in 2026. I’ll be paying a lot more IRMAA and NII, but if you jump way up there it’s not that bad if you look at you average tax rate, counting IRMAA as a tax. These are not the problems of the average retiree, but a lot of people in my circle of friends has to deal with them.
It’s an apples-to-oranges comparison. Delaying Social Security is the equivalent of buying more inflation-indexed Treasurys. Vanguard Total Stock Market is a far riskier investment. That investment should pay off — but obviously it’s much riskier.
I found the links about longevity most interesting!