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A RECENTLY RELEASED book titled How to Retire is a goldmine for those in or near retirement. For the book, Christine Benz—Morningstar’s director of personal finance and retirement planning—conducted interviews with 20 experts, covering every aspect of retirement.
The result is a valuable field guide for those tackling life after work. Below are seven insights I found particularly useful.
1. Social connections. When we think about retirement planning, most of us tend to think first about the numbers. “Do I have enough? Am I on track?” These are certainly important questions. But one of the book’s experts, Michael Finke, points out that they’re just part of the equation. Finke argues that it’s equally important to be investing in social connections during our working years. That’s because isolation—unfortunately—can be a reality for some retirees after leaving the workplace’s built-in social network.
Where retirees choose to live is also critical. Finke cites research that found that folks tend to be happier living in their own homes—but only for a time. “Once they hit their 80s,” he says, “people who live in apartments are actually happier.” Everyone is different, of course. The key lesson: Retirement planning requires more than just making the numbers work. We also need to plan how and where we’ll spend our time.
2. Retirement styles. I recall meeting with a couple who were on the cusp of retirement. When it came to the question of investment strategy, the husband was quick to respond: “Let’s go with 100% stocks.” They could afford the risk, he argued.
His wife countered that they should go with 100% bonds, reasoning that they didn’t need to take any risk. While they were able to find a middle ground, this highlighted a reality of retirement planning: There’s more than one right way to build a plan—and people differ on the best approach.
Some like managing their own portfolio and are comfortable with market risk. Others, meanwhile, would prefer the guaranteed income offered by an annuity and don’t mind the limitations they impose. To help retirees better understand their personal preferences, researcher Wade Pfau has developed an assessment he calls “Retirement Income Style Awareness.” The idea is to help couples like the one I described understand both the range of options, as well as their own preferences, before they set out to make a plan.
3. Safe withdrawals. You’ve most likely heard of the “4% rule.” Based on research by advisor William Bengen, this is a guideline for setting a sustainable withdrawal rate from a portfolio. It’s intended to minimize the chance a retiree would run out of money.
But researcher Jonathan Guyton notes that the 4% “rule” was never intended as a rule. Because it was designed to be a “set it and forget it” strategy, it’s overly conservative, he says. “It’s designed to work even if you get a worst-case scenario” in the market. But since worst-case scenarios occur only in a minority of time periods, most retirees should be able to spend more than 4%.
That’s why Guyton recommends an alternative to the static 4% approach. His “guardrails” strategy allows retirees to adjust their spending from year to year as the market rises and falls. The bottom line: The 4% rule can be useful for a back-of-the-envelope reading on retirement readiness, but it’s not a complete answer.
4. Believing the numbers. Author Morgan Housel has observed that compound interest—a powerful force in finance—doesn’t lend itself to easy computation. If you have to calculate, “eight plus eight plus eight plus eight,” Housel says, the math isn’t difficult. But if we had to compute “eight times eight times eight times eight,” he says, “your head’s going to explode.” The math, in other words, isn’t intuitive.
This has always presented a challenge in financial planning, but author JL Collins provides a further insight. Compounding “is like a hockey stick,” he says. “It goes along slowly and then spikes.” That’s a good thing, of course, but it does present a pitfall. Collins describes a discussion with a woman who, like many people in recent years, had benefited from the market’s hockey-stick-like growth. She had a problem, though: Even though she could see the numbers, “she couldn’t quite believe them.”
It’s an interesting dynamic and fairly common. After decades of saving, plus strong market gains, many people have a hard time shifting gears from saving to spending. That’s why I recommend sketching out long-term projections that include various stress tests.
5. When to stop playing the game. William Bernstein, author of The Four Pillars of Investing, coined this well-known personal finance motto: “If you’ve won the game, quit playing.” If you’ve achieved financial independence, in other words, don’t unnecessarily jeopardize it. Instead, invest conservatively.
But Bernstein explains that this advice was intended only for “the median retiree.” Someone with more substantial savings can certainly take more risk. Folks with modest 2% or 3% withdrawal rates, he says, “are not drawing down enough of their assets to get into trouble.” It’s an important point. As a retiree’s asset base grows, the range of suitable asset allocation choices broadens. The advice to “quit playing” is important—but only in some cases.
6. Understanding history. A theme that runs through many of the interviews in this book is the importance of studying history. Bernstein, for example, explains why stocks tend to be a good hedge against inflation. He cites the Weimar Republic during the interwar era in Germany: “When prices increased there by a factor of one trillion, you actually were able to earn a positive real return.”
Elsewhere, Bernstein notes a little-discussed risk in owning an annuity: the risk that the insurer might fail. “I don’t think anyone should soft-pedal that,” he says, citing the 1991 failure of Executive Life Insurance as an example. It left policyholders with more than $4 billion in losses.
7. Setting an allocation. You may be familiar with the “bucket” approach to asset allocation. With this strategy, the size of a retiree’s bond portfolio is set in proportion to his or her withdrawal needs. Suppose a couple requires $100,000 per year from their portfolio. They might set aside $500,000 or $700,000 in bonds—enough to weather a five- or seven-year downturn in stocks. The remainder of the portfolio could then be invested in stocks, and the result would be a simple stock-and-bond portfolio.
But as Christine Benz points out, we shouldn’t overlook the value of cash. She recommends a separate cash bucket containing one or two years’ worth of expenses. Why hold cash, especially with rates falling? Benz points to 2022, when both stocks and bonds declined: “A retiree with cash on hand could have used those funds to provide spending money.” Holding cash, in other words, might feel inefficient, but it can serve an important role.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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I think that the social aspect of retirement is under appreciated. As Benz states, we need to develop friendships and social connections while working that will transcend retirement.
We retire from work, but hopefully not from life. Life needs a purpose and retirees need to find that in their retirement. It could be hobbies, charitable work, religion or other pursuits. I knew that when I retired I did not want a life strictly of leisure pursuits. I have volunteered at a Christian ministry and currently serve on the board of 2 retirement associations, one with 50,000 members.
When I told a consulting friend of my planned retirement, she asked me what I would do after breakfast? That is actually a serious question.
Man, I’m keeping busy reading the many books recommended here. I’m currently reading the Morgan Housel book Same as Ever, borrowed from My local library and have requested Christine Benz’s new book when it becomes available. Whether you agree with all aspects of these authors or your positions or not, they do provide useful knowledge to consider in our own retirement planning. I appreciate the different perspectives.
Whenever anyone wants to denigrate annuities, Executive Life is the example most often used.
As a former professor of insurance I can tell you that Executive Life and another company, First Capital, went under because of junk bond investing and massive failures in oversight by state insurance commissioners.
The regulations in existence today make such investments illegal, and state insurance regulations have been tightened significantly in the past 30 years. As of 2023, 95% of all bonds held by insurance companies are “investment grade. (Source: https://www.acli.com/about-the-industry/life-insurers-fact-book/2023-life-insurers-fact-book)
While I would recommend choosing insurance companies with solid financials, and not just high ratings, merely as common sense consideration, I would not allow scare tactics, like those voiced by Mr. Bernstein, to dissuade me from considering annuities as a source of retirement income…nor have I.
I am currently receiving monthly income from two annuities (purchased with Roth IRA dollars, so the income is income tax free) and I own two additional annuities that will be “turned on” in 2029.
Is it prudent to be careful in selecting annuities and insurance companies that sell annuities? Absolutely. Just as it is prudent to consider with who you invest, and from whom you accept financial advice. While I cannot provide imperial evidence, I am certain far more money has been lost to investors by poor investment choices and poor financial advisors’ actions than have ever been lost by failed insurers.
Thanks Adam. Morningstar has a 55 minute interview with Benz about her book.
The Long View: Christine Benz – How to Retire
https://www.youtube.com/watch?v=kYxr0VrL2v4&ab_channel=Morningstar%2CInc.
Looks like a great book, Adam. I am ordering it from Amazon immediately.
I’m glad to see that one of the interviewees mentions the collapse of an insurer as a risk for annuities. A smaller company called First Capital failed at the same time as Executive Life, getting very little of the publicity. It took most of my funds with it, at the same time the failure of the Rhode Island savings and loan system locked up the rest. I had to sell my condo at a 15% discount to prevent losing it to the bank.
That’s why I tend to spit when someone mentions annuities without figuring in that risk. It is real and it exists.
Thanks for the review of Benz’s book; I plan to read it this week. I read many articles recommending or at least implying that our cash allocation ought to be determined by interest rates. And, when those rates decline, to move out of cash and into some other category, typically riskier, in order to increase yield. This ignores the principal reason I and many others hold cash in the first place. As a retiree, I can tap my cash for distributions when stocks decline, and rebalance when stocks are “on sale”. Indeed, over long terms, cash is inefficient, but the peace of mind it produces justifies its role, along with short term treasury bills and notes, both ordinary and TIPS.
Thanks for the summary. My local library has it on order and I’m now on the list for when it arrives.
WRT item #1, as I’ve said here before, you shouldn’t wait until your 80s to plan a move. At my Continuing Care Retirement Community the wait for a cottage is 14 years, for a one or two bedroom apartment in the older buildings ten years, and in the more expensive new building five to seven. You could probably get admitted to a for-profit operating on a rental basis more quickly, but that’s less desirable. Besides, while down-sizing is never fun, it’s at least easier when you’re in your 70s than your 80s. And when there are two of you.
Great article Adam. I look forward to reading it.