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I recently viewed an interview by Christine Benz on YouTube with the finance writer for the Washington Post.
The topic was the difficulty transitioning from saving to using money for retirement income, a topic frequently discussed on HD. The writer said she was getting ready to retire and her husband was already retired. She went on about her own thinking regarding the difficulty of transitioning from saving to spending.
After a few minutes of the discussion about withdrawal strategies, she revealed that in addition to what she and her husband had saved, they both had pensions and, of course, social security. Her husbands pension provided her with a survivor annuity.
She then said she was taking her pension in a lump sum because she wanted total control over her money. Giving up a life annuity income when you have additional resources doesn’t sound like good move to me, especially after saying how difficult the withdrawal strategy would be, what do I know, I’m not a financial columnist. However, I do live on a pension and Social Security and I know the feeling that steady income provides.
Maybe she has enough investing skills to pull it off, but I bet most of the YouTube viewers would be making a mistake. To me the key to a secure, stress-less retirement is a steady income stream that does not require annual withdrawal calculations or decisions or fluctuating income.
The writer gave up the second best source, a pension, not available to many Americans these days. Most people must construct their own income stream.
If I was in that position I would use a portion of my investments to purchase an immediate annuity and I would assure an added income stream with dividends and interest. I see that as simple with few additional decisions needed on an ongoing basis. No guardrails, no ladders, no (significant) worries about the stock market. And it preserves at least a portion of investments.
In fact, to cope with my non-COLA pension, over many years I have built a supplement income stream from bond interest and dividends and because it has been reinvested for over twenty years, the monthly proceeds could now boost our pension income by nearly 20%.
No doubt there are other ways to construct a retirement income stream, better than mine very likely, but I like simplicity even at a cost.
How do people do it, that is, construct their retirement income stream from accumulated savings with minimum effort, maximum stability and minimum stress?
You’re not making a logical argument for your position, you’re making an emotional argument based on your way of experiencing the world (nothing wrong with that, but it means you value some things over others, not that it’s a better choice)
It’s not only possible to do this, but a professor from U Chicago has developed a calculator to let you create a 2 fund portfolio, input your known fixed income streams and compare the results quite easily.
The real question is, can the individual do it? Just because it’s easy doesn’t mean there’s follow thru. Just look at the long term investor returns versus market returns, even with people moving to index funds, they lag. Why because they still buy high and sell low.
SO I think you’re asking the wrong question. Everyone should ask themselves:
Can I act in my own best interests or am I best served by paying someone dispassionate (like Mr Grossman) to execute the best long term strategies? (because advisory costs that help you avoid mistakes are way more valuable than other expenses)
I think you answered the question which I also alluded to – can the individual do it? I say the answer for the great majority of people is no. I think what people are actually doing or not in terms of saving for retirement is evidence of that.
A theory proved is not necessarily applicable when you add the human factor. Pensions were designed to be annuities.
Given the possibility of making it all work as you suggest, workers should be happy with 401ks in lieu of a pension. What do you think?
I agree with your first paragraph.
On the 2nd, I’d prefer 401k to pension, it accumulates easier and is portable, that’s a big advantage. Very few people spend 20-30 years in one place to really cash in the best part of a pension.
Unless we’re going to change back to people spending a lifetime at one place 401k. Of note, union jobs, that usually lead to very long tenures, still have pensions, even if they’re not as generous as they used to be.