A sound retirement plan involves multiple factors, but individuals have sole control over only two of them — saving (vs. spending) and asset allocation, according to J.P. Morgan Asset Management’s Guide to Retirement, 2018 Edition.

They have partial controls over their earnings and longevity and no control over market returns and tax policy, according to the guide.

With that context in mind, Anne Lester, Global Head of Retirement Solutions at J.P. Morgan Asset Management, laid out some of the most important decisions individuals should consider when nearing retirement — decisions advisors should be discussing with their clients — at a luncheon meeting with reporters.

1. When to Start Collecting Social Security

This is “the single most important decision” clients will make because it has “long-term consequences,” said Lester. “Deciding when to claim [Social Security] benefits will have a permanent impact on the benefit you receive.”

(Related: ESG Investing Is Missing From Most US Retirement Plans: GAO)

That’s because the sooner individuals start collecting Social Security the less money they will receive, while the odds that they live well into their 80s and beyond continues to increase.

Social Security recipients receive 25% less in monthly payments if they begin collecting benefits at age 62 rather than at their full retirement age, which is now 66 for those born between 1943 and 1954. If they delay receiving benefits until age 70, they will collect 32% more than they would have at full retirement age.

(Related: Small Tax Hike Could Keep Social Security Solvent for Decades)

Despite the benefits of collecting Social Security later rather than sooner,  the median retirement age for workers in the U.S. is 62 even though the average life expectancy for a 65-year-old in 2016 was 85.7 for women and 83.2 for men, said Lester. That differential is expected to narrow further by 2090, when the average longevity is anticipated at 89.5 for women and 87.5 for men.

“Think of Social Security as part of your portfolio,” said Lester.

2. When to Begin Withdrawals From a Retirement Account

One of the greatest risks to success in retirement planning is the moment when a client shifts from savings to withdrawals in their retirement accounts, especially when withdrawals begin during a down market. That “can ravage a portfolio,” said Lester.

Another vulnerability for retirees when they make that switch is spending too much money. J.P. Morgan has observed big spending spikes when individuals first retire — to fix a house, pay off a mortgage, travel or some other purpose — which exacerbates those risks, said Sharon Carson, retirement strategist.

Lester advised that individuals and their advisors consider investments that incorporate downside protection as well as greater diversification among noncorrelated investment classes, including the use of options and annuities. “Don’t frame it as an either/or,” said Lester referring to the decision to annuitize or remain in the market. “You need a basket of strategies.”

She doesn’t consider owning developed and emerging market equities as being truly diversified since they are all equities that eventually “correlate with one another.” Lester suggests instead Treasuries and cash to mitigate portfolio risk.

3. How to View Market Risk

There are two factors investors and their advisors should consider when discussing market risk as it relates to a retirement accounts: the willingness of an investor to undertake market risk and the capacity of their portfolio to do so.

“Most people in their 60s are comfortable taking market risk, but the capacity of their portfolio to withstand a substantial market downturn [at that time] is at its lowest,” said Lester. That’s because a portfolio loses more money when a portfolio is largest, at the beginning of retirement, which can impact later distributions, and loses less when its size has declined.

“Willingness and capacity should be in balance,” said Lester, noting that implies a static glide path in retirement. But she said that could be complicated as retirees age. “Older retirees may find it difficult to make rational financial decisions.”

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