Today's Top 3 Retirement Decisions: Benz

Retirement involves making many important long-term decisions, which advisors do after carefully considering each client’s needs and resources.

Christine Benz, Morningstar’s director of personal finance, outlined three “tricky decisions” for retirement planning that need to be addressed by advisors and investors — and how to handle them — in a recent column.

1. What’s the Best Withdrawal Rate?

Although 4% is the standard drawdown amount per year of a portfolio used, Benz notes, that amount is not only debatable — ”it’s unknowable,” as asset returns and inflation going forward are question marks.

“Nor do you know how long you will live; your spending horizon could be 15 years, or it could be 40,” she says.

Many papers have been presented on the topic, but in an interview with Michael Kitces, William Bengen, who created the 4% guideline, said that if inflation remains low, people could withdraw up to 5.5%, Benz writes.

Two factors are key: a portfolio’s mix of stocks and bonds and an investor’s life expectancy. A higher stock mix typically points to a higher withdrawal rate.

But retirees, who have shorter retirement horizons, may want to take a higher withdrawal. She says that “being flexible with withdrawals” is really the key, “especially taking less when the portfolio is down.”

2. Is Long-Term-Care Insurance Necessary?

Long-term care can cost $100,000 a year, according to a Genworth survey, Benz says. And except for “rehab” followed by a hospital stay, it’s not covered by Medicare, she adds.

But it’s a difficult topic, and the need for it is “basically a coin flip: About half of people turning 65 will need some type of paid long-term care in their lifetimes,” Benz says.

Further, due to low interest rates and poor claims experiences for insurers, premiums have increased.

These insurance plans are a “big wild card for many retirees’ spending plans,” she says. Her advice is to review client portfolios and see where they fall on the spectrum and then develop a long-term-care action plan.

3. What About Annuities?

The latest darlings in the business of retirement, annuities, are another question mark. Many academic researchers support purchasing a simple income annuity for retirement, “arguing that doing so provides longevity risk protection and a higher payout” than something like a bond fund, Benz notes.

Yet there are a plethora of annuity types and many are complicated. She says that although the industry still debates the need for annuities in a portfolio, “there’s little doubt that the lifetime income they offer is in short supply.”

But since pensions are no longer available to most workers, and only a fourth of baby boomers retiring today have them, annuities might be necessary.

However, advisors first need to help clients maximize their payout from Social Security benefits. “Only after maximizing lifetime income through Social Security should an annuity come into play,” she says. And for those with pensions, annuities are less useful.