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Retirement Planning > Spending in Retirement > Income Planning

This Retirement Investing Strategy Can Boost Income 29% a Year

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What You Need to Know

  • Combining an annuity with a more aggressive asset allocation can increase spending power in retirement by 29% a year, new research finds.
  • The researchers also found that delaying Social Security from 65 to 67 can support 16% more annual spending with 15% less downside risk.
  • Ultimately, advisors must help their clients build an optimal retirement income strategy that considers the totality of the retirement income toolkit.

Workers in the United States face a host of difficulties in the effort to prepare for retirement, but while there are clear reasons for concern, there are also some powerful emerging strategies that the typical retirement saver can use to provide themselves with greater peace of mind — and greater spending power — after they exit the workplace.

In fact, according to an in-depth new report published by BlackRock and the Bipartisan Policy Center, adding guaranteed lifetime income combined with a more aggressive asset allocation can generate an additional 29% in a typical person’s annual spending power from accumulated retirement savings, excluding Social Security.

Taking this approach also reduces downside risk by as much as a third when compared to a standard uninsured retirement portfolio of 60% fixed income and 40% equities, researchers say.

As BlackRock and the BPC spell out, in the first year of retirement alone, the strategy of incorporating income guarantees and redeploying the remaining portfolio to a riskier mix of assets increases spending capacity from retirement savings by 35%.

Put simply, the guaranteed income stream affords individuals more flexibility to spend early in retirement, knowing they will have at least a basic income floor in the future that will address their fundamental needs.

The report further suggests that smartly incorporating Social Security claiming into this approach to retirement can also meaningfully boost spending power. Specifically, the paper analyses the utility of delaying benefits from age 65 to age 67, finding this delay can support 16% more annual spending throughout retirement while further reducing downside risk by 15%.

Ultimately, the increased spending power generated by both strategies extends well beyond the average life span, providing a significantly higher spending floor into the typical retiree’s 90s and beyond.

The Retirement Challenge

As the researchers note, although imperfect, the proverbial “three-legged stool” of retirement — Social Security, private pensions and personal savings and investments — has historically supported many Americans.

However, today’s longer periods of retirement, combined with Social Security’s financial challenges and the decline of defined benefit plans in favor of defined contribution plans have begun to disrupt that model. As other recent reports have warned, by some key measures, the U.S. appears to be heading from a retirement “crisis” to a retirement “catastrophe.”

“Every retiree’s financial situation is unique, the product of a lifetime’s worth of decisions and characteristics,” the report explains, citing factors ranging from caregiving responsibilities to market performance.

As the researchers point out, the totality of these factors, plus the uncertainty of mortality, compound the complexity of determining optimal retirement spending.

“Many people believe that delaying retirement or working during retirement will compensate for a lack of savings, but countless other factors, from unanticipated health problems to shifting macroeconomic conditions, can interfere with that plan,” the report warns.

At the same time, longevity is fundamentally unpredictable, and individuals routinely underestimate how long they will live. In part, this is because each additional year of life increases the likelihood that a person has traits that positively affect longevity — such as good cardiovascular health — meaning one’s life expectancy counterintuitively increases as they age.

Disparities along racial, ethnic, gender and income lines pervade many of these challenges. For example, Black Americans on average have shorter life expectancies and more health issues than white Americans, while women and Black and Hispanic workers on average earn less than their white male counterparts, putting them at a significant disadvantage from the beginning of their careers as they try to save.

Where the System Falls Short

According to BlackRock and the BPC, even as the shift from DB to DC plans has increased the role of personal responsibility in preparing for retirement, a growing body of research demonstrates a disconnect not only between what people should do and what they want to do but also between intentions and actions.

“In deciding how much to save and in what to invest, for instance, people are reluctant to stray from default options,” the report notes. “This poses a serious risk to workers when their employer puts little thought into their retirement plan options, but it also presents significant opportunities for the private sector and government to improve financial outcomes by improving plan defaults.”

The paper commends the federal government for the passage first of the Setting Every Community Up for Retirement Enhancement (Secure) Act in 2019 and the subsequent passage of the Secure 2.0 legislative package late last year. This legislation created more flexibility for employers in establishing and maintaining well-designed retirement plans, including by allowing for greater adoption of lifetime income solutions.

However, the researchers warn, the current framework is still inadequate to head off the impending retirement crisis, due primarily to the highly complex and rapidly evolving “decumulation challenge.”

“People often use mental shortcuts to make decisions instead of rigorously evaluating the situation,” the report points out. “Often, these shortcuts are helpful, allowing individuals to judge situations reasonably well without overwhelming their cognitive faculties.”

In complex situations, such shortcuts often do more harm than good, as small changes in context and framing can create meaningful and potentially unintended outcomes.

“For example, the Social Security Administration spent years framing the decision of when to claim benefits using a ‘break-even analysis’ that characterized claiming later than age 62 as a risky gamble that would take many years to pay off — even though most retirees will ultimately receive greater lifetime benefits if they delay claiming,” the paper explains. “This framing caused many retirees to claim benefits earlier than they would have otherwise, as the advice tapped into a widespread aversion to risk.”

A Better Approach Is Possible

According to the report, the sheer breadth of emerging decumulation tools and strategies available to retirees can be daunting, leading some to feel that optimizing their strategy is beyond their abilities. Fortunately, that is not the case in practice.

The paper proposes a three-step process that can serve as a starting point for savers and retirees seeking to generate adequate income in retirement from the assets accumulated during their working lives.

Everything starts with determining clear retirement objectives.

“Many savers (or even retirees) cannot articulate what financial success in retirement looks like for them,” the researchers explain. “Without clarity around retirement objectives, understanding the challenges one must surmount and creating a plan to overcome them is virtually impossible. Each saver’s goal will depend on their circumstances and preferences.”

Step two is to consider the key risk factors that are likely to affect a given retiree. While all retirees must address the risk of outliving their assets and specific savers face a wide variety of risk factors throughout their lives, academic research and surveys with retirement participants consistently show that these risk factors often correspond to three broad phases of the retirement planning journey.

During the early career years, low earnings — and therefore low ability to save and invest — often pose the greatest challenge, the researchers suggest. Then, as savers near retirement, market volatility comes to the fore. Finally, retirees often struggle to spend sustainably from their portfolios.

Taking steps to address these risks throughout one’s working career can be very powerful. Early on, for example, an emphasis can be put on aggressively paying down debt and striving to live within one’s means. Then, as a person advances in their career, staying committed to a budget can help ensure savings are allowed to grow and benefit from the power of compounding.

The third step is to take what has been learned along the way and formulate a holistic retirement strategy, one that optimizes income in retirement considering career earnings, income from Social Security, part-time work in retirement and other wealth sources.

As noted, the research concludes that adding guaranteed lifetime income combined with a more aggressive asset allocation can generate an additional 29% in a typical person’s annual spending power from accumulated retirement savings, excluding Social Security.

Taking this approach, researchers say, also reduces downside risk by as much as a third when compared to a standard uninsured retirement portfolio of 60% fixed income and 40% equities, and the benefit of the strategy grows when one also delays the claiming of Social Security.

“The bottom line is an optimal retirement income strategy that considers the totality of the retirement income toolkit,” the researchers conclude. “Taking a whole-portfolio approach that protects against multiple risk factors allows for comprehensive solutions that help to increase the chances of meeting the saver’s ultimate financial objectives.”

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