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Ask an Advisor: I’m 65 Years Old and Going to Retire Soon. How Should I Structure My Portfolio?

April 12, 2023 2023, Media, Preston Cherry No comments

Shifting from building wealth for retirement to distributing wealth during retirement involves considering preferences related to your life and money. Those factors can include your risk capacity, risk tolerance, lifestyle preferences, longevity, needs, diversification and tax location. Retirement planning happens in stages, with a pre-retirement stage occurring over three to five years during which you begin adjusting your mindset, lifestyle and investments to fit your next stage.

(If you have additional questions about investing or retirement, this tool can help match you with potential advisors.)

How to Structure Your Portfolio

Ask an Advisor: I’m 65 Years Old and Going to Retire Soon. How Should I Structure My Portfolio?

The structure of your retirement portfolio should reflect your needs, lifestyle, risk tolerance and capacity, and financial resources. Diversification across tax location, investment type, time horizon and goals will help optimize your retirement portfolio.

Start by assessing your “sleep-well-at-night meter.” Your risk tolerance may or may not match the risk you need to maintain purchasing power and growth. Maximizing for factors such as growth can help you meet your longevity and medical expense needs.

Second, select fundamental investments that meet your foundational lifestyle needs, commonly called your core portfolio. For example, three to four low-cost, diversified index or exchange-traded funds (ETFs) may suit your core portfolio across equities, bonds and domestic and international investments.

Your market equity participation will depend on how much guaranteed income coverage you have from resources such as Social Security and your risk tolerance.

If you have the capacity and resources to accept volatility and risk for potential additional growth opportunities, consider adding speculative assets to your portfolio, such as gold and cryptocurrencies, and take advantage of bear market corrections.

Let’s dive a bit more into each of these categories of lifestyle and risk considerations. (If you have additional questions about investing or retirement, this tool can help match you with potential advisors.)

Longevity

Although Americans’ average life expectancy has taken a hit in recent years, they still enjoy long retirements by historical standards. The average life expectancy is approximately 80 years for women and 74 for men, respectively, according to the Centers for Disease Control and Prevention. These are averages, meaning retirement can span 25 to 35 years. Longer time spent in retirement requires more funding, and more funding requires a balance of conservation and growth.

If your investment selections are too conservative, they may not provide the growth necessary to accommodate your potential longevity. Consequently, if selections are too aggressive, there is a risk of poor extended performance contributing to a longevity shortfall. (If you have additional questions about investing or retirement, this tool can help match you with potential advisors.)

Lifestyle Needs and Preferences

Ask an Advisor: I’m 65 Years Old and Going to Retire Soon. How Should I Structure My Portfolio?

Your needs and lifestyle preferences are essential when considering investment choices. If your lifestyle preferences require higher levels of funding, your investment selection may orient more toward growth.

You may have travel aspirations, be philanthropic, have wealth transference goals and have higher daily lifestyle standards, all of which require a tilt toward growth. Contrarily, more reserved lifestyle preferences will shift your investment selections toward a more balanced, conservative growth approach.

Fundamental care and needs must be met during retirement. Medical expenses during retirement and long-term care support and services toward the end of life are expensive. These services require a combination of public or private insurance protection with private funding supplements.

Medicare supports a vast amount of medical care beginning at age 65, yet it leaves gaps in coverage that require money. If long-term care insurance has been purchased approaching 65, premiums are expensive, meaning self-funding. Current and long-term care coverage, need and resources will influence portfolio construction. (If you have additional questions about investing or retirement, this tool can help match you with potential advisors.)

Risk Capacity and Tolerance

Risk capacity is your ability to take investment risk, and risk tolerance is your willingness to take that risk. Both forms of risk evaluation will influence your retirement planning and the structure of your retirement portfolio. When considering risk capacity, you must consider your other available financial resources, which affect your risk tolerance.

Other financial resources such as Social Security and a pension, private annuity, or income streams from real estate properties will factor in how much risk you can accept in your market portfolio. For example, Social Security, pensions and private annuities are guaranteed income streams that fund a certain percentage of essential lifestyle needs over time.

The presence of fixed resources reduces the retirement funding need with additional market resources. It increases the risk capacity you can accept to foster growth in your portfolio to combat inflation and longevity risk. Furthermore, you may not need to replicate income types in the market if abundant resources mirror income.

Risk tolerance also includes your emotional ability to sleep well at night during periods of market volatility. The economic and financial markets are cyclical and fluctuate. While additional risk could foster more growth opportunities, more risk also welcomes more volatility during hostile market times. Growth allocation is not to be feared. However, it is to be accounted for both economically and emotionally.

Bottom Line

The structure of your retirement portfolio will depend on your risk tolerance, needs, lifestyle and other factors. Consider evaluating those considerations as you approach portfolio design.

Tips for Finding a Financial Advisor

Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As your consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Annuity Issuers Vie for Shelf Space as Small Distributors Are Rolled Up

April 11, 2023 2023, Media, Paul Tyler, Scott Hawkins No comments

Annuity issuers are operating in an increasingly concentrated marketplace, but also one where the ranks of the top sellers have been fluid recently.

By Warren S. Hersch|March 29, 2023

Annuity issuers are increasingly competing for product shelf space, as private equity-owned aggregators gobble up agents and brokerage firms.

That has pushed issuers to make it easier for distributors to do business with them, said Scott Hawkins, head of insurance research at the global investment management firm Conning, who spoke at a retirement technology forum on Monday.

They must be able to serve increasingly larger distributors efficiently while continuing to cater to the many smaller firms.

“This means their wholesaling operations have to be top-notch,” he said, adding the carriers must establish relationships with independent marketing organizations that can effectively manage relationships amid the ongoing consolidation.

The Monday event, hosted by Nassau Financial, was held at the Applied Innovation Exchange offices of Capgemini, an information technology services and consulting firm.

Acquisitions between 2018 and 2022, including buyouts of asset managers, insurance agencies and broker-dealers, were driven in part by a wave of retirements of older agents and advisors looking to sell their business, Hawkins said. Increased costs of doing business because of expanding regulatory requirements, and the need to invest in new technologies, also contributed to the trend, he said.

Hawkins also identified as a key trend concentration in the life insurance industry. The top 25 carriers in 2021, the last year for which data is available, generated more than 80% of premiums, he said. And the top 10 carriers nabbed about half the total.

“That’s important because these big players can command distributor shelf space,” he said.

But there also has been fluidity in rankings near the top, Hawkins added, observing that 13 of the top 25 carriers had moved up or down by at least five places over the five-year period from 2017 to 2021. So, for example, if a carrier was ranked 11th in sales for a product category in 2017 and then 3rd in 2022, it rose eight positions in the rankings.

Fluctuating consumer interest in the products underpin these changes, and this fluidity has driven new product development, he said.

Hawkins said the rise in interest rates has led to an increase in life insurers’ portfolio yields, reversing the squeeze on profitability in earlier years.

Citing Limra data, he noted the uptick in yields boosted rates paid on fixed-rate annuities: The average amount credited on five-year guaranteed annuities rose to 4.3% in December from 1.9% in January of 2022. The rise led to a spike in sales of the fixed-rate products. Meanwhile, variable annuity sales fell 20%, the result of a less bullish stock market.

Restructuring of the Annuity Market

Hawkins framed a restructuring underway in the annuity market in terms of sellers and buyers of annuity policy liabilities. Sellers, he said, want to offload blocks of fixed annuities because the rates paid the on contracts are higher than what they’re earning on their investment portfolios.

And they’re angling to divest less profitable variable annuity contracts. Hawkins said stock market volatility has forced carriers to increase reserves to support guaranteed living benefits. A rise in the cost of carriers’ variable annuity hedging programs, and their wanting to redeploy capital to other, higher-growth businesses, also underpinned moves to offload these contracts, he said.

But the buyers, mainly private equity-owned companies, have already purchased much of the low-hanging fruit: closed blocks of fixed-rate annuities that they could acquire at low cost.

As their returns on investment decline, annuity issuers have shifted their sights to other areas, including focusing more on businesses selling variable annuities and individual life policies and arranging pension risk transfer deals. They’ve also moved into funding agreement-backed securities and making loans, Hawkins said.

“Companies are acquiring a source of private credit, which they’re using to increase their investment returns,” he said.

Hawkins said that investments in insurance technologies have resulted in improved productivity, as measured by a greater rise in premiums written in recent years (up 52%) relative to employee headcount (up 13%).

“That suggests that this technology investment is paying dividends,” he said. “Insurers are able to do more business with fewer people, and the people they have are focused on doing the high, value-added activities that support growth and profitability.”

The technology investments he added, have also spurred carriers to shed through automation low-paying administrative and clerical positions, and to increase recruitment of more expensive, high-value workers in much demand, including people with computer and mathematical skills.

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How Much Should You Have in Retirement Savings at 65?

April 10, 2023 2023, Media, Paul Tyler No comments

At age 65, you may be retired or preparing to retire soon. It’s an age when you may be concerned about the size of your retirement nest egg.

If you’re already retired, will it be enough to last for the rest of your golden years? If you’re not yet retired, how much more should you aim to save to get your nest egg to a place where you can stop working and have peace of mind?

While there is no one-size-fits-all answer to this question, there are a few rules of thumb you should keep in mind.

Aim for $700K at a Minimum

Larry Hendrickson, founder and managing partner at G&H Financial Group, notes that the amount of retirement savings you should have if you retire at 65 will depend on your personal living costs. It also will depend on whether or not you want to leave an inheritance.

He broke down a few scenarios to see how far different amounts of savings would go if you are a single individual with a desired annual retirement income of $55,000 or a married couple with a desired income of $75,000.

His calculations assume an average annual Social Security benefit payment of $30,708 per year for singles or $61,416 for couples, an inflation rate of 3.5% up to age 80 and a rate of 2.5% thereafter, a Social Security inflation rate of 1.5% and an investment return rate of 4% up to age 95.

“A single individual with $800,000 in a retirement account, spending $55,000 a year with 3.5% inflation and a rate of return of 4% will run out of money at age 95,” he said. “If they passed away at 94, there would be $28,141 left in the retirement account. If the individual desired to leave a legacy, they would need a balance of $900,000 in their retirement. Then at age 95, their beneficiaries would divide $269,985.

“A married couple with $700,000 set aside for retirement would leave $23,979 if they lived until age 95,” he said. “With a retirement account [balance] of $800,000, they would leave $348,328.”

At $900,000, the remainder would be $672,658. At $1 million, it would be $996,998.

Bill Waggoner, partner at Stoney Creek Advisors, LLC in Rochester Hills, Michigan, recommends that a couple who is 65 aim for $1 million in retirement savings.

“Every case is special because everyone has different goals, expenses and needs in retirement,” he said. “As a rule of thumb today, for the average middle-American couple around age 65, I usually suggest accruing a portfolio of around $1 million to retire comfortably and avoid returning to work during retirement.”

How To Calculate Your Ideal Retirement Savings Amount at 65

Paul Tyler of Nassau Financial Group in Hartford, Connecticut, notes that calculating your ideal retirement savings amount can be quite complex.

“You first need a very clear-eyed view of your income and expenses in retirement,” he said.

Income includes Social Security, pensions, annuities and other sources of income, such as rental property. Expenses should include day-to-day expenses, healthcare costs and some financial cushion for unexpected expenses.

Once you know these numbers, use the “4% drawdown rule” to calculate the savings needed, Waggoner said.

“This is one of the oldest ‘rules’ in retirement planning,” he said. “The 4% drawdown rule states that you should be able to take 4% from your investments annually without touching your principal. This approximation is based on the historical 4% to 5% average growth rate that most financial advisors use to gauge growth in retirement investments.”

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What Gen X Women Need To Know To Get Ready for Retirement

April 10, 2023 2023, Media, Paul Tyler No comments

Gen X women are now between the ages of 43 and 58, which means retirement is on the not-too-distant horizon for some of them. However, instead of looking forward to this phase of life, many women in this generation dread it.

A 2019 study conducted by the Employee Benefit Research Institute found that members of Generation X feel less confident about retirement than millennials and baby boomers. The study found that over half of Gen Xers don’t believe their current financial circumstances will allow them to live comfortably throughout retirement, afford the same lifestyle in retirement, have enough money to last their entire life or cover basic expenses in retirement.

So why is this generation, in particular, feeling so anxious about retirement? And why could women be more at risk for feeling this way? Here’s a look at why Gen X women may feel less prepared for retirement than boomer or millennial women, and what they can do to feel more ready.

Reasons Gen X Women Don’t Feel Ready for Retirement

Several factors could lead Gen X women to feel they are not prepared for their retirement years. Here’s a look at some of the hurdles women of this generation could be facing.

Debt

Student loan debt could take more of a toll on the finances of Gen X women than women of other generations.

“Gen X is the first generation of women for whom student loans are a significant financial burden,” said Melissa Mabley Martin, wealth advisor at Bartlett Wealth Management. “The oldest baby boomers paid an average of $243 per year for tuition at a public college and $1,088 for a private college. It was possible to ‘work your way through school.’ By the time Gen X entered university, costs had skyrocketed at a rate well above general inflation, and it was no longer financially feasible for the average person without significant savings to get through school without loans.”

Although millennials are also burdened with student loan debt, Mabley Martin believes a lack of financial literacy may play a role in why Gen X could have taken on more debt than the next generation.

“The difference between Gen X and millennials is that millennials are likely better educated about the consequences of taking out excessive student loans,” she said. “Gen X was sold hard on the importance of getting a good education so that you could get a higher-paying job — in essence, that the degree would pay for itself with a higher salary. Millennials went in with their eyes wide open, and also benefitted from lower rates on fixed federal student loans.”

The Economy

While every generation has had to weather certain economic storms, the state of the economy has taken a toll on Gen X in particular.

“When the ‘tech wreck’ and September 11th happened, Gen X was in their early 20s to mid-30s — peak years to save for retirement,” Mabley Martin said. “When the financial crisis hit, most women in Gen X were mid-career. Unemployment skyrocketed and savings stalled during those prime earning years. The COVID recession a little more than 10 years later was short, but the fallout from the pandemic forced many women to leave the workforce altogether either to supervise remote learning or to care for aging parents.”

The Caregiving Conundrum

Gen X women have had to bear the brunt of caregiving — times two. This can take a major hit on their ability to save for retirement.

“Generation X is commonly referred to as the ‘Sandwich Generation,’ saddled with providing care and financial support to both their parents and their children,” Mabley Martin said. “According to the AARP, the average caregiver in America is a 49-year-old woman. These caregiving responsibilities are unpaid and, unsurprisingly, are reported to be affecting a woman’s ability to save for retirement. And it doesn’t end when those children reach adulthood. More than half of adults ages 18 to 29 reported being supported financially by their parents.”

Changing Retirement Income Options

“Defined benefit programs, [aka] pensions, were common for baby boomers — not just for government employees but at the corporate level,” Mabley Martin said. “These are virtually nonexistent today.”

In addition to not having the same access to pensions as their predecessors, the Social Security program may look different by the time Gen X reaches their retirement years.

“Social Security, which is a primary source of retirement income for the majority of Americans, is projected to have a shortfall beginning in 2035,” Mabley Martin said. “For beneficiaries 60 and younger, the Social Security statements now contain what is essentially a warning that they will be able to pay out approximately $800 of every $1,000 in current benefits given current laws. Millennials should have enough time to pivot and make plans to supplement any potential shortfall in Social Security benefits, but the oldest Gen X women are now rapidly approaching 60. It may be too late to do anything other than push out your retirement date and continue to work.”

What Gen X Women Can Do To Prepare for Retirement

Although it may seem like the deck is stacked against them, there are still levers Gen X women can pull to increase their retirement readiness. The No. 1 thing to do is create a solid financial plan, Mabley Martin said.

“Careful financial planning is essential to a successful financial future,” she said. “This isn’t just true for Gen X women, but it’s going to be particularly important [for them] because, unlike members of younger generations, their savings don’t have the benefit of a long time horizon. They may need to save more or work longer or both in order to ensure they have sufficient resources to fund their retirement.”

Paul Tyler of Nassau Financial Group in Hartford, Connecticut, notes that it’s important for women of this generation to have their own retirement savings, independent of their spouses.

“Women in particular need to recognize they will likely outlive their spouse or partner, and actively plan to build predictable income for later in retirement,” he said, “whether through an IRA, 401(k) or annuity.”

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Jamie Hopkins: SVB Collapse Is Wake-Up Call on Cash Managemen

March 29, 2023 2022, Jamie Hopkins, Media No comments

John Manganaro
March 20, 2023

Word emerged over the weekend that UBS Group AG had agreed to buy Credit Suisse Group AG in what commentators have already described as “a historic deal” brokered by the Swiss government aimed at containing a crisis of confidence in the global banking system.

The new development came less than two weeks after Silicon Valley Bank became the biggest U.S. lender to fail in more than a decade, following its now-tarnished leadership’s unsuccessful attempts to raise capital and an ensuing exodus of cash from the tech startups that had fueled the lender’s rise.

As of Monday morning, the share prices of other regional banks continued to slide, particularly First Republic Bank, although some midsize U.S. lenders began to see promising signs of renewed interest from investors.

According to Jamie Hopkins, managing partner at Carson Group, these rapidly unfolding and interrelated events have underscored a few foundational financial planning concepts that seem to have been forgotten by many investors (and advisors) in the wake of the Great Recession.

As Hopkins emphasizes in a video posted to his Twitter channel, the unfolding banking industry drama shows that investors must take greater care in the management of their cash and cash-like assets, and that inherent “conflicts” in the banking system can leave long-term investors exposed to excess risk.

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Are I Bonds a Good Investment for Retirees?

March 29, 2023 2022, Media, Paul Tyler No comments

Brian O’Connell
March 24, 2023

For retirees, I bonds represent a robust portfolio option in 2023 – and savvy investors know it.

Take the March 2023 I bond composite rate, which stands at 6.89%. That’s a good and safe return for retirement investors, who know only too well that capital preservation is the name of the game in retirement.

Add a decent and guaranteed asset appreciation, and it’s no surprise that investors are lining up to purchase I bonds. In January 2023, I bond sales crested $4.2 billion – that’s a new record for any January since I bonds were created in 1998.

What do retirees need to know about I bonds, and how to buy them? Here’s a quick checklist.

I Bonds Defined.
Return Risk.
Laddering Strategy.
Good Tax Benefits.
How to Buy I Bonds
Investment Caveats.

I Bonds Defined

Known more formally as Series I U.S. Savings Bonds, I bonds are inflation bonds issued by the U.S. government. They’re especially useful for retirees, who need guaranteed income and asset appreciation in retirement.

“For retirees, they’re a safe investment,” says Rachel Christian, senior writer for The Penny Hoarder and a certified educator in personal finance. “The U.S. government has never defaulted on its bonds, so your money is well-protected. If inflation goes back up, you’ll get a higher interest rate, which can be a great hedge against inflation during retirement.”

The government offers I bonds to all investors, but especially retirees, as a personal firewall against runaway inflation.

“In a high inflationary period – like today – investment and economic risk are very real for retirees,” says Paul Tyler, chief marketing officer at Nassau Financial Group. “The tradeoff is that the rate is guaranteed only for six months versus other kinds of bonds that offer a set interest rate for the duration of the bond.”

I bonds don’t pay interest as you own them. Rather, the interest accrues and you get paid when you sell or the bond matures.

“You can cash them in after a year of purchase, but if redeemed within five years you will lose three months’ worth of interest,” says Brian Walsh, senior manager of financial planning at SoFi.

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Retirement Income Adoption…It Ain’t That Hard

March 29, 2023 2022, Media, Michelle Richter No comments

Bruce Ashton, Martha Tejera and Michelle Richter-Gordon
March 21, 2023

Last December, Nevin Adams wrote a thought-provoking article titled “6 Obstacles to Retirement Income Adoption.” Nevin makes several interesting points, but in our view the obstacles he describes can be easily addressed as employers consider lifetime income solutions for their defined contribution retirement plans.

1. There is no legal requirement to provide a lifetime income option.

While the statement is true, we believe the absence of a legal requirement is irrelevant. Until this year (with the adoption of SECURE 2.0), there was no legal requirement to implement automatic enrollment, yet many plans implemented it voluntarily because it results in a higher level of savings and was therefore the right thing to do. Adding a retirement income option is not any harder than adding any investment to the plan and is likely easier than implementing automatic enrollment.

2. The safe harbor for selecting an annuity provider doesn’t feel very “safe.”

What can be safer than the safe harbor set out in SECURE 1.0? Plan sponsors have an absolute right to rely on written representations from an insurer unless they have actual knowledge that the representations are not true.

Further, there are various retirement income solutions available, some of which include a guaranteed income feature, like an annuity, but many others do not. Providing retirement income does not require providing an annuity.

Frankly, the selection of an annuity provider (if they select an insured product for their plan) should not be a concern for plan sponsors.

3. Operational and cost concerns linger.

Nevin refers to the portability concern regarding annuities saying that the “cost and complexity” would be “daunting, at best.” He also refers to the “‘learning’ curve, and…in some cases, an UN-learning curve — for plan fiduciaries, and those who advise them.”

SECURE 1.0 resolved the portability issue by allowing a participant to take a distribution of a product no longer supported by their plan and rolling it into an IRA. The costs associated with adopting this are routine — establish the administrative process, amend the plan, and communicate the rules.

Providers are also making it easier to transfer a retirement income product so that the product can remain as an investment alternative in the plan. If this option is available, plan sponsors can weigh the complexity and expense relative to the distribution approach.

Finally, since fiduciaries must act in the interest of the participants, plan sponsors and advisors may have a fiduciary duty to learn about retirement income solutions. Using this as an excuse to avoid consideration of retirement income solutions is, in our view, inappropriate.

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Rising Rates Push Sales of Individual Deferred Annuities Higher: Wink

March 29, 2023 2022, Media, Sheryl Moore No comments

Allison Bell
March 17, 2023

Soaring interest rates might complicate the lives of life insurance company risk managers, but they were great for individual fixed annuity sales in the fourth quarter of 2022.

Overall sales of all types of deferred contracts increased 30% between the fourth quarter of 2021 and the latest quarter, to $79 billion, according to new issuer survey data from Wink.

Sales of three types of products classified as fixed — traditional fixed annuities, non-variable indexed annuities and multi-year guaranteed annuity (MYGA) contracts — climbed 102%, to $58 billion.

Sheryl Moore, Wink’s CEO, said MYGA contracts in particular benefited both from increases in crediting rates and consumers’ fear of market volatility.

“Eighteen percent of insurance companies offering MYGAs experienced at least triple-digit sales increases over the prior quarter,” Moore noted.

Here’s a look at how sales of some of the types of annuities Wink tracks changed between the fourth quarters of 20212 and 2022:

Multi-year guaranteed annuity contracts: $36 billion (+217%)
Non-variable indexed annuities: $22 billion (+28%)
Traditional fixed annuities: $575 million (+18%)
Index-linked variable annuity contracts: $9.3 billion (-7.1%)
Traditional variable annuities: $12 billion (-45%)

Wink based the latest annuity sales figures on data from 18 index-linked variable annuity issuers, 48 variable annuity issuers, 51 traditional fixed annuity issuers and 85 multi-year guaranteed annuity (MYGA) issuers.

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Kiplinger’s Retirement Report | Volume 30 | Number 3

February 8, 2023 2022, Media No comments

Alina Tugend

March 2023

About a dozen years ago, a video of two silver-haired seniors fruitlessly trying to figure out Skype—not knowing their webcam was on—made the internet rounds. The unintentionally comic bit, one viewer commented, showed why technology was “geriatric kryptonite.”

A lot has changed since then. Nonetheless, the image of a senior fumbling helplessly with a computer or smartphone is still a persistent trope.

While the digital divide between older and younger people is narrowing, it is still too wide; 99% of those between 18 and 20 use the internet, while 75% of those 65 and older use it, according to an analysis by the Pew Research Center.

And the pandemic had a paradoxical effect on this divide: It helped many of those who successfully navigated Zoom or ordered online groceries, for example, to feel more comfortable with the virtual world, but it also highlighted how urgent the need is for older adults to acquire technological literacy.

For the full article: https://store.kiplinger.com/about-kiplingers-retirement-report.html

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Why Clients Shouldn’t Claim Social Security Early to Protect Portfolios

January 11, 2023 2022, Media, Wade Pfau No comments

John Manganaro
January 9, 2023

A new paper published in the January 2023 edition of the Journal of Financial Planning by Wade Pfau and Steve Parrish asks a question that is of paramount importance for financial advisors and their clients: Which Social Security claiming strategy generates the highest legacy value?

Parrish is an independent consultant, an adjunct professor at Drake University and The American College of Financial Services, and co-director of the American College Center for Retirement Income. Pfau is a professor of retirement income and director of the Retirement Income Certified Professional program at The American College of Financial Services.

As Pfau and Parrish note, the issue of when and how to claim Social Security is as important today as it has ever been for the typical retirement investor. On the one hand, other sources of guaranteed retirement income have diminished in prevalence, especially employer-sponsored defined benefit pensions. On the other, the average life expectancy for healthy Americans continues to rise, putting additional pressure on the typical retiree’s nest egg.

With such questions hanging in the air, Pfau and Parrish use a model based on historical return data to explore whether claiming benefits at age 62 leads to greater wealth at death compared with delaying Social Security benefits until age 67 or 70. In almost all cases, the pair finds, delaying payments is the superior method if one’s goal is to maximize wealth.

Faith in the Markets

According to Pfau and Parrish, there are significant and well-understood benefits to delaying Social Security. For example, monthly benefits will be as much as 77% larger in inflation-adjusted terms for those who claim at 70 instead of 62.

Still, many individuals decide to claim earlier for a variety of reasons. In some cases, Pfau and Parrish write, these early benefits selections are related to the individual’s personal situation. Some may feel they need the income to support their spending needs, or they have a medical condition that is expected to shorten their life expectancy. As Pfau and Parrish write, such choices are perfectly rational and may result in “better” outcomes for certain subsections of the U.S. retiree population.

However, there are also many individuals and couples who appear to have sufficient resources to cover their spending needs without relying on Social Security — but they claim early anyway. As the new analysis and prior research shows, this group is sizable, with only about one in 10 Americans saying they plan to delay Social Security until age 70.

Pfau and Parrish find that one common early-claiming motivator is the idea that individuals should claim benefits as early as possible in order to leave more of their assets invested in the market. In other words, they believe that the receipt of Social Security benefits will allow them to withdraw less from their investment accounts to support their retirement spending needs.

Does It Work?

Using historical return data, Pfau and Parrish directly tackle the question of whether claiming benefits at age 62 leads to greater wealth at death compared to delaying Social Security benefits until age 67 or 70. The pair use assumptions about life expectancy, current wealth and spending needs that reflect the current U.S. retiree population.

In crunching the numbers, the researchers find that delaying Social Security typically leads to higher amounts of wealth at death than claiming it at age 62, refuting the claim that it is a good idea to start Social Security benefits early just to keep more dollars invested in the market.

he percentage of cases where the legacy amount is greater when claiming at 67 or 70 compared to 62 ranged from about 60% to almost 97%.

According to the analysis, one key variable in the outcome of any given scenario being tested is the assumed allocation to stocks.

Specifically, the early claiming strategy tended to fare better with higher stock allocations. Similarly and as expected, the results of the market-based approach are superior when stock market returns are strongest in the years between when the individual turned 62 and 70.

As the researchers explain, the role of sequence of returns risk is key in the analysis. Those individuals who are lucky enough to experience strong returns early in their retirement years will end up with greater lifetime wealth, but the strategy is a risky one, as the percentages above demonstrate. As a purely logical exercise, Pfau and Parrish find, delayed claiming is the proven method for maximizing wealth.

More About the Math

According to Pfau and Parrish, the “internal rate of return” on delaying Social Security is actually a very favorable real return. They note that separate research has shown that those who delay claiming until age 70 and reach age 90 can generate the equivalent of a 5% real rate of return on what is essentially a government-backed bond.

Further, delaying Social Security benefits also tends to reduce the chances that an individual will run out of money before death, providing an additional benefit to this strategy.

Ultimately, Pfau and Parrish argue, the key point is that the guaranteed return provided by delaying Social Security is a highly compelling benefit for those who have the means to delay claiming. It effectively competes with the returns of all but the most aggressive (and lucky) investment portfolios.

And, as Pfau’s and Parrish’s work shows, waiting to claim benefits can not only reduce the chances that an individual will run out of money during their lifetimes, but it also increases the likelihood that they will be able to leave more assets.

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Aim for $700K at a Minimum

How To Calculate Your Ideal Retirement Savings Amount at 65

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By Gabrielle Olya

Reasons Gen X Women Don’t Feel Ready for Retirement

Debt

The Economy

The Caregiving Conundrum

Changing Retirement Income Options

What Gen X Women Can Do To Prepare for Retirement

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