(The source for much of the material in this short blog is taken from the November 1, 2016 “Journal of Investment Consulting”. The article is entitled, “An Overview of Retirement Income Strategies”, written by Michael Finke, PhD, CFP © and David Blanchette, CFA ©, CFP ©.)
Gains in medical science or environmental improvements can result in added longevity for all retirees. This means that all retirees could face a retirement time horizon that ranges anywhere from about 10 to about 40 years.
This essentially leaves the retiree with three primary choices about how to create retirement income:
- Retirees may choose to drawdown assets quickly in order to spend the most during ages when they are most likely to be alive. This “live for today” approach will result in an increased risk of running out of financial assets. We find that this approach is the least attractive to the clients with whom we work.
- The second choice is to select a sustainable spending strategy that minimizes the risk of outliving assets. The challenge with this approach is that retirees can run the risk of limiting choices in retirement by selecting a withdrawal rate that may sustain the portfolio assets for a longer period than the retirees actually live.If clients want to leave a significant bequest either to family and or to charities, this may be a very acceptable solution.
- The third choice is to approach retirement income with the use of guarantees. These guarantees are offered through annuity products-which often seem to be painted with a very bad reputation. However, studies conducted in 1965 by Yaari and later confirmed in 2016 by Michael Finke and David Blanchette indicate that using annuities is the optimal retirement income strategy for a retiree with “constant spending needs and no specific bequest motives”.
So what is a person/couple to do?
We actually find that none of our clients fit neatly into either option one, two, or three. Rather, we have learned that it is our job to figure out the proper allocation of retirement assets into a combination of these three solutions. This tends to bring the greatest peace of mind to our clients, who are about to retire or already enjoying the retirement years.
We’d love to have a complementary conversation with you to help formulate the proper combination of these three primary retirement strategies designed to bring you and your loved ones peace of mind.
Barbara A. Culver
CFP®, ChFC®, CLU, AEP®