- The simple days of go to work, earn a pension, and retire with money to spend appear to be at an end.
- Your clients may be good savers but still be ill-equipped to craft a sensible retirement-spending plan.
- Left on their own, retirees may spend too much too fast, or they may deprive themselves of a comfortable retirement.
Financial professionals may have a bigger role than ever in preparing for retirement, according to a study by researchers working with the Stanford Center on Longevity at Stanford University.
Retiring in the defined benefit—or “pension”—era of yesteryear seems simpler than today’s retirement. Back then, the order of operations went: work, retire, collect pension check, and spend.
That appears to be changing rapidly. In 1979, 87% of American workers had access to an employer-sponsored pension. But by 2015, that number was down to 15%.
In today’s “defined contribution” environment, planning for retirement – a retirement that may last a lot longer than many expect – is a complicated process that many don’t get right when they try on their own, the study found. That may be where a financial professional needs to step in.
“Left to their own devices, retirees tend to exhibit two distinct strategies to generate retirement income: Spending their savings too rapidly, at a rate that will most likely cause them to outlive their savings, or 2. Conserving savings for a rainy day, often withdrawing just the required minimum distribution (RMD) from IRAs and 401(k) accounts,” the study concludes. “Neither strategy seems optimal.”
Researchers reviewed the tangle of issues facing modern retirees –and those preparing to retire – and tackled the retirement income puzzle in a comprehensive report, Optimizing Retirement Income Solutions in Defined Contribution Retirement Plans.
The team sought the best ways for retirees to use their savings to generate retirement income and still prepare for emergency expenses, big one-time expenses, and just buying the little things that make them happy.
Turns out, there may be no single answer, and going it alone may not be the right way to prepare.
“Deciding how to deploy savings to generate retirement income, and estimating the amount of savings that is needed to generate target amounts of retirement income, is a task that is beyond the interest or skill of many retirees,” the study found.
The findings were built on a complex set of forecasts, projections, and scenarios that incorporate variables such as continued increases of American life spans. It examined tradeoffs between investing savings, which may not last a lifetime, and purchasing a plan that provides guaranteed lifetime income but limits access to those funds.
It may come down to what each individual wants, the study found. Increase retirement income, or leave an inheritance? Give up control of savings in exchange for guarantees, or hang on to a lump sum that can be spent at a variable rate?
The report also discusses Social Security and using savings to delay claiming benefits, as well as a mention of reverse mortgages, and insurance or investments outside of tax-qualified plans.
In its concluding thoughts to financial professionals, the study suggests they help their clients diversify savings, understand Social Security, investments, and annuities.
“Advisors can add value to their clients by using concepts in this report to develop retirement income portfolios that deliver retirement income throughout their clients’ lives, no matter how long they live,” the study reported.
The full report is online and available for download.
For a better understanding of Social Security and its role in retirement, check out Transamerica’sField Guide to Social Security, an overview of benefits, claiming strategies, and survivor’s benefits .
Things to Consider:
- Don’t just help clients save, help them develop a retirement spending plan.
- Make sure clients understand all of their options.
- Show clients how Social Security, retirement savings, reverse mortgages, and other forms of guaranteed lifetime income may fit into a well-rounded retirement plan.
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as, medical, insurance, securities, tax, legal or financial advice or guidance. Please consult your personal independent advisors for answers to your specific questions.