In a year when stock and bond markets have fallen sharply and inflation has been achingly high, it’s been a scary time for retirees trying to scrape their last bucks and for near-retirees who worry about it.
The key, says longtime retirement income and Social Security analyst James Mahaney: putting together what he calls a “resilient retirement income plan.”
“The idea is to have a retirement income plan that no matter what happens in the market, no matter how long you or a spouse live, you have an income that you can depend on. It allows us to enjoy our retirement a lot more,” said Mahaney, former Prudential Financial vice president of strategic initiatives and now director of consulting firm Mavericus Retirement Services in New Jersey.
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Dealing with the major financial risks of retirement
Mahaney’s new 92-page book – How to Craft a Resilient Retirement Income Plan – lays out six financial risk factors that can affect your retirement income and the best ways to address them.
I think his suggestions are wise and at times provocative (particularly why he thinks some retirees should own more stocks than they do).
Mahaney believes many retirees struggle to create and manage retirement plans.
“It breaks my heart to read some of these articles about people running out of money,” he says. “And you’re starting to see it now, with inflation.”
Mahaney believes financial advisory firms are expensive for many people. “And the people who can do it on their own, I think they need a lot of help,” he adds.
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What a resilient retirement income plan is
So what exactly is a “resilient” retirement income plan? An important element, Mahaney says, is adopting a “dynamic strategy to cover some of your discretionary expenses in retirement.”
In other words, don’t feel constrained by the rule of thumb that many financial advisors use and recommend that retirees follow the 4% spending rule to make their money last.
This time-honoured idea suggests spending up to 4% of savings in the first year of retirement and then increasing that percentage annually with inflation. (Some consultants have reduced the percentage to around 2% to 3% in recent years.)
But Mahaney says withdraw more or less from your savings each year based on how your investment portfolio performs. “In good years you might take more out and in bad years you might cut back a bit.”
Be flexible about spending and withdrawals from the retirement account
This flexible approach means you adjust your pension spending accordingly. Spend less in years when markets are down. When markets rise, you spend more.
But regardless, Mahaney says, “Make sure you’re covering your essential expenses with income you can rely on.” That could be Social Security, a pension (if you’re lucky enough to have one), and possibly a pension one Be an insurance company that makes regular, guaranteed payouts.
One way to do that, Mahaney advises, is to “build a bridge to Social Security” — which he says is “probably the most important part of building a resilient retirement income plan.”
Building a social security bridge
Instead of applying for Social Security at 62 (as soon as possible), Mahaney advises deferring the application until 70 if possible.
That’s because Social Security increases your benefits when you defer eligibility – benefits increase by 8% per year for each year you delay eligibility between full retirement age and 70.
The “bridging” part is figuring out how much you would need to cover your essential expenses in retirement, and deducting that amount from your IRA or other retirement accounts until you later start filing for Social Security.
This gives you the opportunity to claim higher, inflation-adjusted Social Security benefits later.
By covering essential expenses with this bridge, Mahaney notes, “we don’t have to worry as much about what’s happening in the marketplace; We can just ride out losses.”
And he adds, “If you defer Social Security, especially if you’re married, you can cover most of these essential expenses in retirement.”
Mahaney believes that “the biggest mistake many people make is not optimizing their Social Security.”
fighting inflation
The protection against inflation that Social Security offers is a great advantage these days.
A recent study of retail investors by Hearts & Wallets found that inflation is their top concern. And 70% of those over 50 surveyed by Kiplinger said they are concerned that inflation will cause serious economic difficulties during their retirement.
In his book, Mahaney writes that if you use the Social Security bridging strategy and your Social Security benefits cover all or most of your essential expenses in retirement, “you can afford to take a little more risk with the rest of your portfolio.”
Maybe, he adds, you can invest the rest of your portfolio 100% in stocks.
A provocative approach to stocks
I told Mahaney that sounded a little aggressive to me about investing.
His response: “If you’re willing to take a dynamic approach to spending and let your spending go up and down a little each year, then I think a lot of people could comfortably invest most of their remaining wealth in stocks willing to take the extra risk.” that stocks bring.”
Basically, Mahaney believes retirees should view their Social Security benefits as part of the fixed income portion of their portfolio.
Mahaney on pensions
Mahaney has long been a proponent of instant income annuities for retirement if you have enough savings to divert some money into them.
In particular, he suggests considering guaranteed-income ones sold through fiduciary financial advisors, rather than high-commission annuities sold by insurers. “They can see a higher payout because they don’t have the commissions,” says Mahaney.
The cost of the purchase depends on the consultant. For example, Mahaney charges a fee of $600.
Longevity risk and care risk
One major risk, Mahaney believes, is underestimated by many retirees: longevity risk. They don’t plan how long they will live given today’s longer lives.
A recent article on financial regrets in old age by economists Abigail Hurwitz and Olivia Mitchell states: “People may just not understand how long they will live in retirement, leading them to make suboptimal financial lifecycle decisions .”
The most difficult retirement risk to manage, Mahaney says, is long-term care risk — the possibility that you may have to pay for exorbitant home care, nursing home, or assisted living expenses. Medicare rarely covers such care.
You could buy a long-term care policy, but Mahaney doubts many would. The sales figures prove this. According to Hurwitz and Mitchell’s study, 40% of 1,764 respondents over the age of 50 regret not having long-term care insurance.
Instead, he says, you may need to tap into your home equity or retirement accounts to cover that risk, or maybe take out a reverse mortgage on your home.
“I think we’re going to be using reverse mortgages a lot more because a lot of retirees will have built up a lot of home equity,” Mahaney says.
