Take These Steps to Make Your Money Last in Retirement

Key Concepts

• Retirement Shortfall
• Portfolio Asset Allocation
• Investment Fees
• Bucket Approach (Cash, Fixed Income, Equities)
• Flexible Spending System
• Working Longer
• Delaying Social Security
• Lifestyle Changes (Budgeting, Housing, Relocation)
• Financial Advisor

Addressing Retirement Shortfall Concerns

Margaret Giles interviews Christine Benz, Morning Star's Director of Personal Finance and Retirement Planning, to discuss strategies for mitigating the risk of running out of money in retirement. Benz acknowledges that while an insurance company survey highlighted this fear, genuine concerns stem from uncertainty about future portfolio returns, inflation during retirement, personal longevity, and the potential for significant long-term care costs.

Investment-Related Strategies

Portfolio Review and Optimization

Benz emphasizes the importance of a thorough review of one's retirement portfolio. Key investment steps include:

• Asset Allocation Assessment: Ensuring the portfolio is not too conservatively positioned, which could hinder growth over a long retirement horizon.
• Cost Audit: Evaluating and reducing investment fees, as high fees can significantly drag down portfolio returns.

Balancing Risk and Return

Benz cautions against over-adding risk to portfolios in an effort to boost returns as retirement approaches. A recommended approach is the "bucket approach":

• Bucket 1 (5-10 Years of Withdrawals): Holding approximately 5 to 10 years' worth of anticipated portfolio withdrawals in a combination of cash and fixed-income investments. This provides a stable base for immediate and near-term spending needs.
• Bucket 2 (Higher Risk Assets): Any assets exceeding the 5-10 year withdrawal requirement can be allocated to higher-risk assets, primarily a globally diversified equity portfolio, to pursue growth potential.

Smarter Spending from Portfolios

Benz suggests that retirees can spend more strategically from their portfolios by adopting a flexible spending system:

• Flexibility is Key: Unlike rigid rules of thumb (e.g., the 4% guideline) designed for worst-case scenarios, a flexible system adjusts withdrawals based on portfolio performance.
• Tying Withdrawals to Portfolio Value: This means potentially taking less during market downturns but being able to take more when the market performs well. Staying plugged into portfolio behavior is crucial.

Non-Investment Related Strategies

Working Longer

While often unpopular, working longer offers significant financial advantages:

• Pros:
  • Forstalls Portfolio Withdrawals: Reduces the duration for which portfolio assets need to support living expenses.
  • Continued Investing: Allows for ongoing contributions and potential tax-deferred growth.
  • Enables Other Strategies: Can facilitate strategies like delaying Social Security.
• Cons:
  • Unforeseen Circumstances: Data shows a disconnect between planned and actual retirement ages, with many retiring earlier due to health issues (personal or spousal) or job loss. Flexibility beyond the "working longer" goal is advised.

Delaying Social Security

Delaying Social Security benefits can yield substantial financial rewards:

• Benefit Increase: For every year delayed up to age 70, individuals receive an approximate 8% inflation-adjusted increase in their eventual benefit. This is described as a "great return on your money."
• Best Candidates: Individuals with average or above-average life expectancy and those whose spouses may outlive them and rely on their Social Security benefit are prime candidates. Delaying can enlarge the spouse's benefit and total lifetime income.

Lifestyle Changes

Benz suggests reviewing and potentially adjusting one's budget and lifestyle:

• Budget Tightening: Identifying areas for savings, with subscriptions being cited as "low-hanging fruit."
• Big Ticket Items:
  • Vehicles: For married couples, potentially consolidating from two cars to one.
  • Housing: Considering downsizing to a smaller, more age-appropriate, and less expensive home.
  • Relocation: Moving to a lower-cost area of the country, even within the same geographic region, can be a significant lifestyle change.

Seeking Professional Advice

A seemingly counterintuitive step for those worried about money is paying for professional help:

• Peace of Mind: Hiring a financial advisor can alleviate anxiety about portfolio longevity.
• Flexible Engagement: Advisors can be engaged on an hourly or per-engagement basis, not necessarily requiring a long-term commitment.
• Identifying Blind Spots: Advisors can offer professional insights, identify overlooked areas, and make recommendations that individuals might not consider. Benz states this can be "money well spent" despite the initial outlay.

Conclusion

Christine Benz provides a comprehensive set of actionable strategies for retirees concerned about outliving their savings. These strategies encompass optimizing investment portfolios, adopting flexible spending habits, considering extended working years and delayed Social Security, making prudent lifestyle adjustments, and leveraging professional financial advice for enhanced confidence and planning.