Strategies to Increase Retirement Income

You finally made it! You have reached your golden years. This is what you have prepared for your entire adult life. But will your nest egg carry you through to old age? Is there something else you should be doing to be sure to get the most out of your retirement savings? Here is advice.

The Society of Actuaries and the Stanford Center on Longevity analyzed retirement income generators and determined that yes, there are several strategic ways to approach retirement and maximize income. Steve Vernon, a Fellow of the Society of Actuaries, discussed with a few possible retirement income solutions to help you get the most out of your nest egg. Here is what you need to know:

Boomer: You say there are “tradeoffs” to consider when planning retirement income disbursements. Explain?

Vernon: Deciding how to make your hard-earned retirement savings last for a potentially long life is a daunting task. There are many reasonable ways to turn your savings into a reliable retirement paycheck -- there’s no “one-size-fits-all” answer.

Retirees and their advisers will need to make a series of informed tradeoffs. Efficient frontier methodology measures and compares the impact of these tradeoffs for various retirement income solutions. Our project analyzed the following two tradeoffs:

Efficient frontier #1: Compare the average amount of annual income expected over your lifetime for a particular retirement income solution, to the risk that your income will fall below a target amount if you assume investing risk. Our analyses show if your exclusive goal is maximizing your expected lifetime income while minimizing investment and longevity risk, the most effective solutions are low-cost, competitively bid single premium immediate annuities, which have been around for decades.

Efficient frontier #2: Many retirees highly value liquidity – the ability to access savings during retirement to respond to changes in your financial situation. The annuities mentioned above don’t have this feature. This frontier compares the average annual income expected over your lifetime to the average savings you can access over your lifetime. Our analyses show a tradeoff – if you want to access more savings, you’ll need to accept reduced expected retirement income.

Both these efficient frontiers consider Social Security and the retirement paycheck generated from savings.

Our analyses support a diversified, portfolio approach for retirement income solutions. Decide how much basic income you absolutely need to survive severe stock market crashes or if you live a long time; cover this amount with Social Security, pensions if applicable, and low-cost annuities. This is the “bond” part of your retirement income portfolio. Our analyses support significant stock investments for the rest of your savings to meet your discretionary living expenses, using a systematic withdrawal method to calculate your annual paycheck.

Boomer: What strategies can older workers adopt to protect their retirement incomes in the period leading up to retirement?

Vernon: Our research highlights the risk of remaining fully invested in target date funds right up to retirement. Older workers are vulnerable to another crash similar to 2008-2009, when many were forced to delay their retirement or retire on reduced incomes.

Older workers should begin learning about retirement income strategies, and develop strategies to protect the basic amount of income they absolutely need as described above. These solutions include strategies to optimize Social Security, annuities, and fixed income investments.

Boomer: What can plan sponsors offer to help older workers achieve this goal?

Vernon: Plan sponsors can definitely help older workers convert their savings to retirement income. Many older workers don’t have the skills or time to effectively analyze retirement income solutions or have access to skilled, unbiased advisers who could help them. Plan sponsors have the resources to evaluate and offer effective, low-cost retirement income solutions, and help older workers to implement these solutions.

Plan sponsors can offer systematic withdrawal programs using their plans’ investment funds, guaranteed lifetime annuities, and payouts over a fixed period to optimize Social Security. Our research shows institutionally priced retirement income options can increase retirement incomes by 10% to 20%, compared to more expensive retail solutions.

Boomer: How can using savings to delay Social Security increase the projected average retirement income?

Vernon: For many workers, delaying Social Security will increase their expected lifetime income, and for married workers, help maximize the income of a surviving spouse. Our research estimates that a delay strategy can increase expected retirement incomes by 2% to 6% compared to retirement strategies with significant stock investments (which contain significant investment risk); this increase can be 10% or higher compared to strategies with significant bond investments. Delaying Social Security is a low-risk way to boost total retirement income, particularly for risk-averse retirees who might otherwise invest in bonds. A retiree could make withdrawals from savings to cover living expenses while delaying Social Security benefits.