How to Retire with Safety and Security

Dr. Wade Pfau is a leading expert on the subject of retirement. He is the Professor of Retirement Income at The American College of Financial Services and is also Co-Director at the New York Life Center for Retirement Income.

Dr. Pfau has made many powerful contributions in the field of retirement income planning. One is adding insights to the ‘safety-first’ school of retirement planning thought, or where a retirement plan is built on a safety-first approach.

How a Safety-First Approach Can Help with Financial Stress

In an interview with Wharton School of Business podcast knowledge@wharton, Dr. Pfau talked about how retirees can reduce the amount of financial stress that they feel after they stop working.

Here are some highlights from that interview. It’s good to keep these things in mind as we plan for our own financial futures.

Three Primary Retirement Concerns

Most retirees and pre-retirees have three main worries when it comes to finances.

Longer Living

The first worry is related to longevity. People are living longer than ever now, and this makes retirement more expensive.

Many retirees today can expect to live for another 30 years after they stop working. This makes saving for retirement more vital than ever.

Having Enough Retirement Money

The second worry is spending your money during retirement. You need to create a stable spending plan for your post-career years so that you don’t run out of money.

Your spending plan should also be able to handle unexpected financial expenses. Those may include major illness or long-term care.

Market Ups and Downs

The third worry is market volatility. Your retirement portfolio is also particularly vulnerable to market losses in the red zone: ten years before you retire and the ten years after you retire.

Sequence of returns counts for the most at this juncture. It’s good to watch how your investments are performing (but within reason, especially if you are prone to knee-jerk reactions in down-market situations).

A major market loss during this period can seriously affect your ability to retire when you want. It may force you to work longer than you had planned.

Your financial professional can help you balance this risk with the practical benefits of also staying invested. Ask them for insights if you have any questions about this.

Two Schools of Retirement Thought

There are two basic approaches to retirement planning. One of them is the “probability-based” scenario, and the other is the “safety-first” scenario.

According to Pfau, the probability-based approach is “more comfortable with investments and with the idea of holding stocks for the long run. This is the view that if you can hold on to your stocks for a sufficiently long time, they will generally outperform bonds. They should support more spending than just a bond portfolio could in retirement.”

He continued: “The idea in the probability-based world is to use an aggressive investment portfolio. The baseline advice is hold 50% to 75% stocks in retirement. You fund your retirement from your portfolio earnings and also from the principal in your portfolio.”

In contrast, the safety-first approach combines investments with risk-pooling and insurance.

Some money is put into something like an annuity to support spending in retirement. The rest of the assets are allocated into investments.

In exchange for giving up some potential for market returns, the annuity provides a reliable, guaranteed income stream for baseline retirement spending. The remaining money goes into stocks and bonds for a combination of growth and income.

Following an Integrated Approach

Having said, Pfau recognized that there is a happy medium called the “integrated approach.” With this strategy, part of the assets goes into an annuity and the remaining assets into aggressive investments.

The guaranteed income from the annuity helps maintain your standard of living. Meanwhile, the other investments can be put into higher-risk instruments that pay higher returns over time.

The income from your annuity, in addition to Social Security, help offset this investment risk.

How Much Do You Need to Follow This Approach?

Pfau said that retirees need at least $100,000 in their retirement portfolios to be able to use the integrated approach. He cautions investors not to put all of their money into an annuity because they do need some liquid assets.

This strategy can also work for affluent retirees who want a consistent, predictable lifestyle. Of course, they can put a smaller portion of their assets into an annuity.

They might put money into an annuity to cover their base expenses during retirement and invest the rest of their money in a diversified portfolio. That can enable them to leave a legacy for their heirs.

The Waiting Game Works Well for Social Security

It’s also wise to delay taking Social Security until age 70, if at all possible. This approach wasn’t always the optimal solution.

In 1983 when the Social Security laws were last updated, interest rates were much higher. People also weren’t living as long as they are today. But the 25% benefit boost for waiting until age 70 is hard to pass for many retiree situations.

If you live to age 90, then waiting for that additional four to eight years will really pay off. This is especially true for the higher earner of a couple, as the bonus 25% will be larger.

Should the higher income earner pass away first, then the surviving spouse will get a larger residual benefit. It’s more likely that at least one spouse will get more benefits than they would have if the higher earner had claimed Social Security at their full retirement age.

What Should We Be Thinking About with Retirement Planning?

The first question that retirees should ask themselves is how long they think that they are going to live.

If your parents died in their 60s, don’t assume that you will go that soon. Improved healthcare has many people living longer than ever before.

Therefore, it’s not prudent to plan your retirement based on the assumption that you will die at age 65.

The next question is taxes. You should have a blend of taxable, tax-deferred, and tax-free accounts. It lets you have some control over how much of your income is taxed.

One suggestion from Pfau is to take periodic withdrawals from taxable or tax-deferred accounts so that you can plan ahead for those taxes when you file.

In turn, that lets your Roth accounts grow until you need to take a large distribution. You also don’t impact your tax planning for that year.

One more important question is how much money to put in an annuity. There is one way to determine this.

Calculate how much money you will need in the annuity for it to pay the guaranteed income that you will need for your retirement lifestyle.

Once you have that in place, then remaining assets can be invested aggressively, as Pfau discussed. This can stretch your savings further over time and give you more money to live on.

The Four Ls of Retirement Planning

Ultimately, Pfau believes that retirement planning boils down to four key factors:

  • lifestyle,
  • longevity,
  • liquidity, and
  • legacy.

Those are the financial goals of retirement. The lifestyle and longevity are your retirement budget. Legacy is your legacy goal. Pfau’s most important advice would be to think about liquidity.

Don’t Leave Liquidity on the Back-Burner

Liquidity is the concept of when you have money to cover unexpected expenses.

In a retirement income plan, for something to be a liquid asset it can’t be earmarked for something else. You can’t double-count assets.

There is an idea that just because you have a brokerage account with stocks and bonds, that it’s technically liquid. But it may not be truly liquid because that money has been earmarked for another purpose.

If you spend it because you have an unexpected spending shock, that will reduce your ability to meet your future baseline spending.

You have to be more holistic when thinking about liquidity. Your assets are only liquid if they haven’t been earmarked for something else in the financial plan.

Putting Your Financial Plan in Place

Pfau offers many practical insights for retirees in every situation. You can use these principles and research-backed rules to help build a retirement plan in which you can be confident.

Nevertheless, no two situations are ever the same. What you will need for your retirement plan, and the assets that you use to achieve it, will look very different from those of others.

If you are looking to settle your retirement ‘what-ifs’ and want personalized guidance for your circumstances, consider seeking out an independent financial professional.

When they are independent, the financial professional is better equipped to serve you. They aren’t beholden to one financial company, and they are free to offer you solutions from many providers that can be customized to your needs.

You should also look for someone who specializes in retirement strategies and understands the unique challenges, issues, and nuances of this life stage. They will have knowledge and experience in helping other clients enjoy successful retirements in many different market cycles, economic conditions, and other settings.

For your convenience, many experienced and independent financial professionals are available here at

Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly for an initial appointment. You can discuss your situation and explore a working relationship. Should you need a personal referral, please call us at 877.476.9723.

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