Strategies to Help You Bridge Retirement Income Gaps

Strategies to Help You Bridge Retirement Income Gaps

The mantra for success in real estate is “location, location, location.” For success in retirement, the canned phrase becomes “income, income, income.”

 When you retire, you no longer have a salary from full-time employment. Or maybe you were an entrepreneur, so you brought home the bacon in other ways, such as business ownership. Either way, your income situation will probably change.

A key factor for living well is how much money you can expect to receive every month from your own unique mix of retirement income sources. However, some Americans may fall short of the income they need for their golden years. Consider research done by the Employee Benefit Research Institute, for instance.

In one study, center researchers found that as many as 40% of baby boomers in the study may run out of money in retirement. According to the Employee Benefit Research Institute’s Retirement Readiness Ratings, released in 2014, only 56.7% of “early” baby boomers (born from 1948 to 1954) and 58.5% of late boomers (1955 to 1964) will have the financial resources required to meet their retirement expenses. The remaining retirees would struggle with income that falls short of their needs.

The EBRI’s model indicates that a household is considered likely to run short of money if its assets can’t meet “minimum retirement expenditures.” This is a combination of expenses from the federal Consumer Expenditure Survey (as a function of age and income); some health insurance and out-of-pocket health expenses; and expenses from nursing-home and home-health care.

Stanford Evaluates Retirement Income Strategies

For those in a quandry about how to ensure their own rock-solid income sources, some of the brightest minds in retirement academia recently offered down-to-earth guidance.

In November 2017, The Stanford Center for Longevity released a report called “Optimizing Retirement Income by Integrating Retirement Plans, IRAs, and Home Equity: A Framework for Evaluating Retirement Income Decisions.” In it, the authors, all well-regarded retirement planning experts, made recommendations to help Americans compare and assess strategies for developing lifetime retirement income.

They begin by encouraging all of us to work with our financial professionals to pursue rigorous analyses for supporting retirement income decisions. It’s a far better approach rather than falling back on our intuition, a gut feeling, or winging it, the authors write.

“Our analyses project that many middle-income workers will fall short of retirement income goals commonly advocated by financial planners,” the report cautions. “As a result, retirees will need to make the most effective decisions when deploying their constrained resources.”

What’s In Your Nest Egg?

Effectively deploying all of your retirement resources includes considering accounts in defined contribution retirement plans, IRAs, and even maybe home equity. For many households, the value of home equity exceeds the amount of retirement savings held inside or outside employer-sponsored defined contribution retirement plans, according to the report.

That would make home equity a considerable resource, considering Stanford’s research reveals that at the end of 2016 the total amount of savings that resided in IRAs was $7.9 trillion. Meanwhile, the amount held in employer-sponsored defined-contribution retirement plans was close at $7 trillion.

For those seeking ways to supplement their financial resources and Social Security benefits, their most important retirement income planning decisions might be “when and how to leave the paid workforce, when to claim Social Security benefits, how to manage and reduce living expenses, and whether to deploy home equity,” the report states.

Bond. Retirement Bond.

Spearheading the Stanford research and recommendations were Wade Pfau, Ph.D., CFA, Joe Tomlinson, FSA, CFP®, and Steve Vernon, FSA. These experts suggested that several income sources can fulfill the “bond” or “guaranteed” part a retirement income portfolio, including Social Security benefits, pensions, annuities, and tenure payments or lines of credit from reverse mortgages.

“Social Security is the foundation of retirement income, providing anywhere from half to more than three-fourths of total retirement income,” they explain. “Social Security has several desirable features that, in aggregate, aren’t available with any other retirement income solution. As such, optimizing Social Security benefits through delayed claiming is often an important component of a retirement income strategy.”

Optimize Your Social Security Strategy

The researchers believe it’s important for report’s target audience—workers and retirees with less than $1 million in savings—to understand Social Security’s critical role in their retirement security. They say Social Security retirement income has several valuable features:

  • It’s paid for the rest of the retiree’s life, helping address longevity risk
  • It’s not subject to capital market risk, helping address investment risk and sequence of returns risk
  • It’s increased by the Consumer Price Index (CPI), helping address inflation risk
  • Part or all of Social Security income is exempt from federal income tax, helping address taxation risk
  • Social Security benefits are paid automatically (and often electronically), helping address the risk of cognitive decline, fraud and making mistakes

“No other method of generating retirement income includes all these desirable features, so Social Security benefits represent a unique, valuable resource,” the study says.

Spend Safely in Retirement

To make its suggestions consumer-friendly, the report sums up one of its recommended strategies as “Spend Safely in Retirement.” It asserts that the best way for an older worker to implement this is to work enough to pay for their living expenses until age 70. “If possible, they shouldn’t start Social Security benefits or begin withdrawing from savings to pay for living expenses,” the report details.

The report adds that using a portion of savings to enable the delay of Social Security benefits as long as possible, but no later than age 70, may be advantageous. “The primary disadvantage of this approach is that it can use a substantial amount of savings to enable delaying Social Security; this is the reason the best way to implement the strategy is to continue working, if possible.”

While the ideal income strategies and which one is right for you will vary from person to person, these studies confirm the importance of investigating all of your options. Longevity risk and other risks are putting new pressures on Americans that earlier generations didn’t face. Longevity vehicles, such as annuities, are specifically designed to help retirees face these challenges with confidence.

Need Help Getting Your Retirement Income Strategy in Order?

Everyone’s situation is different. Many retired and near-retirement aged people have found that working with a financial professional helps bring more finesse and confidence to their financial futures. If you believe you could benefit from personal financial confidence, help is a click away.

Financial professionals stand ready to help you here at Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.

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