Is This Outcome Worse Than Running Short in Retirement?
The results suggest that current annuity payouts of about 6.3% would need to be reduced by about 50% to eliminate the difference in added spending comfort between non-annuitized and annuitized assets, according to Finke and Blanchett.
In the end, the decision to turn savings into income, either by saving in an employer pension or by purchasing an income annuity, will give retirees a license to spend savings they might otherwise be tempted to preserve, Finke and Blanchett write.
Easing Spending Fears
Finke and Blanchett argue their findings show advisors a different way to think about annuities — one that is less about playing defense and more about taking full advantage of one’s accumulated wealth in retirement. But there are also other ways advisors with fearful clients can respond.
Some of these were shared in a video published last year by the retirement planning expert Jamie Hopkins, now the CEO of Bryn Mawr Capital Management. Fear and concern are reasonable responses when an individual is facing a rocky financial outlook in retirement, Hopkins said, but many clients who are demonstrably retirement ready from a financial perspective are also plagued by doubt.
Americans are generally all taught about the importance of saving, Hopkins pointed out, but they don’t necessarily get those same lessons about how to spend. The typical worker may spend a career putting money into their 401(k), but then they get to the end of their career and suddenly they’re supposed to change direction and start spending.
“That can be really tough,” Hopkins said, noting there are many ways for advisors to help their clients feel comfortable spending. Personally, Hopkins added, there are three methods in particular that he has found to be the most powerful.
The first is “testing it out.”
“We’re always better off when we test things, and in this context, that might mean knocking back the work schedule and transitioning into a partial retirement, where you are still working part time,” Hopkins says. “You can supplement the working income by starting to make retirement withdrawals.”
This helps people get comfortable with a shrinking portfolio. Another useful technique, according to Hopkins, is to help retirees see the fact that not all spending is equal. Instead, spending exists on a broad spectrum that ranges from spending on nondiscretionary needs to spending on fanciful wishes.
“This may seem like an obvious thing, but the point is to go through the planning process and specify what the person’s needs, wants and wishes are,” Hopkins said. “You lay out the safe assets and income sources against these different spending buckets, and that can give people a lot of peace of mind about spending.”
The third key to spending in comfort, Hopkins said, is to steer the client away from an obsession about “pure success or failure metrics.”
This is a two-front approach, he explained. On one hand, the advisor can help the client understand the importance of guaranteed sources of income that are not going to run out. It’s about reminding people that they will be able to rely, at the very least, on Social Security, and they have the option of purchasing guaranteed income annuities, as well.
On the other hand, this approach is also about showing clients that, unlike a plane trip, retirement is not a binary outcome of complete success or failure. In reality, people will adjust their spending in retirement as situations warrant, and a “failing” Monte Carlo projection may simply require a modest lifestyle adjustment to become a success.
Pictured: John Manganaro
