Retirement Experts: A Better Way To Crack the Retirement Income Nut.

More than 11,200 Americans will turn 65 every day for the next four years, the largest surge of retirement-aged people in U.S. history (also known as Peak 65)¹. And it’s highlighting many of the flaws in our retirement system.

For this year’s annual TIAA TMRW Retirement Income Roundtable, we sat down with an annuity expert, a policy wonk and a financial planner on how more people can get an income edge in retirement.

What follows is an excerpt from a larger conversation published in the most recent edition of TMRW.

TIAA: Retirees get the most from Social Security if they wait until age 70 to claim benefits, but how should retirees think about income if they don’t want to work that long?

Wade Pfau, author of the “Retirement Planning Guidebook” and professor of practice at the American College of Financial Services: If you are delaying Social Security, you’ll probably need to draw from investments. That comes with sequence-of-return risk. That’s the risk of markets falling early in your retirement, because in order to cover your expenses, you need to sell more when they’re down in value. The problem is you won’t have that money in the markets to enjoy the recovery, so it’s hard to get back to an amount that supports your initial spending plan.

Dana Anspach, founder and CEO of fee-only wealth manager Sensible Money: A reason people don’t delay Social Security is that it feels scary to rely on investments even for a few years. It can feel like a lot when they’re taking 6% or 8% out of their retirement accounts each year for up to eight years. This is the better strategy when you look at a lifetime of spending, not just a few years, but it can be emotionally hard.  

Pfau: To cover the missing Social Security benefit in those years, you can carve out income, either through an annuity or a bond ladder. That way you are not as vulnerable to the markets.

Jason Fichtner, chief economist at the Bipartisan Policy Center and executive director of Alliance for Lifetime Income’s Retirement Income Institute: I call that a “bridge annuity.”

TIAA: Did someone say annuity? How do you all think they fit into retirement planning?

Pfau: Annuities can be workhorses for retirees because they provide protected, reliable income that can cover disproportionately more of your spending needs than other investments. And, the more you have, the less vulnerable your spending is to market downturns. Your portfolio may decline, but your lifestyle isn’t going to be affected as negatively.

Fichtner: If people have enough protected income, they can use the rest of their assets for growth. For higher-income people, Social Security will only replace maybe a third of their income. They need something on top of that to maintain their lifestyles.  

There’s research that says getting regular paychecks from an annuity can help you budget, because your recurring income is basically your license to spend until you get that bump in Social Security.

Anspach: I like the term protected income. This truly is a different asset class: You have upside assets for growth, reserve assets for the unexpected, and then there’s protected income that’s allocated to lifetime income.

Pfau: Since you have that protected income, you don’t have to rely on your investments to fund your essential expenses, which means you have the capacity to invest more aggressively with the rest of your assets.

¹“The Peak 65 Zone is Here: Creating a New Framework for America’s Retirement Security,” Retirement Income Institute, January 2024.

This is an excerpt from an article that appeared in the TIAA TMRW Magazine.

Click here to read the full article. 

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