THOUGHT LEADERSHIP

Income for the Retirement Years: Optimizing the Main Decisions in Retirement

Financial advisors and their clients planning for retirement must navigate a set of intricate and inter related decisions.

By:

Steve Sapra, Executive Vice President, Client Solutions and Analytics

Ying Gao, Vice President, Client Solutions and Analytics


 










Financial advisors and their clients planning for retirement must navigate a set of intricate and inter related decisions. When’s the best age to start taking Social Security benefits? How should assets be allocated? Does an annuity make sense? These decisions are complicated enough in isolation. Bu
t when they’re addressed together, they grow exponentially more complex.

Complications arise because each decision affects the others. The chosen asset allocation at retirement, for instance, affects both the level and sustainability of income generated by their investment portfolios. Social Security can be an excellent hedge against longevity risk, but delaying benefits means a larger fraction of a client’s investment portfolio may be needed for consumption in the intervening years. This, in turn, may affect the asset allocation and whether to buy an annuity.

We provide a framework for answering these questions collectively. Our model seeks to optimize decisions by aiming to generate the most stable and consistent income stream possible for a given retiree’s wealth and Social Security income. We illustrate the inter relationships among these decisions in two hypothetical case studies – one for an individual with moderate income and low wealth, and one for someone with high income and high wealth.

Based on our model, we conclude that the mix of stocks and bonds one should hold at retirement depends significantly on an individual’s level of wealth and that the decision to annuitize is relatively consistent across the wealth spectrum, albeit with differing allocations.

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