How to factor your lifespan into retirement planning

  • Published: May 16, 2014
  • Runtime: 5:57
Retirees should consider their longevity when making plans for how to take Social Security benefits and invest in annuities. The Wall Street Journal columnists Jonathan Clements and Jason Zweig explain.
This week on Wealthtrack two outstanding personal finance journalists, Jonathan Clements and Jason Zweig, tackle the biggest financial challenges facing Americans and how to overcome them: retirement income, Market volatility and getting good financial advice. Are next on Consuelo Mack WealthTrack. I began the interview by asking them about one of the greatest challenges facing Americans, finding enough income for retirement. Well, you know what the big story is. You go back to 1981; we had the 10 year treasury note yielding almost 16%. That rolled all the way down to July, 2012, we hit 1.4%. From there we bounced up a little bit. We got pretty close to three, but still we are at a very low level. And for a lot of retirees it's like, I can't live off 3%. Where am I gonna turn for income? And my first suggestion is you should exploit the one advantage that we all have. We're gonna die. And the way you exploit that advantage. [LAUGH] Is one, you can buy an annuity that'll pay you lifetime income. And the longer you wait to buy that annuity the more income you're gonna get. What I'm talking about here is like, plain vanilla immediate fixed annuities. Mm-hm. And second, if you're interested in the annuity idea, the best annuity out there is Social Security. So, if you want that lifetime stream of income, what you should think about doing is delaying Social Security for as long as possible, preferably to as late as age 70. If you do that, delay till age 70, the amount of income you're gonna get will be more than 70% higher than what you would have got at age 62 and on top of that, there will also be inflation increases. Jason, would you agree with Jonathan number one on how we've started this conversation and Social Security and, and a fixed immediate annuity would be, would be, those would be two things that you should really look seriously at? You know, well, well, definitely. I mean, I think one thing that retirees and near retirees tend to forget is they think of Social Security as an, as a source of income, which. Right. Of course it is. They don't really think of it as an asset. Mm-hm. And one of the useful things, I don't know what multiplier you would use, Jonathan, but maybe as a rough rule of thumb, something like 30, right? You would say, well, if I get a, if I get a thousand dollars a month from Social Security, that's $12,000 a year. So that's sort of the equivalent of owning maybe 350, $400,000 worth of bonds. That's a very rough rule of thumb. No, but that's a really good way to look at it. And so a lot of people feel going into retirement, you know, I need to own a ton of bonds, because I need all, to generate all of this income, but you already own some bonds in the form of the Social Security that's being generated for you. So you should factor that into your thinking. I'm richer than I thought. [LAUGH]. Yeah, exactly, exactly. And, I guess the, the flip side to the annuity argument is that Americans need to be careful of annuities that are pushed really hard by people with what I think we could call sort of obscene incentives to sell them. Not the immediate income annuities that Jonathon's talking about but a lot of other fixed annuities carry commissions of, you know, nine, 10% or higher, and you should really ask yourself, if somebody has to get paid 10% to sell this to me, how good could it be? [LAUGH] When, you know, much lower cost alternatives are available. You probably don't wanna buy the thing that somebody wouldn't be willing to sell you if he wasn't gonna be able to earn 10% to do it. The biggest risk in retirement is that you're gonna outlive your savings. And so what you want are lifetime streams of income. And you get that from Social Security. And you can get that from an immediate fixed annuity. So what I would suggest people do is, if you're gonna spend down your savings at any point, spend them down early in retirement so that you can put off buying that immediate fixed annuity, and you can put off claiming social security, and that way you're going to get that larger stream of lifetime income. And you'll say to me, well, okay, but what if I do die young? Well, it's not a decision you'll live to regret. You can buy an immediate fixed annuity at any time and you're saying that, that the, that the later you wait, the longer you wait, the later you buy it, the better off and the more money you're gonna get for whatever investment you make in it? That's correct. There are other people who have advised us on wealth track is to stagger your purchases of these annuities. For instance to buy, I don't know, $50,000 now and then in another five years when interest rates are higher, buy another $50,000. I mean, what about that kind of strategy? [CROSSTALK] Assuming, cuz you're assuming, number one, where you're gonna get more money, but also you're assuming that interest rates will be higher than they are now, which are still pretty much near record lows. Yeah, well it's hard to forecast interest rates. What we do know, and Jason's much more adept at talking about this than I am, investors tend to have an aversion to regret. And so, people don't want to make that annuity purchase all at once. So if you stagger it over time, what you do is, at least in your head, reduce the risk that you're going to make the big annuity purchase and then keel over and die. Right, Jason? Yeah, for sure. And, you know, part of what investors always need to diversify is the risks in their own behavior. So one risk is people are aversed to annuities because they don't like shelling out the lump sum up front. Yes. To get drips and drabs over time. So what you can do is you can say, well, I'm little uncomfortable shelling out all this money out today that I'm gonna receive over the next 10, 20 or 30 years, so maybe I'll do some today, some one year from now or five years from now. The trick to that is you have to make a pre-commitment to it. [MUSIC]

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