Yes. This is another post extolling the benefits of building a Floor Portfolio to fund your future Essential Expenses in retirement. Recently released research shows that households spend more of their assets if they hold a portion of their wealth as guaranteed lifetime income and not as investments. In addition to providing economic benefits, shifting assets from investments to guaranteed lifetime income can also provide psychological benefits that give households a “license to spend” their assets. So, you can worry less, spend more and achieve your financial goals by shifting some of your assets from investments to guaranteed lifetime income.
Background
In our post of June 19, 2021, we discussed how failure to spend assets during retirement (underliving wealth) can prevent you from achieving your financial goals. In our post of June 23, 2021, we noted that “the many uncertainties involved in retirement planning can and do lead to anxiety, stress and sub-optimal decisions,” and we suggested facing financial fears in retirement by developing a robust plan to mitigate and/or address future contingencies. The plan we recommend (Recommended Financial Planning Process) involves building a Floor Portfolio of non-risky (guaranteed) investments to fund future estimated household Essential Expenses. These non-risky investments include:
- Social Security benefits (and deferral of commencement of such benefits)
- Pension benefits, and
- Lifetime income annuity products
New Research
Recent research from Drs. David Blanchett and Michael Finke supports shifting assets from investments to guaranteed lifetime income in household retirement asset portfolios under certain circumstances. In their June 29, 2021 ThinkAdvisor article, Why Annuities Work Like a ‘License to Spend’ in Retirement summarizing their research paper, they say
“What You Need to Know
- Out of fear of running out of money, many retirees spend less than they could comfortably withdraw.
- Households spend more if they hold their wealth as guaranteed income, and not as investments, as they age.
- Retirees without a pension should consider buying an income annuity or delaying their Social Security claim.”
Their research suggests that assets held in investments generate only about one-half of the spending associated with an equal amount assets held in the form of guaranteed lifetime income.
Summary
We encourage our readers to read this important research or the ThinkAdvisor article, which closes with the following:
“While studies on optimal annuitization have generally focused on the economic benefits, shifting assets from savings to lifetime income can provide a retiree with the psychological benefit of being given “license to spend” accumulated savings.
The ability to gain greater enjoyment from savings is an important reason to consider funding guaranteed income from investments either through delayed Social Security claiming or by annuitizing a portion of retiree savings.”
And while we totally agree with Drs. Blanchett and Finke, we will point out that our Recommended FinancialPlanning Process also provides guidance as to how much of your accumulated savings you may actually wish to “shift” to lifetime income.
