Risky Business:  Living Longer Without Income for Life
(American Academy of Actuaries, June 19, 2013)

A discussion paper released by the American Academy of Actuary’s Lifetime Income Risk Joint Task Force. "The discussion paper focuses on the issue of ensuring retirees secure income that lasts their entire lifetime and discusses potential solutions through changes in education, plan design, and federal retirement policy."

"What can be done to lower these [unnecessarily high hurdles to finding the right lifetime income solutions] and better prepare current and future retirees to secure and manage their lifetime income needs."

It is nice to see the Academy taking action on this important topic.

The discussion paper advocates expanding financial literacy and education for prospective retirees, refocusing plan design on lifetime income needs and implementing Federal retirement policies to support lifetime income needs.

While I believe that investing some or all of a retiree's accumulated retirement savings in a life insurance annuity product can be part of a reasonable retirement strategy, it appears to me that the discussion paper over-emphasizes the use of these products relative to other approaches.  While managed structured-income payments are briefly mentioned as a source of lifetime income, the paper points out that such approaches are not guaranteed, and they are not included as part of the paper's discussion of potential solutions through changes in education, plan design and federal retirement policy.

While a good start, I would like to see the Academy take a broader view of the potential solutions to the problems facing current and future retirees.  My specific recommendations to the Academy in this regard include:

1. The Academy should acknowledge that retirees may want to use some or all of their accumulated savings to provide for their retirement income needs through a structured series of payments rather than through guaranteed lifetime income insurance products.  And, those who make this choice need better guidance than the 4% withdrawal rule set forth in the discussion draft.  As I have indicated countless times, I believe the actuarial approach recommended in this website is one such better approach, particularly if the retiree wishes to coordinate the structured series of payments with other fixed annuity income.
2. Lifetime income products that provide fixed dollar payments do provide payments for life (and therefore appear to address one of the paper's definitions of Lifetime Income Risk), but those payments will be eroded by future inflation.  Therefore, income may become inadequate over time (and may not address another of the paper's definitions of Lifetime Income Risk).  Communication of such fixed dollar amounts in defined contribution plans may be misleading because it can overstate real dollar income throughout retirement and it may also be misleading if participants do not elect to purchase an annuity at retirement.  The Academy may wish to consider these factors when discussing this issue with policymakers.
3. Retirement planning generally does not end at retirement.  It is an ongoing process involving periodic assessment of many factors.  Education changes and potential solutions proposed by the Academy should address this reality.
4. As noted in the discussion paper, the risk pooling argument in favor of investing in insured annuities is compelling.  But this argument must also be weighed against anti-selection and profits built into insurance company pricing.  The Academy may wish to explore ways to make these items more transparent to consumers.
5. Given its relationship with the insurance industry, the Academy may wish to consider exploring whether it should be disclosing a potential conflict of interest when discussing the pros and cons of life insurance annuity products in accordance with Precept 7 of the profession's Code of Conduct.
    

The Consequences of Saving Too Much for Retirement
David Ning (US News, May 29, 2013)

"The future is unknown, so it's always good to be conservative with your money, but you can go too far. Make a carefully thought out plan to make sure you're saving enough, but don't save too much. Money isn't just for hoarding, it’s for spending too."

I agree with Mr. Ning. It is critical, however, to make sure that you are indeed on track to "save enough" before you decide that you have saved too much and you should be spending more.
The table below might help you determine whether you are on track or not. It shows the approximate multiple of final year's pay in accumulated savings needed to provide real dollar annual income during retirement that is expected to replace a specific percentage of your income prior to retirement (when added to income from Social Security). This table is based on the methodology set forth in the article in this website entitled How Much Accumulated Savings Will I Need To Replace My Pre-Retirement Standard of Living? and the following assumptions:

1. Social Security Normal Retirement Age 66
2. Social Security will replace 28% of final pay at assumed retirement age/benefit commencement age of 65 and 39.6% of final pay at assumed retirement age/benefit commencement age of 70 and will be increased by inflation of 3% per year after assumed retirement/benefit commencement.
3. Investment return on accumulated savings of 5% per annum after retirement. Inflation increases of 3% per annum.
4. No other sources of retirement income (other than accumulated savings and Social Security)
5. Death occurs at age 95
6. No amounts intended to be left to heirs on death
   

These are just approximate amounts of accumulated savings needed based on the assumptions above.  Changing any of these assumptions would change the multiples needed.   For example, if a person had defined benefit income or had fixed annuity income, the amounts needed would be reduced.  In addition, if a person decided to purchase a life annuity with some or all of her accumulated savings at retirement, multiples of pay needed may be less as insurance company pricing is based on an assumption of death closer to average life expectancy.  In addition, Social Security benefits may replace lower or higher percentages than assumed for this table.

But the bottom line is that if you don't have other significant pension income and you want to approximately maintain your standard of living in retirement, you probably don't need to be terribly concerned about the problem of "over-saving" until your accumulated savings start to exceed something like ten times your current compensation.

Achieving a Higher Safe Withdrawal Rate with the Target Percentage Adjustment 
David M. Zolt (Journal of Financial Planning)

Nice article by Mr. Zolt, who is a financial planner and another member of the Society of Actuaries.

"A much higher initial withdrawal rate than previously thought possible can be achieved without increasing the probability of failure as long as the retiree reduces or eliminates the inflation increase for years indicated by the Target Percentage™.   The Target Percentage is developed and used to determine whether the portfolio is ahead of or behind target at any point during retirement. If the portfolio is ahead of target, the full inflation increase is taken in that year. If the portfolio is behind target, the inflation increase for that year is reduced or eliminated."

I like the approach suggested by Mr. Zolt because it is not as static ("set and forget" as defined by Wade Pfau) as the traditional safe withdrawal rate method.  Adjustments to withdrawals are made (as frequently as annually) to take into account "good" and "bad" years and to keep the spending plan from veering off the tracks.

Note that Mr. Zolt's approach (or something similar) can easily be accomplished using the suggested process and spreadsheet found on this website.  As an example, let's assume that a retiree would like to have a higher initial withdrawal rate and is comfortable with future increases of CPI minus 1% rather than full CPI increases.  Let's further assume that she believes the best estimate assumptions for future experience are 5% annual investment return, 3% per year inflation and a 30-year withdrawal period.  Also assume no annuity income and no bequest motive.    The retiree runs the New and Improved Spending Calculator on this site with her best estimate assumptions which determines an initial withdrawal rate of 4.34%.  She doesn't like that rate and determines that she can live with lower inflation protection (1% per year less), so she inputs 2% annual desired increases in the spreadsheet (but retains the 3% inflation assumption to measure the potential effect on future inflation-adjusted withdrawals).  This yields an initial withdrawal rate of 4.92%, which is much more to her liking (about 13% higher compared with Mr. Zolt's 10%).  She also looks at the inflation-adjusted runout tab on the spreadsheet and sees that if experience is exactly as assumed, her withdrawals will decrease in inflation adjusted dollars (by almost 25% in year 30).

As discussed in the original March, 2010 article in this website, our hypothetical retiree needs to employ an algorythm (rules) to adjust for actual experience and changes in assumptions and other input items each year.   She likes Mr. Zolt's basic approach so she decides that she will use the following rules to determine subsequent year's withdrawals:

1. If the preliminary withdrawal rate falls inside the "corridor", she will increase her withdrawal amount for the previous year by CPI-1%
2. If the preliminary withdrawal rate falls above the high end of the corridor, she will increase her withdrawal amount for the previous year by the full CPI.
3. If the preliminary withdrawal rate falls below the low end of the corridor, she will withdraw the greater of i) the average of the preliminary withdrawal rate and the expected withdrawal rate or ii) the same dollar amount withdrawn for the previous year (i.e., no CPI increase).

For this purpose, the preliminary withdrawal rate is the rate produced by running the spreadsheet at the beginning of the year based on assumptions and new asset data as of that date (and presumably continuing with desired increases of CPI minus 1%), the expected withdrawal rate is the rate for year two shown in Column M of the previous year's run-out tab and the corridor could be something like 95% to 105% of the expected withdrawal rate.

Note that I am not necessarily advocating this approach.  I'm only illustrating that something similar to what Mr. Zolt suggests can be accomplished with the tools set forth in this website.

Mr. Zolt has graciously provided the following spreadsheet for those who would like to build their own target percentages. [Target_Percentage_Calc_2013_05_24.xls]

Want a Happy Retirement?  Don't Just Guess About What You'll Need 
Chuck Saletta (DailyFinance, May 13, 2013)

"In its research, EBRI found that people who either used online retirement calculators or who worked with financial advisers were far more prepared to have a successful retirement than those who didn't. On the flip side, those who relied primarily on guessing at how much they'd need to cover their expenses wound up far worse prepared for their retirement than the typical person."

Not sure that the EBRI research actually measured happiness, but the conclusions in this article are 100% consistent with the themes expressed in this website--In these days when individuals are much more responsible for their own retirement, you need to do the retirement math--you need to crunch your numbers based on your financial situation.  And how much you can spend in retirement is just the other side of the retirement planning coin of how much you need to save to replace your pre-retirement standard of living.

DoL Proposes to Include "Lifetime Income Illustrations in Benefit Statements

DoL Proposes to Include "Lifetime Income Illustrations in Benefit Statements
(Groom Law Group, May 9, 2013)

The Department of Labor recently published an Advance Notice of Proposed Rulemaking (ANPRM) soliciting comments on their proposals to mandate inclusion of lifetime income illustrations for 401(k) plan participants and other defined contribution plans.  This Groom Law Group summary is a good explanation of the proposed changes to current requirements.

Here is a link to the DoL's ANPRM
http://www.gpo.gov/fdsys/pkg/FR-2013-05-08/pdf/2013-10636.pdf

Here is our response to the ANPRM
http://howmuchcaniaffordtospendinretirement.webs.com/EBSA_benefit_statement_proposals.pdf

Is the 4% Rule Folly?
(AdvisorOne, April 29, 2013)

Another excellent article by Michael Finke, professor and coordinator of the doctoral program in personal financial planning at Texas Tech University debunking the 4% Rule.  Mr. Finke criticizes the "shortfall analysis" used to develop the 4% Rule and concludes that use of this rule by individuals or advisors has a tendency to result in a more conservative spending strategy than necessary.  Mr. Finke says, "That money in the bank [at death] over and above the desired legacy is the money left on the table in the game of retirement living."

Finke refers to a 2008 study by Olivia Mitchell and others which estimated, "that the average retiree could improve expected happiness in retirement by as much as 50% by adopting a blended annuitization and investment strategy."

Participants Need a Retirement Income Plan
(Plan Sponsor, May 2, 2013)

I agree with Bryan Hodges that, "Individuals need a process for converting their resources into income in retirement."  He proposes a six step process that is more "holistic" (more comprehensive and more focused on pre-retirement planning) than the actuarial process to determine a spending budget in retirement described in this website.  For further discussion of holistic retirement planning, readers may find this link to be helpful.
http://www.cabourneandassoc.com/news/hp2.html

Mr. Hodges also refers to "sequence of return" risk.  Dr. Wade Pfau has a nice explanation of this term in a recent post.
http://www.marketwatch.com/story/retirement-the-sequence-of-returns-2013-02-08

How to Balance Saving Money With Enjoying Retirement 
Dave Bernard (US News, April 19, 2013)

"...you may have to accept that you cannot do everything your heart desires.  But you do not necessarily want to deny yourself of [all] life's pleasures either.  Try to be realistic about what you can afford and then make smart choices."

I agree with Mr. Bernard, and have written several times about the two potentially conflicting goals of  1) spending enough to enjoy a certain standard of living and 2) not spending so much that accumulated savings is depleted prior to death.   As mentioned in my March, 2010 article, retirees who worry about outliving their retirement assets often spend too little, denying themselves an enjoyable retirement."

The key to managing the risks of withdrawing too much or too little of your accumulated savings is to have a good sense of how much you can spend each year.  In my opinion, this knowledge can only come from crunching the numbers each year using the spreadsheet and process set forth in this website, or some other reasonable approach.  If you know how much you can spend each year, you are in a much better position to make the "smart choices" that Mr. Bernard refers to.

Reverse Mortgages
(Federal Trade Commission)

With the housing market beginning to recover, tapping into home equity may once again become a larger part of retirement planning.  The article in the link above contains a good explanation of reverse mortgages from the Federal Trade Commission.

My original March 2010 article describing the general actuarial process for developing a spending budget (which is the foundation for this entire website) indicated that accumulated assets to be input into the provided spreadsheet generally would not include home equity.  That opinion was the conservative actuary in me talking.  I have recently revised the original language as follows:

If you believe that you will eventually have access to some of your home equity (as a result of downsizing to a smaller, less expensive home or apartment, or through a reverse mortgage that will pay you a lump sum or monthly payment while allowing you to remain in your home) and you want to factor the value of this future action in your spending plan, you can include an estimate of the present value of the net equity you expect to receive in the amount of accumulated savings you input in the spreadsheet. Note that doing so is less conservative than not anticipating such action and could leave you more vulnerable to future financial surprises, such as unanticipated medical or nursing home costs.

Why 4 Percent Annual Withdrawals are Still Safe
David Ning (US News, April 17, 2013)

"But with the original 4% annual withdrawal rate already too low for many people to sustain a comfortable lifestyle, what is a future retiree to do?"  Ning argues that the 4% rule is still conservative and appropriate as long as you are willing to adjust your future spending to reflect actual investment experience and you are also willing to eliminate unnecessary expenses.

Since I have ranted against the 4% rule in previous posts, readers may be somewhat surprised to know that I'm not in violent disagreement with Mr. Ning's post.  Using the spending calculator on my site (Version 2.0) and inputting $500,000 of accumulated savings, $0 immediate or deferred annuity income, 30 year payment period, 5% investment return, 3% inflation and no amounts left to heirs, you get a spend rate for the first year of 4.34% of the accumulated savings.  Note, however, that if you change the immediate annuity amount to $15,000, you get an initial spend rate of 3.45%.

The reason I'm not too upset with Mr. Ning's post is that he suggests that you can't blindly follow the 4% rule as intended by its inventor.  Of course Mr. Ning does not provide any guidance as to how your spending budget should be adjusted for actual investment experience.

So, I suggest rather than simply pulling a percentage out of the air, you need to 1) do the math based on your personal situation and 2) make adjustments in the future as outlined in the original March, 2010 article (actuarial approach) on this site in order to keep your spending plan on track.