17
Morningstar FundInvestor
June 2
014
now relative to where you need to be, plan to build
your positions gradually rather than dramatically
increasing them all at once, as market valuations
aren’t what they once were.)
Mistake 2
| Not Delaying Social Security Filing
Because it provides an inflation-adjusted income
stream for the rest of your life, Social Security
ensures that you’ll have at least some money coming
in the door even if your investment portfolio runs
low (or out) during your later years. If you file early—
you’re eligible to do so as early as age
62
—you
permanently reduce your longevity hedge, your annual
benefit from the program, by as much as
25%
.
Meanwhile, delayed filing has the opposite effect,
amping up the value of your hedge: Not only will
your benefits last as long as you do, but they’ll be
higher as well, perhaps even substantially so. Those
who delay filing until age
70
will receive an annual
benefit that’s more than
30%
higher than what they
would have received had they filed at full retire-
ment age (currently
66
) and more than
50%
higher
than their benefit had they filed at age
62
. More-
sophisticated filing strategies—including the (poten-
tially endangered) “file-and-suspend” strategy—
help couples maximize their benefits during both
partners’ lifetimes.
Mistake 3
| Not Adjusting Withdrawal-Rate
Assumptions
Just as our savings rates are the main determinant of
success during the accumulation years (much more
than investment selection, in fact), the spending rate
is one of the central determinants of our retirement
plans’ viability.
The
4%
rule—which indicates that you can withdraw
4%
of your total portfolio balance in Year
1
of retire-
ment, then annually inflation-adjust that dollar
amount to determine each subsequent year’s portfolio
payout—is a decent starting point in the sustainable
withdrawal-rate discussion. But it’s important to
tweak your withdrawal rate based on your own situa-
tion. If you have a sparkling health record and it looks
likely that you’ll be retired longer than the
30
-year
withdrawal period that underpins the
4%
rule, you’re
better off starting a bit lower. (The fact that bond
returns are apt to be meager in the coming decades is
another argument for veering toward the conservative
side on the withdrawal-rate front.) On the plus side,
you may be able to live on much less than standard
rules of thumb (such as
80%
of preretirement income)
would suggest.
In a similar vein, it’s important to not set and forget
your retirement-plan variables, such as your spending
rate and your asset allocation, because retirement
progresses and new information becomes available
about your health and potential longevity, market
valuations, and so forth.
Mistake 4
| Reflexively Dismissing Guaranteed
Products
There are a lot of reasons many investors avoid prod-
ucts that promise guaranteed lifetime income, such
as annuities. They can be high-cost, it can be difficult
to part with a large sum of money in exchange for a
guaranteed lifetime income stream, and transparency
is often lacking. (I’m often surprised by the number
of people I run into who own annuities but don’t know
what they have.) There’s also the matter of current
interest rates, which have a depressive effect on the
payouts of fixed-type annuities.
That said, guaranteed lifetime income is a huge
attraction on the longevity-protection front, and
not all annuities are complicated and costly. Single-
premium immediate annuities, while the most
beholden to the current interest-rate environment,
are the least complicated, most transparent, and
most cost-effective annuity type. Deferred-income
annuities, meanwhile, provide an even more direct
hedge against longevity risk by enabling you to
start up your income stream at some future date—
when you hit age
85
, for example.
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Contact Christine Benz at
