Retirement planning: unanswered questions
Posted February 23, 2010on:
“Much rides on how you take your money out, not simply how much you have in.” –Lee Eisenberg in The Number
It’s true. Yet, for whatever reason, there’s much more written about strategies for accumulating assets than about strategies for intelligently spending down your assets.
Investors nearing retirement have a lot of questions, and so far they’ve gone more or less unanswered by mainstream financial media.
Asset Allocation in Retirement
During the accumulation stage, the goal when crafting a portfolio is simply to achieve the maximum return over the period in question without giving yourself a heart attack due to volatility.
During retirement, however, asset allocation is trickier because volatility carries an additional level of significance: It can wreck your returns if your timing is unlucky (i.e., if you have a serious bear market early in your retirement).
So it becomes a balancing act: What asset allocation will allow you to stay ahead of inflation over a 30 year period while still protecting you against the risk of an untimely bear market?
Safe Withdrawal Rates
Is a 5% withdrawal rate safe? What about 4%? 3%? And how much does your safe withdrawal rate depend on whether you are:
- Withdrawing that percentage of your portfolio each year, as opposed to
- Withdrawing that percentage of your portfolio in the first year of retirement, then adjusting the withdrawal amount upward each year to account for inflation?
And how does any of that change if you plan to retire at, say, 57 instead of 65?
Annuitizing Your Portfolio
Annuitizing a portion of your portfolio can help to increase your safe withdrawal rate. But how should you determine how much of your portfolio to annuitize? And, if you plan to annuitize:
- At what age(s) should you buy an annuity? Is it best to do it as soon as you retire, or should you wait a few years? Does the answer have anything to do with current market valuation levels or with the rates currently being offered on TIPS?
- What factors should you consider when choosing a company from which to purchase a single premium immediate annuity?
- What riders are likely to be valuable, and which will probably turn out to be a waste of money?
Social Security Strategies
When should you start taking social security payments? What factors play into the decision? What strategies can you use to increase your expected payout?
There are literally thousands of articles online explaining how to choose between a Roth or traditional IRA. But how should you choose which to take money out of each year once you’re retired? And how does that changed based on with whether or not you’re receiving social security payments?
Planners and Resources
With the noteworthy exception of the recent Bogleheads’ Guide to Retirement Planning, most of the above questions go unaddressed by mainstream financial literature. Such questions have primarily been the domain of financial advisors seeking to help clients through them one-by-one.
I fully support those advisors in their efforts. At the same time, it would be great to see a larger pool of quality information resources for investors who prefer to do their own research. If you know of any such resources, please share them!