Delaying Social Security payments until 70 is one of the best decisions retirees can make.

Michael Kitces, director of research for Pinnacle Advisory Group, said circumstances have changed so that it makes sense to put off taking Social Security.

“Everyone gets an 8% increase if they delay Social Security,” he said.

At that point, “it’s really a mispriced annuity. Too bad you can’t buy more,” Kitces said.

Allan Roth, financial planner and writer at Wealth Logic, echoed that sentiment, calling Social Security “the best annuity.”
Roth and Kitces spoke Thursday at the Morningstar Investor Conference in Chicago on a panel about retirement planning.

While Social Security can be viewed as the best annuity available, neither panelist has use for annuities otherwise. Their main concern is the inability for the annuities to adjust for inflation.

Kitces said the issue he’s most concerned about in retirement planning right now is the view advisors and their clients have regarding bonds and the likelihood of bond prices falling and yields rising as the Federal Reserve exits its quantitative easing program.

“What worries me the most in retirement planning is the idea that people are so afraid of what will happen in bonds when rates rise is that they buy stocks. In a bear market in bonds, you may lose about 3 percent. In stocks you can lose 45  percent. It’s not a good risk strategy,” Kitces said.

Rising rates can be a problem for stocks, too, he said. “Depending on what triggers the rising rates, it’s not good for stocks. If rates rise because we have awesome economic growth, (that’s one thing). Otherwise there are other reasons rising rates hurt stocks,” he said.

Kitces and Roth differed when it came to the “4 percent rule,” a guideline for advisors to use to decide how much clients can withdraw from their portfolios annually.

Roth said the 4 percent rule regarding spending “is true in theory” but he said advisors need to take into consideration 1 percent cost for fees and another 1 to 1.5 percent cost for client “emotion.” That then lowers the spending guideline to about 2 percent.

Yet Kitces said that criticism is not valid, saying that the 4 percent rule is based on markets with lower returns. He said if advisors assume the Standard & Poor’s 500 stock index won’t rise beyond 2100 by 2029, and the advisor buys a 15-year Treasury inflation-protected note for a portfolio split 60 percent stocks and 40 percent bonds, that mix would still return 4 percent.

“We’re at 1900 now in the S&P,” he pointed out. “We’d have to have a horrible environment to only get (a) 4 percent (return).”

The two panelists were asked about whether they use Monte Carlo simulations when they seek to model portfolio incomes, and both said they had issues with the programs.

Kitces said his problem is the programs can’t be tweaked to allow some of the timeframes to have lower returns in the beginning of the client’s retirement and then modified to an average longer-term return.

What he would like to do is create an outlook that would show what returns are like having a 1 percent haircut on stocks and a 1.5 percent haircut on bonds in, say, the next 10 years. “No software will do it,” he said.

Additionally, trying to extrapolate returns for the next 30 years is impossible, he said. Roth said instead he takes a view to keep spending conservative. “It’s better to die with money than running out of money when trying to forecast,” he said.