Two years ago, Stanford University’s Center on Longevity produced a report on optimizing retirement income. They followed that up this year with another paper called "Viability of the Spend Safely in Retirement Strategy" funded by the Society of Actuaries.

Authored by Wade Pfau of The American College, Steve Vernon of Stanford’s longevity center and consulting actuary Joe Tomlinson, the report takes a deep dive into numerous strategies for middle-class Americans with $1 million or less. That’s still the vast majority of the nation.

Many of their conclusions shouldn’t be surprising. For most healthy middle-class individuals, the single best strategy is to delay Social Security until age 70 or as long as possible. No strategy is risk-free and, with a 26 percent cut in benefits looming in 2034, Social Security has political risk associated with Washington D.C. gridlock.

Even among people who many think can’t afford to take huge risks, “a significant allocation to equities provides the potential for delivering much higher retirement income compared to investing in bonds,” the trio writes. “However, there’s no guarantee of that outcome, and retirees incur the risk of realizing lower retirement incomes if stock market returns are poor in the early years of retirement.”

The study extensively tests three retirement portfolios: 100% equities, 100% bonds and a 50-50 stock/bond structure. Over time, the all-equity allocation generates more income under most scenarios, but it also is accompanied by much higher income variability.

The authors suggest an equity allocation of 75% “might be a reasonable compromise,” adding it “still compares favorably to other retirement strategies.”

Assumptions also are important. “The degree of optimism vs. pessimism reflected in the assumptions regarding expected investment returns significantly impacts the expected amounts of retirement income received over the retirement period.”

That means that an advisor’s role in setting expectations is critical even though, as the report acknowledges, many Americans with less than $1 million don’t use an advisor and are left to their own devices.  If actual returns through retirement fall short of these assumptions, individuals “may need to reduce future spending” whether they want to or not.

Advisors say clients often spend more in the first few years of retirement. They also saw working and retired clients dramatically reduce their spending in the 2008-2009 recession.

But unlike many of the folks the Stanford study is addressing, most advisors’ clients have a plan that is spelled out a lot more clearly. What isn’t clear is whether individuals with significantly less than $1 million have the flexibility to reduce their expenditures, “particularly in their later years when they might need to increase spending on medical and long-term care,” the report said.

First « 1 2 » Next