Safe Retirement Spending

Many advisors are being tested in 2022 when counseling their retiree clients regarding spending levels.  On the income side, seniors have seen their investment portfolios suffer with a bear market in stocks and the worst decline in bond prices in decades.  On the expense side, a dramatic spike in inflation has driven up the cost of pretty much everything, including necessary consumer goods.

It has been a rough season for seniors who are taking account withdrawals during a time when spending is increasing, and nest eggs are dwindling.

“One of the biggest fears that people have about retirement is if their money will last as long as they do,” NewRetirement reports. “How much can I spend? How much do I need? How much do I actually have? There are so many questions.”

The Stanford Center on Longevity, in collaboration with the Society of Actuaries (SOA), analyzed 292 retirement income strategies to identify and recommend an approach that would help retirees answer these spending related questions with confidence. This “spend safely in retirement strategy” helps seniors convert assets “into the most retirement income possible,” according to NewRetirement.

The five components of the “spend safely” strategy are as follows:

1. Delay Social Security

Financial advisors know that the longer a retiree can wait to start collecting Social Security, the higher his or her monthly check will be.  If it is possible to wait until age 70 or as close to 70 as possible, then the benefits could be significant.

2. Plan Savings Withdrawals

Use the Required Minimum Distribution (RMD) formula to determine a senior’s annual withdrawal rates from his or her various investment and savings accounts. The actual RMD rule only applies to tax-deferred retirement accounts and is triggered at age 72, but the RMD formula is a good barometer to apply across the board to keep withdrawals in check.

3. Project Expenses in Detail

Research illustrates the critical importance for retirees to know the details of their spending habits to evaluate whether their current income streams are adequate to cover their needs. The more accurate the details, the more reliable projected forecasts will be.

4. Explore Other Income Sources

If a senior is unwilling or simply unable to reduce expenses, he or she may consider getting a part-time job or tapping into a home equity line.  Another option is to review line-by-line everything he or she owns and evaluate whether each item is still serving its intended purpose and can or should be sold.

For example, for most retirees, the decision to purchase a life insurance policy was fueled by providing financial relief for loved ones in the event of their untimely death.  But today, that may no longer apply.  For example, the kids may be grown, and financially independent, and other assets may be thankfully protecting the spouse.  Under such circumstances, one option to consider is to sell a life insurance policy to a third-party investor in a highly regulated transaction called a life settlement. The retiree receives a cash payment in exchange for the sale of the life insurance policy — typically four to seven times greater than the cash surrender value — and the buyer assumes the premiums and collects the death benefit when the insured passes away.  This newly found cash flow can be used in any manner whatsoever and could bridge the shortfall between a client’s retirement income and expenses.

5. Explore Other (Sophisticated) Withdrawal Strategies

Other withdrawal strategies apply to retirees with sizable savings and include the following: annuities; variable withdrawals (changing how much is taken out for spending based on market performance in the current year); and bond ladders (accessing funds from bonds with different maturity dates so that a retiree can react swiftly to interest rate fluctuations).  Such strategies help to apply floors and guardrails that will keep a senior’s income streams from drifting too far off course in the event of difficult market conditions such as the one we are in today.

Financial advisors are in a unique position to help their senior clients manage the emotional and practical implications of both preserving and spending down their retirement savings.  If there are liquidity concerns and they own a life insurance policy, then the life settlement option should be explored to see if it is a suitable strategy.   And the only way to make sure that a retiree is obtaining the maximum value for a life insurance policy is to work with an experienced life settlement broker like Welcome Funds Inc., who has a duty to represent his or her best interests.

For more information or to receive a free life insurance policy appraisal in the secondary market, please visit www.welcomefunds.com or call 877.227.4484.