Wade Pfau

Why Clients Shouldn’t Claim Social Security Early to Protect Portfolios

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John Manganaro
January 9, 2023

A new paper published in the January 2023 edition of the Journal of Financial Planning by Wade Pfau and Steve Parrish asks a question that is of paramount importance for financial advisors and their clients: Which Social Security claiming strategy generates the highest legacy value?

Parrish is an independent consultant, an adjunct professor at Drake University and The American College of Financial Services, and co-director of the American College Center for Retirement Income. Pfau is a professor of retirement income and director of the Retirement Income Certified Professional program at The American College of Financial Services.

As Pfau and Parrish note, the issue of when and how to claim Social Security is as important today as it has ever been for the typical retirement investor. On the one hand, other sources of guaranteed retirement income have diminished in prevalence, especially employer-sponsored defined benefit pensions. On the other, the average life expectancy for healthy Americans continues to rise, putting additional pressure on the typical retiree’s nest egg.

With such questions hanging in the air, Pfau and Parrish use a model based on historical return data to explore whether claiming benefits at age 62 leads to greater wealth at death compared with delaying Social Security benefits until age 67 or 70. In almost all cases, the pair finds, delaying payments is the superior method if one’s goal is to maximize wealth.

Faith in the Markets

According to Pfau and Parrish, there are significant and well-understood benefits to delaying Social Security. For example, monthly benefits will be as much as 77% larger in inflation-adjusted terms for those who claim at 70 instead of 62.

Still, many individuals decide to claim earlier for a variety of reasons. In some cases, Pfau and Parrish write, these early benefits selections are related to the individual’s personal situation. Some may feel they need the income to support their spending needs, or they have a medical condition that is expected to shorten their life expectancy. As Pfau and Parrish write, such choices are perfectly rational and may result in “better” outcomes for certain subsections of the U.S. retiree population.

However, there are also many individuals and couples who appear to have sufficient resources to cover their spending needs without relying on Social Security — but they claim early anyway. As the new analysis and prior research shows, this group is sizable, with only about one in 10 Americans saying they plan to delay Social Security until age 70.

Pfau and Parrish find that one common early-claiming motivator is the idea that individuals should claim benefits as early as possible in order to leave more of their assets invested in the market. In other words, they believe that the receipt of Social Security benefits will allow them to withdraw less from their investment accounts to support their retirement spending needs.

Does It Work?

Using historical return data, Pfau and Parrish directly tackle the question of whether claiming benefits at age 62 leads to greater wealth at death compared to delaying Social Security benefits until age 67 or 70. The pair use assumptions about life expectancy, current wealth and spending needs that reflect the current U.S. retiree population.

In crunching the numbers, the researchers find that delaying Social Security typically leads to higher amounts of wealth at death than claiming it at age 62, refuting the claim that it is a good idea to start Social Security benefits early just to keep more dollars invested in the market.

he percentage of cases where the legacy amount is greater when claiming at 67 or 70 compared to 62 ranged from about 60% to almost 97%.

According to the analysis, one key variable in the outcome of any given scenario being tested is the assumed allocation to stocks.

Specifically, the early claiming strategy tended to fare better with higher stock allocations. Similarly and as expected, the results of the market-based approach are superior when stock market returns are strongest in the years between when the individual turned 62 and 70.

As the researchers explain, the role of sequence of returns risk is key in the analysis. Those individuals who are lucky enough to experience strong returns early in their retirement years will end up with greater lifetime wealth, but the strategy is a risky one, as the percentages above demonstrate. As a purely logical exercise, Pfau and Parrish find, delayed claiming is the proven method for maximizing wealth.

More About the Math

According to Pfau and Parrish, the “internal rate of return” on delaying Social Security is actually a very favorable real return. They note that separate research has shown that those who delay claiming until age 70 and reach age 90 can generate the equivalent of a 5% real rate of return on what is essentially a government-backed bond.

Further, delaying Social Security benefits also tends to reduce the chances that an individual will run out of money before death, providing an additional benefit to this strategy.

Ultimately, Pfau and Parrish argue, the key point is that the guaranteed return provided by delaying Social Security is a highly compelling benefit for those who have the means to delay claiming. It effectively competes with the returns of all but the most aggressive (and lucky) investment portfolios.

And, as Pfau’s and Parrish’s work shows, waiting to claim benefits can not only reduce the chances that an individual will run out of money during their lifetimes, but it also increases the likelihood that they will be able to leave more assets.

Read more: https://www.thinkadvisor.com/2023/01/09/why-clients-shouldnt-claim-social-security-early-to-protect-portfolios/

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Nick DesrocherWhy Clients Shouldn’t Claim Social Security Early to Protect Portfolios
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Most Americans Plan To Rely Heavily on Social Security for Retirement — Here’s What To Know

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The majority of Americans don’t have much faith in the future of Social Security. A recent GOBankingRates survey found that 46% of Americans believe the program will offer a lot less than it does today by the time they retire, and 23% believe the program won’t exist at all by the time they retire. Yet despite this, most Americans plan to depend on Social Security to fund at least some of their retirement — 26% said they plan to use Social Security to fund less than half of it, but 51% said they plan to depend on it to fund more than half (31%) or all (20%) of their retirement.

Can Americans Rely on Social Security as It Stands To Fund Their Retirement?

“With the rise of inflation and the overall cost of living, unless you can truly stick to a budget — which in my experience most people don’t — Social Security is not sufficient for most retirement expenses,” said Frank Murillo, partner and managing director at Snowden Lane Partners.

“What people envision spending in retirement and what they actually spend are two different things,” he continued. “With the clients I work with, we go through an exercise I call ‘recreating the dollar’ where we piece together sources of income to mimic what they had through their working years. Then we stretch that for a reasonable time span, and the results of what they can actually spend are eye-opening.”

Social Security was never meant to be a retiree’s only source of retirement income, said Wade Pfau, co-director of the Retirement Income Center at The American College of Financial Services.

“It is meant to replace about 40% of the average indexed lifetime earnings of someone who worked and earned an average wage over their lifetime,” he said. “Many retirees will seek to replace a higher percentage than this.”

Most experts suggest aiming to plan for retirement income that is at least 70% of your pre-retirement income.

“Since Social Security is likely to make up only a portion of your retirement income, it is important to have a well-rounded strategy to meet your income needs in retirement,” said Katherine Tierney, CFA, senior retirement strategist at Edward Jones. “We recommend you act now to understand what you need to do to achieve your ideal retirement. If you’re unsure where to start, a financial advisor can help you outline your goals, develop a strategy to meet them and measure your progress along the way.”

What To Do If You Must Rely on Social Security To Fund Your Retirement

Although financial experts do not recommend living on Social Security alone, for many Americans, this is their only source of retirement income. The GOBankingRates survey found that 25% of Americans have not started saving for retirement and that 36% have less than $10,000 saved.

“Each situation is unique and some people can live on Social Security only,” said Colleen Carcone, director of wealth planning strategies at TIAA. “If your only source of income is Social Security, remember that continuing to work and delaying the start of your Social Security benefits can close the gap [between how much you need for retirement and how much you have saved] because a delay would mean a bigger check when you do start.”

What Will Social Security Look Like in the Future?

As the survey found, most Americans believe that Social Security benefits will be reduced or cease to exist in the coming decades. As it stands, the Social Security trust fund is set to run out in 2035, so are these concerns warranted?

Most experts believe Social Security will continue to exist, but to keep it going will likely require some changes in the current program.

“There are a few simple solutions that will likely occur,” said Jeremy Finger, CFP, founder of Riverbend Wealth Management. “First, we could eliminate the earnings cap on Social Security tax so that all income above $147,000 is taxed. This could extend the Social Security trust fund. Second, [the Social Security Administration could] increase the full retirement age, which is kind of a pay cut. For example, people who were born after 1970 may not able to get full benefits until age 68 or 69. Third, [they could] increase the payroll tax on Social Security.”

One or a combination of these solutions should balance the Social Security trust fund, Finger said. However, because there are a lot of unknowns, Finger does not recommend relying on Social Security to fund your retirement.

“I would not advise clients to make their Social Security decisions based on what the government may do,” he said.

No matter how the Social Security trust ends up being funded — and most experts believe this will happen before it gets depleted — there is a chance that benefits will be reduced in the coming years.

“Social Security could be reduced to match incoming revenue from individuals and their employers,” Carcone said.

The uncertainty surrounding the future of Social Security should be taken into account when retirement planning.

“While most advisors consider current funding estimates as provided by the Social Security Administration for retirement planning, one should consider possible changes to the system,” said Wendy S. Baum, a financial advisor with Equitable Advisors. “The more saved over time with pension strategies and portfolio building, the less reliant one will be on Social Security benefits.”

Read More: https://www.yahoo.com/video/most-americans-plan-rely-heavily-110242798.html

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Nick DesrocherMost Americans Plan To Rely Heavily on Social Security for Retirement — Here’s What To Know
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7 Money Moves Retirees Almost Never Regret

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We often hear stories about retirees sharing money mistakes they regret in retirement. Looking at the flip side of the coin, what are some financial moves retirees almost never regret?

Working With a Financial Professional
It is incredibly rare for a retiree to regret working alongside a trusted and qualified financial advisor or planner for their retirement needs. These individuals, after all, are here to look out for the retiree’s best interests.Kurt Heineman, financial planner at Vision Casting Financial Planning, uses the example of rising interest rates in the current economy. Financial planners can help retirees think about ways to make low-risk returns on cash they may be holding for short or intermediate purposes they might not be aware of if they were working on their own.“It can be very reassuring to have a retirement plan and someone who will walk alongside you as you transition into retirement,” Heineman said. “Financial planners can help retirees build, monitor and manage a financial plan which can lead to peace so you can enjoy the retirement you worked hard for.”

Planning When To Claim Social Security
According to the Social Security Administration (SSA), retirees at age 62 are eligible to start claiming Social Security. Some retirees may decide to delay retirement until age 70 to receive the full benefit amount.It is often quite difficult to determine the right timing for Social Security, and retirees rarely regret carefully considering when they will claim Social Security to receive a financial boost. Wade Pfau, professor of retirement income at The American College of Financial Services, said claiming Social Security does not have to happen at the same time you retire.“A thoughtful claiming strategy could add more than $100,000 of lifetime benefits to a retirement plan,” Pfau said.

Using Proper Annuity Solutions
Mark Kennedy, founder and president of Kennedy Wealth Management LLC, specializes in helping people who are within reach of retirement or who are already in retirement. The primary money move Kennedy’s clients never forget is building in guaranteed lifetime income and guaranteed growth using the proper fixed index annuity solutions with lifetime income riders.While the market is down everywhere, Kennedy said the lifetime income for retirees is not. Many advisors lean predominantly on the stock and bond markets to provide their clients with incomes for life, but Kennedy recommends taking the time to understand the proper and correct annuity solutions and weaving them into a client’s overall retirement income plan.“I can’t tell you how many clients I’ve spoken to on client review calls this year and they always say, ‘I’m glad you encouraged me to go with that annuity. It’s a lifesaver,’” Kennedy said.

Maxing Out Their Roth IRA
For those who qualify, Rafael Rubio, president of Stable Retirement Planners, said retirees who max out their Roth IRA as opposed to a traditional IRA benefit in retirement. This gives retirees a bucket of tax-free assets they can pull from or create tax-free supplemental income.

Maxing Out Their 401(k)
Retirees who work for companies where employer-sponsored retirement plans are offered, like a 401(k), rarely regret taking the opportunity to max out their contributions. The earlier one can start doing this, and prioritizing contributions throughout their working career, the better especially if you contribute at a level your employer is willing to match.“Doing this almost always gives retirees more options on how to live their lives in retirement,” said Eric M. Jaffe, CEO and founder of Mosaic Wealth Partners. “Typically, it provides greater peace of mind when retirees have adequate funds available in retirement to maintain their desired lifestyle.”

Diversifying Investment Vehicles
Most retirees never regret planning ahead for retirement to meet their goals and investing early to reap the benefits of compound interest. Another money move retirees seldom regret is diversifying their savings and investment vehicles. This includes accounts like IRAs, Roth IRAs, employer-sponsored retirement plans and general accounts that do not necessarily have particular tax efficiencies under the Employee Retirement Income Security Act.“Each of these accounts has different contribution limits and availability as well as varying tax ramifications while saving and also while distributing funds in retirement,” Jaffe said. “For most retirees, having different buckets from which to distribute assets in retirement with varying tax consequences when doing so proves to be beneficial.”

Eliminating Debt
Steve Sexton, CEO of Sexton Advisory Group, said eliminating debt before you retire does more than prepare you to make a smoother transition into the next chapter. It enables you to earn interest rather than paying interest.“Many people carry high-interest rate evolving debt, which means your expenses go up when interest rates go up – making your monthly budget unpredictable in retirement,” Sexton said.Whether you’re planning for retirement or in a completely different chapter of your life, nobody who has ever eliminated debt, like student loans, car payments or mortgages, can say they regret not being in debt. Focus on paying off any existing debt, or paying in full on any big expenses, prior to retirement, before you decide to retire.

Read More: https://www.gobankingrates.com/retirement/planning/money-moves-retirees-almost-never-regret/

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley Saunders7 Money Moves Retirees Almost Never Regret
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Forbes: Sequence of returns risk is ‘upending’ retirement

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Sequence of returns risk — defined as a risk of receiving lower or negative returns early during a time when withdrawals are made from an investment portfolio — is harming the ability for many seniors to retire when they initially planned to, throwing actual retirement dates into doubt as people everywhere continue to reckon with historic levels of inflation and economic volatility.

This is according to a column published by Forbes and written by retirement financing columnist Bob Carlson.

“About 48% of people who were planning to retire in 2022 are putting their plans on hold or reconsidering them, according to a recent survey taken by Quicken,” Carlson writes. “Another 22% of people who were planning to retire sometime after 2022 are considering delaying their retirement dates.”

An additional survey conducted by BlackRock indicated that the number of respondents reporting that retirement plans were “on track” declined by 5% to 63% compared to the same period one year earlier, with another 42% of respondents describing that retirement plans were altered by the ravages of the COVID-19 coronavirus pandemic.

“We’re living through an example of sequence of returns risk and how it can arise quickly and unexpectedly,” he writes. “Many people build their retirement plans on long-term average financial data or on the assumption that recent performance will continue indefinitely. Events often don’t unfold that way. The long-term average of stock index returns is the result of years of very different returns. It’s a rare year when the return of an index is close to its long-term average. In most years the return of an index is very different from the long-term average.”

In the past, sequence of returns risk has been a commonly-discussed retirement risk during times of market volatility by Wade Pfau, professor of retirement income at the American College of Financial Services and founder of RetirementResearcher.com. Pfau has previously described how a reverse mortgage has the potential to help someone at or near retirement avoid sequence of returns risk if a borrower taps a standby line of credit until the market — and their investments — stabilize.

“Even if the overall market recovers, a retiree spending from their portfolio might not get to enjoy that recovery,” Pfau explained in a 2020 episode of The RMD Podcast. “And that sequence of returns risk amplifies the impact of investment volatility. So, that’s where a reverse mortgage can fit into this in a number of different ways to help alleviate that risk on the investment portfolio.”

Read the Forbes column on current levels of sequence of returns risk.

Read More: https://reversemortgagedaily.com/articles/forbes-sequence-of-returns-risk-is-upending-retirement/ 

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Ashley SaundersForbes: Sequence of returns risk is ‘upending’ retirement
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4 retirement income strategies to match any client’s style

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By Susan Rupe

When it comes to planning for retirement income, clients face a number of risks. Each risk requires the right set of tools to manage it. And each client has their own retirement income style, which dictates the type of strategy needed to properly fund the client’s post-employment years.

How to match the right retirement income strategy to the client’s retirement income style was discussed by Wade Pfau, professor of retirement income at The American College, and Alex Murguia, CEO of RISA, during a recent webinar by the National Association for Fixed Annuities.

Retirement spending strategies

Pfau described four basic strategies to fund essential and discretionary spending in retirement:

  • Total return approach, in which a retiree holds an aggressive, diversified portfolio and takes systematic withdrawals from it.
  • Risk wrap strategy, which has a lifetime income floor built into it to fund essential spending but uses an annuity to fund discretionary spending.
  • Income protection strategy, in which a floor of essential income is built and then investing for discretionary spending.
  • Time segmentation or bucketing strategy, in which funds are invested in different vehicles for short-term and long-term spending.

A client’s style leads to specific strategies, Pfau said. He identified the dimensions that best capture a client’s retirement income style:

  • Probability based versus safety first.
  • Optionality versus commitment orientation.

A client who is probability based depends on market growth through the risk premium for stocks to outperform bonds. Clients who prefer a safety-first strategy rely on funding their essential needs with safer income such as that generated by annuities or bonds.

Clients also vary on how much plan optionality they prefer, Pfau said.

Some clients prefer flexibility to keep their options open and take advantage of new opportunities. Other clients prefer to lock in a solution that solves a lifetime income need.

RISA created a matrix that shows a role for retirement income investments based on a client’s retirement income style.

Choosing an approach

Clients who are commitment-oriented and prefer a safety-first approach need a protected income have a protected income style. Clients who have a commitment-oriented and probability-based approach are more likely to be served with a risk wrap income style. Those who want to combine optionality with a safety-first approach would most likely benefit from a time segmentation income style. A total return approach would be the best bet for clients who want optionality along with a probability-based approach.

What role do annuities play in these different approaches? Pfau explained that some approaches use annuities more for income and other approaches use annuities for growth.

In the commitment-oriented approaches, single premium immediate annuities, deferred income annuities, fixed indexed annuities, registered index-linked annuities and variable annuities can provide income. In the optionality-oriented approaches, FIAs and RILAs, as well as multiyear guaranteed annuities and investment-only variable annuities can provide growth.

Read the full article: https://insurancenewsnet.com/innarticle/experts-4-retirement-income-strategies-to-match-any-clients-style

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley Saunders4 retirement income strategies to match any client’s style
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Reverse Mortgages and Estate Planning

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Your home may be your most valuable asset and represent the largest portion of your estate. A reverse mortgage can help you hang onto that asset, by letting you tap into your accumulated home equity without having to sell the home. Still, the money you receive from the reverse mortgage will also have to be repaid after you die, reducing the value of your estate, possibly substantially. Here is what you need to know about reverse mortgages and estate planning.


  • If you have a reverse mortgage on your home, it will have to be paid off after you die, reducing the home’s value to your heirs.
  • The rules are different for spouses who inherit homes with reverse mortgages than for other heirs.
  • A reverse mortgage could allow you to supplement your retirement income without drawing down other assets in your estate.

What Happens to Your Reverse Mortgage After You Die?

When you leave a home with a reverse mortgage to someone, you’re also leaving them with responsibility for the mortgage. What they’ll need to do next depends on their relationship to you.

If Your Heir Is Your Spouse

Spouses who inherit a home with a reverse mortgage fall into three groups. Which group your spouse is in will determine whether they have a right to stay in the home and possibly continue to receive benefits from the reverse mortgage.

  • Co-borrowing spouse – A co-borrowing spouse is listed as such on the original loan documents. Any co-borrower (they don’t have to be your spouse) can stay in the home and continue to receive money from the reverse mortgage.
  • Eligible non-borrowing spouse – Spouses who didn’t qualify to be co-borrowers (typically because they were under age 62 when the loan was issued) can be listed on the mortgage as eligible non-borrowing spouses. If they meet certain other requirements, they can also remain in the home, but they won’t receive additional money from the reverse mortgage.
  • Ineligible non-borrowing spouse – Such spouses don’t meet the requirements for one of the first two categories. They must buy the home themselves if they wish to remain in it. They can also sell it.1

In the case of co-borrowing or eligible non-borrowing spouses, the home and reverse mortgage become part of their estate when they die.

(Please note that this article describes the rules for Federal Housing Administration (FHA)–insured home equity conversion mortgages (HECMs) originated on or after Aug. 4, 2014; older HECMs have somewhat different rules. The Consumer Financial Protection Bureau provides both sets of rules on its website.)2

If Your Heir Is Someone Other Than Your Spouse

If you leave your home to your children or other heirs who are not your spouse, they will not be eligible to keep the reverse mortgage; instead, they must pay it off within a specified time frame. Essentially, they will have three choices:

  • Sell the home –After they pay off the mortgage, anyequity that remains is theirs to keep.
  • Buy the home –They can also pay off the reverse mortgage with their own funds if they want to keep the home.
  • Deed the home over to the lender – This way of settling the debt is known as a “deed in lieu of foreclosure.”3

Fortunately, no matter how much you owe on a HECM, your heirs won’t be stuck with a net debt. The most they’re obligated to pay is either the full loan balance or 95% of the home’s appraised value, whichever is less. The FHA insurance will cover any difference.4

Your heirs may have to take action fairly quickly. Technically, they have only 30 days from receiving a due and payable notice from the lender, although they can ask for an extension of up to a year to give them time to sell the home or arrange for financing to buy it themselves.5 Which course they are likely to follow will depend on a variety of factors, including how attached they are to the home and how much debt it carries.

One suggestion you may see online is to use some of the proceeds of the reverse mortgage to buy a life insurance policy made payable to your heirs. This could provide them with sufficient cash to purchase the home after your death. However, you may need all the money you receive from the reverse mortgage to cover your living expenses and not have any left over to buy life insurance, which can also be costly in your later years. Still, this could be an option for some people.

If You Have Other Assets

Reverse mortgages may be of greatest appeal to people who lack retirement accounts, nonretirement investment accounts, or adequate cash savings, making their home their only significant financial asset.

For example, if you know your heirs would like to inherit your home, drawing on those other assets for income could make more sense than running up a large balance on a reverse mortgage. On the other hand, if your heirs don’t have any particular attachment to the home, borrowing against it can be a way to preserve your other assets for them.

Wade Pfau, author of Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,notes that having a reverse mortgage to draw on is one way to protect your other assets in a bear market. Rather than being forced to sell investments when prices are down to supplement your income, you can tap the reverse mortgage for income until prices rise again.6 Of course, you’ll pay a price for that flexibility in terms of the reverse mortgage’s steep up-front costs.7

A reverse mortgage might also help protect your other assets if you ever face major long-term care costs. Bear in mind, though, that the mortgage will have to be repaid if you move out of the home and into a care facility for 12 consecutive months or more, unless you have a co-borrowing or an eligible non-borrowing spouse living in it.8

How Much Can You Borrow With a Reverse Mortgage?

How much you can borrow with a reverse mortgage depends on your age (or the age of your co-borrowing or eligible non-borrowing spouse, if they’re younger than you), the equity you have in your home, and current interest rates. The current maximum for a government-insured HECM is $970,800.7

Where Can You Get a Reverse Mortgage?

To get a HECM (the most common type of reverse mortgage), you must go through a lender approved by the FHA. There is a search tool for locating lenders on the website of the FHA’s parent organization, the U.S. Department of Housing and Urban Development (HUD).9

At What Age Do Most People Get Reverse Mortgages?

While you’re eligible for a reverse mortgage at age 62, most people who get one wait until later. A Consumer Financial Protection Bureau study found that in 2019, the latest year for which data is available, the median age of reverse mortgage borrowers was 73.10

The Bottom Line

Your home may represent a significant part of your estate and having a reverse mortgage on it will affect how much of its value your heirs will receive when you die. If you have financial assets in addition to your home, supplementing your income with a reverse mortgage can help you preserve them for your estate. Because your heirs will generally be responsible for paying off the loan when you die, it’s worth discussing the situation with them well in advance.

Today’s Refinance Rates Are Better Than Ever

$400,000 for 1.93% APR for a 15-year fixed mortgage. These low rates won’t last forever. Experts agree rates will likely rise 30% over the course of this year. Skip this month’s payment if you refinance today. Calculate your new payment and see how much you could save with LendingTree.

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersReverse Mortgages and Estate Planning
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TIPS and Annuities Good Bets When Inflation Is High with Wade Pfau

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Higher inflation means advisors need to be more efficient in positioning client assets for retirement, says Wade Pfau, professor of retirement income at the American College of Financial Services and a prolific author, his most recent book being the “Retirement Planning Guidebook.” He also writes the Retirement Research blog with Bob French and Alex Murguia.

In our ongoing VIP series, Pfau noted that using reserve funds was a good way for retirees to get through this higher inflationary period. Here are his responses to our series of questions.

Inflation has jumped 7.9% over the last 12 months. How would you counsel advisors to prepare clients for either pre- or post-retirement portfolios with this threat? What are the best options now?

Higher inflation requires being more efficient with positioning assets for retirement expenses. Rather than using traditional bonds, [Treasury inflation-protected securities] will help manage high inflation, and annuities with lifetime income can provide an extra kicker beyond the bond interest alone. A well-diversified investment portfolio, over time, provides opportunity to keep pace with inflation.

The Social Security COLA, which was raised to 5.9% this year, is now lagging current inflation rates. What is the best way for advisors to help retirees to counteract the crunch they are taking to their Social Security benefits (especially if they already are collecting benefits)?

Right, the COLAs only happen once a year and so start to lag inflation throughout the year. If some reserve funds are set aside for unanticipated expenses, higher than expected inflation could be a valid use for such funds.

What is your opinion on whether the COLA index should be changed from CPI-W to CPI-Elderly? 

I think this is a relatively minor issue and not a pressing need.

Do you believe that Congress will step up and make changes to Social Security, including making the appropriate funding, in the next couple years? Why or why not?

I don’t think we can expect Congress to act on Social Security until we get closer to the deadline when action will be needed, which is still not expected to happen until the early 2030s.

As Seen on ThinkAdvisor at https://www.thinkadvisor.com/2022/03/31/wade-pfau-tips-and-annuities-good-bets-when-inflation-is-high/

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersTIPS and Annuities Good Bets When Inflation Is High with Wade Pfau
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The Two Biggest Risks for Investors and Retirement Savers

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There’s no shortage of risks that you’ll face in retirement, but two, in particular, are taking center stage at the moment: market risk and sequence-of-returns risk.

Markets are volatile, Wade Pfau, founder of Retirement Researcher and Professor of Retirement Income at The American College of Financial Services, writes in his most recent book, Retirement Planning Guidebook. And market volatility causes investment returns to vary over time. “Even with an average market return in mind, it is possible that markets could perform at a below-average rate for a prolonged period,” he writes.

And related to this, market volatility is further amplified by the growing impact of sequence-of-return risk in retirement. “This is the heightened vulnerability individuals face regarding the realized investment portfolio returns in the years around their retirement date—it adds to the uncertainty by making retirement outcomes more contingent on a shorter period of investment returns,” says Pfau, who also is the director of retirement research at McLean Asset Management.

Put another way: Sequence-of-returns risk is the risk that a retiree withdraws money for living expenses from retirement accounts that are falling in value. Imagine, for instance, a retiree with a $1 million portfolio who needs to withdraw $40,000 per year from that account. Now imagine that portfolio, after withdrawing $40,000, declines 16.6% in year one to $800,000, and then in year two, after withdrawing another $40,000, declines another 7.9% in year two to $700,000. That retiree is now looking at a nest egg that likely won’t fund their desired standard of living throughout retirement.

‘Worst Returns at the Worst Possible Moments’

“I would characterize sequence-of-returns risk as being the risk of the ‘worst returns occurring at the worst possible moments,’ says Andrew Clare, a professor of asset management at Bayes Business School City, University of London and co-author of Reducing sequence risk using trend following and the CAPE ratio.

And managing this risk is very difficult. “It requires careful risk management; transitioning to lower risk asset classes at these crucial times – such as the point of retirement – is the usual way of dealing with it,” says Clare. “However, the cost of this could be lower returns.”

In his book, Pfau highlights four general techniques for managing sequence risk in retirement.

Spend Conservatively

Even though retirees want to keep spending consistently on an inflation-adjusted basis throughout retirement, one option to manage sequence risk in retirement is to spend conservatively, according to Pfau.

In his book, Pfau writes:

“With a total-returns investment portfolio, an aggressive asset allocation provides the highest probability of success if the spending level is pushed beyond what bonds can safely support and annuities are not otherwise considered. The primary question with this strategy is how low spending must be to ensure a sufficient probability of success.

“Combining an aggressive investment portfolio with concerns of outliving your assets means spending must be conservative. Ultimately, fearful retirees may end up spending less with an aggressive investment strategy than they might have had they focused more on fixed-income assets. This aggressive portfolio/conservative spending strategy can be rather inefficient, as the safety-first school argues that there is no such thing as a safe spending rate from a volatile investment portfolio.”

The bottom line? This approach, which seeks to mitigate sequence-of-returns risk, can actually increase it, as there is no lever to provide relief after a market decline, according to Pfau. “The only solution is to sell more shares to keep spending consistent,” he wrote.

Maintain Spending Flexibility

Another approach keeps the aggressive investment portfolio of the “spend conservatively” strategy while allowing for flexible spending, says Pfau. “Sequence risk is mitigated here by reducing spending after a portfolio decline, thereby allowing more to remain in the portfolio to experience any subsequent market recovery,” he wrote.

This strategy, however, “results in volatile spending amounts, so most practical approaches to flexible retirement spending seek to balance the trade-offs between reduced sequence risk and increased spending volatility by partially linking them to portfolio performance,” Pfau writes.

Reduce Volatility (When it Matters Most)

A third approach to managing sequence-of-returns risk is to reduce portfolio volatility, at least when it matters the most. “A portfolio free of volatility does not create sequence-of-returns risk,” writes Pfau.

Essentially, however, individuals should not expect constant spending from a volatile portfolio. “Those who want upside (and, thus, accept volatility) should be flexible with their spending and should make adjustments,” he wrote.

So, what then are some ways to reduce volatility on the downside when the volatility could have the largest impact. According to Pfau, you could hold fixed-income assets to maturity or use income annuities.

Another approach, according to Pfau, is to use something called a rising equity glide path. With this approach, Pfau writes, you would start with an equity allocation that is even lower than typically recommended at the start of retirement, but then slowly increase the stock allocation over time. “This can reduce the probability and the magnitude of retirement failures,” he says. “This approach reduces vulnerability to early retirement stock market declines that cause the most harm to retirees.”

Jim Sandidge, a retirement researcher and author of Chaos and Retirement Income, also recommends this approach. “You manage market risk and sequence risk by using a conservative allocation early to minimize the frequency and magnitude of losses and gradually transition to more growth,” he says. “You can also manage it through cash flow allocation by skipping increases in the early years or in response to negative years.”

Avoid Selling at Losses

The fourth way to manage sequence risk is to have other assets available outside the financial portfolio to draw from after a market downturn. One could, for instance, “maintain a separate cash reserve, perhaps with two or three years of retirement expenses, separate from the rest of the investment portfolio,” Pfau says.

One could also use the cash value of permanent life insurance policies as a reserve and/or a line of credit with a reverse mortgage to serve as a reserve, writes Pfau.

Of note, in practice, more than a few advisers use not just one option when managing sequence of returns risk. They might, for instance, use what’s called bucket strategy, or time segmentation, or asset-liability matching. With this approach, the adviser puts two to three years of retirement expenses in cash, and then builds a bond ladder in which the bonds owned mature in the year the retiree needs the money for living expenses in years four to 10. And, then put the rest of a client’s portfolio in stocks and bonds for fund retirements expenses more than 10 years away.

Focus on Managing Negative Returns

To be fair, Sandidge says the emphasis on sequence risk obscures what retirees should focus on. “I would argue that sequence of returns risk is superfluous information or unnecessary jargon that will create mental dazzle and distract from the essence of the problem which is managing the effects of negative returns,” says Sandidge.

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersThe Two Biggest Risks for Investors and Retirement Savers
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The Intuition for Reverse Mortgages

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The following is excerpted from chapter 1 of Wade Pfau’s newly revised book, Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement. It is available at Amazon and other leading retailers.

Understanding how reverse mortgages can add value in retirement planning requires an understanding about the peculiarities of sequence-of-return risk that the reverse mortgage can help to manage. When combined with a long retirement, sequence-of-return risk can lead to some potentially unanticipated outcomes regarding what types of strategies may work to support retirement sustainability. Sequence-of-return risk is a fascinating concept in that minor spending tweaks can have major implications for portfolio sustainability by impacting the amount of investment wealth that remains at the end of the planning horizon. This is the intuition I hope to help you develop in this section, as this will be key to recognizing why the later analysis of reverse mortgages in Chapters 5 to 8 works and is not “too good to be true.” ​

We proceed by examining these peculiarities using an example from the historical data that will serve as a baseline for comparing different reverse mortgage strategies later in the book. In the case study detailed further in Chapter 5, a 62-year-old recently retired couple is working to create a retirement plan that will support their budget for 34 years through age 95. We will consider a simplified version of that case study in which the couple has $1 million of investment assets in a Roth IRA and is seeking to spend $39,485 per year plus inflation throughout their retirement with a balanced investment portfolio of 60 percent stocks and 40 percent bonds. This spending goal is chosen because it will cause their investment assets to deplete fully after covering their spending at age 95, using the market returns from 1962 to 1995.

Because the risk that a market downturn pushes the current withdrawal rate from remaining investments to an unsustainable level, the first sequence-risk synergy to note is that small changes to the initial withdrawal rate can have a large impact on portfolio sustainability. This situation is illustrated in Exhibit 1.3. With an initial withdrawal rate of 3.95 percent, the portfolio is depleted in 1995. The exhibit also shows portfolio sustainability for small withdrawal rate changes: 3.55 percent (-0.4 percent less), 3.75 percent (-0.2 percent less), 4.15 percent (0.2 percent more), and 4.35 percent (0.4 percent more).

Read the full article, here: https://www.advisorperspectives.com/articles/2022/03/03/the-intuition-for-reverse-mortgages 

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersThe Intuition for Reverse Mortgages
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Retirement Expert Wade Pfau Discusses Dividend Stocks, Long-Term Care, and More

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by Christine Watkins

Courtesy Wade Pfau

Economist Wade Pfau’s views on funding retirement, subject of a recent Barron’s article, spurred a lot of comments from readers, including those who believed Pfau erred by not touting the virtues of stocks or real estate investment trusts that have histories of paying high dividends.

Pfau is dubious. Owning stocks that pay a high dividend doesn’t provide the same secure retirement income as owning safe bonds “because dividends can be cut,” he says. 

He adds that if retirees are willing to own a broad market index and live off the dividends, that’s a “pretty conservative” strategy. The problem is that the

S&P 500
stock index yields only around 1.4% currently, and retirees with a dividend-income strategy typically gravitate to stocks with higher payouts.

“As soon as you move away from a diversified market portfolio, you’re taking on more risk,” says Pfau, a professor of retirement income at the American College of Financial Services.

Pfau believes that seniors can’t count on continued gains in the stock market to fund their retirement. He has recommended that they consider products like variable annuities, whole life insurance, and reverse mortgages that will hold their value even if stocks take a dive.

On Delaying Social Security

Other readers took issue with Pfau’s assertion that retirees should consider spending down their portfolio to delay Social Security and receive a higher benefit. One reader said he was starting Social Security at age 62 so he won’t have to tap his 401(k) and will reap the benefits of stock-market returns until his required minimum distributions begin at 72.

Pfau says this approach overlooks that stock-market returns aren’t guaranteed, and that delaying Social Security provides a guaranteed boost in benefits.

Pfau agrees that retirees will come out ahead if they claim Social Security early, they invest the money, and the stock market rises briskly. “Obviously if you get 10% returns [in the market], you’re better off claiming early,” he says. “It’s just, what is the reality of that happening over an eight-year period?”

Other readers said they wanted to claim Social Security early because the federal pension is underfunded and benefit cuts are likely.

Pfau has calculated even if benefits are cut 21% the year you turn 70, you’re likely still better off delaying benefits. Such a benefits cut would delay the break-even age to 83 instead of 80 for someone who waits until age 70 to claim, he says.

On Roth IRA Conversions

Pfau told Barron’s he recently built a model to determine when it is best to convert money from tax-deferred accounts to tax-free Roth IRA accounts. That spurred one reader to ask: What did Pfau’s model find?

“There is no one answer,” Pfau said in a follow-up interview. “It depends completely on each personal situation. On how much you have in your tax-deferred account. On how much you have in your Roth. What are your spending goals? When are you claiming Social Security?”

In a Roth conversion, investors pay taxes on money moved from their tax-deferred account to their Roth account. The conversions generally make sense when their current tax bracket is lower than their future tax bracket.

The question readers should be asking themselves, according to Pfau: “Is there a chance of prepaying some taxes and avoiding higher taxes later on?”

On Long-Term-Care Insurance

Pfau expressed skepticism about traditional long-term-care insurance in the Barron’s Q&A. But he said that newer hybrid products that combined long-term-care insurance with life insurance or an annuity had potential.

One reader wanted more explanation. Pfau has run calculations on long-term-care insurance, and he says the traditional policy he examined barely pays off even if you use it for the maximum benefit. And if you don’t need long-term care, all the money you paid in premiums is gone.

By contrast, combining long-term-care insurance with life insurance means that it is no longer use it or lose it, Pfau says. “Even if you don’t need long-term-care insurance, you have the death benefit,” he says.

Pfau has done consulting for insurers, and his work is sometimes cited by the industry. One reader complained that “smooth-talking yet pushy insurance sales guys” had used Pfau’s research in a sales pitch for annuities.

Replies Pfau: “I wish people weren’t using my research in any way. I do put in a caveat that I’m talking about competitively priced annuities. And there are some noncompetitively priced annuities that pay higher commissions” to salespeople.


Read the full article: https://sportsgrindentertainment.com/retirement-expert-wade-pfau-discusses-dividend-stocks-long-term-care-and-more/

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersRetirement Expert Wade Pfau Discusses Dividend Stocks, Long-Term Care, and More
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