I recently read Retirement Planning Guidebook, a 453-page tome by retirement researcher and American College professor Dr. Wade Pfau, cover to cover. As an age 60+ adult and a CFP® professional, I consider myself fairly well informed about retirement planning topics. Nevertheless, there was still many valuable insights. Whether you read this book completely, as I did, or use it as an “as-needed” desk reference, Dr. Pfau’s guidebook is a very valuable resource.
Below are some
useful “nuggets” that I took away from each of the 13 chapters:
Chapter
1- Saving money for retirement and later withdrawing
money from savings is like climbing a mountain. The goal of mountain climbing
(i.e., retirement planning) is not just making it to the top of the mountain (i.e.,
saving enough money) but also getting back down safely (i.e., spending assets
in a sustainable manner throughout a person’s lifetime).
Chapter
2- There are three major risks in later life:
longevity risk (potential life spans are uncertain with a chance of outliving
one’s assets), market and sequence-of-return risk (volatility and a downturn at
the onset of retirement), and spending shocks (e.g., health care, long-term
care, inflation, death of a spouse, family responsibilities, and divorce).
Chapter
3- Three tricky retirement expenses to project in
advance are health care, housing, and taxes and the four Ls of spending in
later life are Lifestyle, Longevity, Legacy, and Liquidity. Having a strong
social support system may reduce the need for large expenses for health care,
long-term care, and other shocks.
Chapter
4- There are four ways to mitigate the aforementioned
risks associated with retirement spending: 1. spending less, 2. flexible
(decreased) spending during market downturns, 3. Reducing the sensitivity of
spending to portfolio volatility, and 4. strategically withdrawing money from
buffer assets (e.g., a money market fund) during downturns.
Chapter
5- Cash refund and period-certain annuity provisions
are popular in practice because, psychologically, many people feel it is unfair
to receive little back from a life-only annuity if people die young. The amount
of savings placed in an annuity should support longevity goals beyond other
reliable income streams (e.g., a pension and Social Security).
Chapter
6- Social Security benefit claiming can be done
independently from when someone decides to stop working. This decision should
be made as part of an overall plan that can include a “delay bridge”
coordinated with investments. Beneficiaries who continue to work may receive
higher benefits if their earnings are higher than earlier low-earning years.
Chapter
7- Approximately 5% of Medicare recipients pay
income-related monthly adjusted amount (IRMAA), an above- baseline level
premium for high income earners. Later life spending often looks like a “smile”
when plotted on a graph with high spending at the start of retirement, followed
by reduced spending, and increased expenses at the end of life.
Chapter
8- Long-term care (LTC) is a big unknown. About half
of retirees may not have any LTC expenses while a few outliers could spend over
$1 million. Three triggers for LTC are accidents, chronic illnesses, and
conditions such as Alzheimer’s disease. Four payment options are self-funding,
Medicaid, traditional LTC insurance, and hybrid policies.
Chapter
9- Downsizing is not a “given” in later life. In
fact, one study of older adults found that 30% upsized to a larger home.
Decisions to move to a new location should not be taken lightly and require due
diligence. For example, visiting or renting in an area during different
seasons. This saves the expense of undoing a less than satisfactory relocation.
Chapter
10- Tax-efficient distributions, tax diversification,
and tax bracket management can prolong the sustainability of retirement
savings. Following a spouse’s death, the surviving spouse can receive a
couple’s (up to $500,000) exclusion of long-term gains from the sale of a home
for two years. Tax issues for affluent retirees with multiple income streams to
beware of include IRMAA, required minimum distributions (RMDs), and the net
investment income tax (NIIT).
Chapter
11- Asset titles and beneficiary designations always
take precedence over property distribution language in a will. Agents named in
legal documents (e.g., executor, power of attorney) should be consulted first.
If someone does not have a trusted person to ask to serve, “it may be best to
allow the guardianship process play out with court supervision.”
Chapter
12- Retirement is a time for people to do whatever they
want, including working if this makes them happy. Besides financial security,
other aspects of a happy retirement are a sense of purpose/passion, strong
relationships, and a healthy lifestyle. If people stop working, key challenges
are loss of work identity and an increase in unstructured time. A traditional
retirement with a complete work stoppage may not be good “if what you do is who
you are.”
Chapter
13- This chapter provides a summary of action steps
from the previous twelve chapters and a list of “trigger” ages for major
retirement planning decisions (e.g., 62 for early Social Security benefits and
72 for RMDs). It also notes the need for specialized planning by early retires
such as those practicing Financial Independence, Retire Early (FIRE).
Again, I highly
recommend this well-written book, especially for people in the second half of
their financial life.
This post provides
general personal finance or consumer decision-making information and does not
address all the variables that apply to an individual’s unique situation. It does
not endorse specific products or services and should not be construed as legal
or financial advice. If professional assistance is required, the services of a
competent professional should be sought.