A Financial Journalist’s Retirement Planning Insights
MARTHA SHEDDEN
Bob, you have watched the Social Security and retirement landscape for a long time. What developments are currently happening that you would like people to be most aware of?
ROBERT POWELL
The elephant in the room is the possibility of the trust fund becoming exhausted, and the possibility of less income coming in than going out. Everyone says, "Oh, Congress will do something. They'll wait till the last minute, but something will be done." On the other hand, if nothing's done, the possibility exists that people will get 80 cents on the dollar of their benefit.
I think people should take that possibility seriously and start planning accordingly. Ask yourself, "If it’s the worst case and I get 80 cents on the dollar of my benefit, how does that affect my financial plan?" Now, we can all go through lots of machinations to say, "If they do reduce benefits, it probably won't affect the people who are presently retired or about to retire. They'll do what they did last time in terms of raising the full retirement age. They'll do it gradually over years to come." So, maybe the people who will be most affected will be my children who are in their 20s instead of me. But what would happen if it was across the board and the reduction to 80 cents on the dollar affected everyone? I just think we all need to plan for the possibility of a benefit cut, however remote.
MARTHA SHEDDEN
That's the really good conservative way to approach retirement because then you're not going to be surprised if it does happen.
ROBERT POWELL
Here’s something else. When we think about Social Security, sometimes we talk about averages. But we should think about how important it is to lower income Americans versus higher income Americans. For lower income people, Social Security could represent 90% of their retirement income. For higher income, it may be 20% or less. It's much less problematic if we have a benefit cut for higher income folks. I think we have to think about whether a potential across-the-board benefit cut harms the people who need it most.
MARTHA SHEDDEN
You wrote in a MarketWatch article that saving for retirement is easy enough, spending it is more complicated. Talk about why retirement is so different than the accumulation phase and what's involved in that.
ROBERT POWELL
Accumulation is easy, right? You say, "I need to accumulate a million dollars by the time I retire at 65, so I need to save this much and earn this much on my money. Along the way I can make some adjustments. Maybe I start saving more, or maybe I delay my retirement." But once you get to retirement, you have to figure out, “Okay, what's my planning horizon? How long will I live? Is it 10 years? Is it 30 years?” How long you live in retirement matters because your money has to last that long in order for you to fund your desired standard of living.
I joke with people that if they could tell me their date of death, I could build them a bulletproof retirement plan. But since we don't know that, we have to factor in all these possibilities. What you're spending, what the rate of inflation will be on your expenses, how your expenses will change as you go through retirement, through the go-go years, the slow-go years and the no-go years. The financial planning community will tell people, "You should expect to retire on 80% of your pre- retirement income on an inflation-adjusted basis. If you retire at 65 on $100,000, by the time you get to 95 you might need $130,000 in order to support your desired standard of living.
But the truth of the matter is it's not a straight line for retirees. What they tend to do is decrease their spending as they go through retirement, even on an inflation-adjusted basis. What's happening is people don't know how much they can actually spend, because they don't know how long their money has to last. So, people are underspending in their early years because they fear they may need that money in their later years to fund healthcare expenses.
MARTHA SHEDDEN
That's so true, and it's so sad because those are the go-go years, when we should be able to go out and enjoy it. Having the security of knowing that your healthcare costs and long-term care are covered is the hardest thing.
ROBERT POWELL
One of the things I think about, different from saving for retirement, is this notion of all the risks you'll face in retirement and how important it is to understand them. The Society of Actuaries lists 15 risks you'll face in retirement, including things like longevity, inflation, healthcare shocks, death of a spouse or divorce, market volatility, et cetera. If you were to go about this prudently, you would say, "I do face this risk. I have exposure to this one. The probability of it happening is high and the consequences would be negative if it happened to me. So, this is how I plan to manage or mitigate that expense."
For me, that takes a lot of the worry out of retirement planning. If you’re worried about healthcare expenses, but haven't taken the time to manage or mitigate the risk of those expenses, you’re likely not going to spend money when you should be. But if you bought a long-term care policy, that gives you more freedom to spend your money early in retirement.
It’s interesting, the RAND Corporation did some research on why people stop spending as they go through retirement. While just scaling back is a big reason, another is the satisfaction people get from spending money. They say, “I've already done that. I've taken an around-the-world cruise,” or “I've already visited the Grand Canyon. I don't need to do it again." So, the money they spend in retirement just starts declining. Which is one more reason why people should spend more in the early retirement years, presuming that they've managed all the retirement risks that they worry about.
Healthcare shock is a big one. Studies from T. Rowe Price, Vanguard and others have shown that the likelihood of having a very severe expensive healthcare shock late in life is quite low for the vast majority of Americans. You just don't know if you're going to be in that tiny percent of people who face it. People say, when you have a long tail-risk, you insure it. You hedge, use pooled money to get rid of that risk.
MARTHA SHEDDEN
Meaning insurance, annuities?
ROBERT POWELL
It could be long-term care insurance, it could be a deferred income annuity, it could be a QLAC. All these instruments that allow you to manage and mitigate the risk because you're sharing it with others instead of retaining that risk.
The super wealthy probably can retain the risk of a healthcare shock. They have enough risk capacity in their portfolios. But the vast majority of Americans need to figure out, “How do I get rid of this risk?”
MARTHA SHEDDEN
Do you agree that the average retiree's biggest fear is losing that standard of living?
ROBERT POWELL
Yes, and what's important about that is a lot of times when people retire, they don't necessarily know what they're going to do and how they’ll spend their time. Some people retire and do something for a little bit and then go back because they couldn’t figure out what to do in retirement. I have one close friend who’s retired several times because he didn’t know what he was going to do. I think he finally figured it out on the fourth try. It’s important that you retire to something, not from something.
On the other hand, I have another friend whose volunteer work started taking over his retirement, because he learned that he didn’t know how to say no when people asked him to volunteer for a board, activity or project.
MARTHA SHEDDEN
That's a good problem to have though in retirement. You do hear of people whose whole life is tied up with their career. Retirement can be such a jolt, especially if they just retire and don't phase out at all.
ROBERT POWELL
It would be important for people to really take the time to think about what they plan to do. There are retirement counselors and coaches out there who can help you if you're having trouble. There's a large number of resources. You don't have to think that there's no help out there.
MARTHA SHEDDEN
That's such a good point. It's not just the financial aspect. Coaches are so valuable for something like that, to help get that objective view to get you thinking about what you really love to do. What are pre-retirees not asking? Or what are the tried-and-true pieces of advice you find yourself giving to people year after year?
ROBERT POWELL
One of the most important things is understanding what your expenses will be. Really getting a handle on it, almost year by year, throughout retirement. Think about your essential expenses: housing, transportation, etc. Also, think about what your sources of income will be. Then, match guaranteed sources of lifetime income against your expenses, so you know, at a bare minimum, you've got those expenses covered from these sources of money that you'll never outlive. That could be a pension, it could be annuity income. It's obviously Social Security.
MARTHA SHEDDEN
Social Security is the biggest annuity there is.
ROBERT POWELL
It’s the best annuity. It's inflation adjusted and you'll never run out of your Social Security paycheck. If there's a gap between your expenses and your income, you may have to look at your 401(k) or IRA and say, "How do I fill the gap with that money? Do I buy another income annuity? Do I use a systematic withdrawal plan? Do I use a bond ladder, or do I use an income annuity ladder? Do I use bullet shares? How do I make sure there's an asset covering a liability?" Professionals refer to it as asset liability matching. I think that's really important that you have these assets that you know will cover, for lack of a better term, your floor of expenses. Then, once your floor is covered, the rest of the money could be used to cover discretionary expenses.
You need to have a plan, not just a good understanding of what your expenses will be, but how your sources of income match up. It's interesting, earned income plays a role for many retirees, whether it's from part-time work or consulting or even full-time work. Some people will say, "I need the income to fund my desired standard of living." Others say, "I don't need the money, but I need the interaction with people, and I just need to stay busy.”
Whatever the reason, it can be a very important component. It can relieve the burden on your portfolio. If you're worried about running out of money, any time you don't have to draw down money from your portfolio is great. Earned income can fill that gap. Another thing I think is important is to think about new products and new research and new laws. Several years back, no one ever thought about using a reverse mortgage to fund retirement.
MARTHA SHEDDEN
I try to get clients to educate themselves on that because why not at least know what's out there, what's available?
ROBERT POWELL
In 2005, I would talk to financial planners and they would say, "Oh, reverse mortgages. Those are only for people who are destitute. They didn't save enough, blah, blah, blah." But over time, research showed this is an interesting financial instrument. Say you were to take out an HECM with a line of credit at age 62. Perhaps you use it when the stock market is down, so you don’t have to pull assets from your portfolio. Now you’re preserving that portfolio and avoiding taking money from a declining asset. You have this wonderful asset over here that you can take money from that is tax free.
I think people need to be very conscious of the fact that on any given day, there's a new product or a new law or new research that says “Here are some tools you could use to make your retirement outcome even better.” I just wrote a story about something called contingent deferred annuities.
MARTHA SHEDDEN
What does contingent deferred mean?
ROBERT POWELL
It's insurance for your portfolio. People sometimes refer to buying puts as insurance against market declines. Think of CDAs in that regard. You're buying insurance so if the market declines and you're not able to pull out the money you wanted from your portfolio, the insurance would kick in. Not immediately, but later in life at the point at which your portfolio was exhausted.
So, it's a way to protect yourself against both sequence-of- return risk and longevity risk. Very few people know about it. Very few financial advisors use it, but it's one more tool in the toolbox where someone could say, "Well, let me think about using this. What are the pros and cons of it? What's the cost of it? What's the benefit?" In some cases, it may make sense. I'm of the opinion that none of these products are bad, just like a hammer or screwdriver aren’t bad, they just have to be used in the right way.
It may be appropriate for some people, and it’s certainly appropriate to not dismiss it out of hand because the word annuity is in it.
MARTHA SHEDDEN
That's exactly what I was just thinking, because annuities are like HECMs. People just automatically say it's bad, and we have to get over that. Education, just learning about these is all it takes.
ROBERT POWELL
But it's hard work. The notion of a Roth IRA conversion is still somewhat new to some people. When would you do it and how would you do it? Should you do a partial or a full Roth conversion? It’s complex, there's no doubt about it.
MARTHA SHEDDEN
It's very complex and I am so grateful for financial advisors that are tackling this whole nasty financial puzzle for their clients, because it can't be done without unraveling when you should take what out and what you should use first.
ROBERT POWELL
Yes, and lawmakers aren't making it any easier. We now have these new RMD rules for beneficiaries of inherited IRAs and it's complex. You couldn't do this on your own, and you really do need to find someone who has the competence and the background and the education and the experience to help you sort through some of this stuff. The same is true with Social Security. There’s so much to learn about that.
Sometimes the first time anyone ever looks at their Social Security statement is the day before they retire. People should start early on, getting familiar with that statement and understanding how your benefit is calculated. Knowing the importance of having high earnings, and having 35 years of earnings.
MARTHA SHEDDEN
If you don't have a My Social Security account now, the administration is sending out the statements to those folks, which I think is wonderful because it hasn't been on the radar of younger workers. That's going to help.
ROBERT POWELL
The other thing that would be helpful is for folks to start really thinking about when they are claiming, especially for couples to really think about the surviving spouse. I once wrote a column aimed at husbands that said if you truly loved your spouse, you would do X, Y and Z. One of those things was delay Social Security so your surviving spouse would at least perhaps enjoy the higher benefit, assuming the male spouse was the higher earner. The comments I got were things like, "Well, why would I want to do that? It’s my money. The break-even is X. Blah, blah, blah." They weren't thinking about the downstream effect of a lower Social Security benefit for a surviving spouse. That’s important, especially if you have no other resources.
MARTHA SHEDDEN
It’s also important for the higher-earning spouse, because they're going to collect that for the rest of their life.
ROBERT POWELL
I know sometimes people say, "Oh, waiting one year doesn't really change my benefit all that much." That may be true, it may be a nominal increase for you, but it could make a big difference for the surviving spouse. People need to not just think about themselves when they're claiming Social Security but their household.
MARTHA SHEDDEN
You wrote about busting the Social Security myths. Can you give us a breakdown on this and how you suggest they be addressed?
ROBERT POWELL
It's really important that people understand that if they do claim Social Security before full retirement age and continue to work there will be a benefit reduction. There's a myth that you’ll lose that amount forever and that's not quite true. Then there's this notion of whether Social Security will be taxed after full retirement age. Of course, the answer is yes, but it's only up to 85% of benefits at the worst case. From an after-tax perspective, you're still getting 15% tax free, and that's a good thing.
MARTHA SHEDDEN
Let’s talk about financial professionals who are helping their clients plan. Do you think there are specific areas or topics they routinely fail to educate themselves on, and how can these financial professionals be better prepared to help their clients retire?
ROBERT POWELL
If you think about the things that can cause big problems, a lot have to do with IRA rules. I think getting better educated around IRA distribution rules would be helpful. Also, becoming educated about these products that are available out there. One of the things I do is serve as the editor of the Retirement Management Journal, which is published by the Investments and Wealth Institute. We just published this study about the use of registered index linked annuities (RILAs), and how you can improve outcomes.
There are some risks you can't control, but there are others you can, and some levers you can move in order to improve outcomes. So, it's really important that people get a sense of how these tools can help improve their clients' outcomes. What are the things you can be doing to improve your clients’ outcomes, including becoming better equipped to create tax- efficient systems, because it’s not what you earn, it’s what you keep, and it's even more important when your resources are limited in retirement. Learning how to create tax-efficient withdrawals is extremely important.
Also, understanding when to do things. When doing a Roth conversion, you need to understand what someone's tax bracket is and how to manage the conversion so you're not tripping someone into a higher tax bracket. Or if you are tripping them into a higher bracket, you understand the consequences, such as triggering Medicare part B income- related monthly adjustment amounts. Or if they're not yet on Medicare, they're on a marketplace healthcare, doing a Roth conversion may trigger a loss of their advanced premium tax credit.
I wouldn’t say avoid it at all costs, but if you're going to do it, know the downstream effect. It's pulling the yarn off a sweater. Be very thoughtful about this because the mistakes you make will matter.
MARTHA SHEDDEN
How do pre-retirees find the financial advisor that can do all this?
ROBERT POWELL
I think it starts with interviewing. It also starts with getting some baseline knowledge. Financial planners are so different depending on who you talk to. Someone who's regulated by the insurance industry will be different from someone who's regulated by FINRA, who may be different from someone who's regulated by the SEC. What that means to me is what you get is a function of who you talk to. If you're talking to an insurance agent, maybe it's an insurance-based solution. If you're talking to someone who's regulated by FINRA, maybe it's a packaged product solution. Maybe if you're talking to an RIA, it might be a little bit more customized.
But there are no best practices across the suite here. It's a function of who regulates them, what their business model is, what their training and education has been, what their biases are. So, before you even start to interview someone, I think it would pay for you to learn more about who you're talking to.
MARTHA SHEDDEN
Again, it comes down to that education you need to have.
ROBERT POWELL
More people spend more time figuring out their vacation and what hotels they're going to stay in than they do being serious about who they would talk to, to manage their most important asset, their money. For me, it always comes down to which advisor has the most tools available to them to help you accomplish your goals. The example I always use is, you would never go to a doctor who could only prescribe half the medicines available. But that's in essence what happens today. If you talk to an advisor who's not licensed to do X, or not able to do Y, then you're talking to someone who doesn’t have the entire toolkit.
It may mean doing a little bit of legwork and a lot of interviewing. Then, understand that a lot of times what someone will tell you in an interview will certainly sound good. These people have been in business for years, or decades, and they have their practice down to a science. You just have to make sure that what they're doing is right for you. It’s like the old saying, to a hammer, everything is a nail. You don’t want to use someone who only has a hammer and thinks you’re a nail.
MARTHA SHEDDEN
That’s a good analogy. Let’s say someone is planning to retire in five years. If they can only remember one or two things from this interview, what would you like them to remember?
ROBERT POWELL
Five years is a good time to narrow in on whether you have the resources to fund what you think your expected retirement lifestyle will be. Because at that point, time is short. You’re in the home stretch. In five years, you're not going to save or invest your way out of this. But there are a couple things you could do that might make a meaningful impact. One would be to consider working longer if you haven't saved enough, but I would caution you that while that's a good solution, it doesn’t work for everyone. The Employee Benefit Research Institute has said of the folks who want to keep working longer, only half are able to do so, because of a healthcare shock, a layoff, downsizing, or other unexpected event. If you want to work longer, there’s a 50% chance you won’t be able to.
That five-year runway is your chance to get a good handle on what your expenses will be and how your sources of income are lining up. Do you need to save more? Do you need to reduce your expenses? Do you need to work longer? You need to actually start crunching the numbers and be serious about things.
One of the things that’s very important for people to understand is that the planning horizon isn’t a probability. Software can give you a planning horizon to whatever age you plug in. But while it's important to target how many years of retirement you'll have, it's also important to look at the probabilities of someone living longer and what that means. For me, the important thing is building not just a plan, but doing scenario planning and “what-if” situations.
MARTHA SHEDDEN
For those different life expectancies.
ROBERT POWELL
For different life expectancies, and for different expense scenarios. One of the analogies people make is that no pilot ever leaves LaGuardia for LAX without a flight plan. But how many pilots get to LAX without making adjustments along the way? Flight plans change. You have to think like an airline pilot and say, "I have my plan, but I know that I'm going to be making adjustments along the way." Life throws us curveballs. Maybe one of your children moves back in with you, or someone becomes chronically ill, or you get divorced.
Let’s go back to the flight analogy. We’ve all heard stories about a pilot passing out on a small plane, and the passenger having to take over, and then landing the plane safely. Imagine that you have a retirement plan in place, and all of a sudden, your pilot is gone.
What I would want to do is inspire people to become students of the subject. Obviously, I am. I eat, breathe, sleep all things retirement. I wake up reading about it. I go to bed reading about it. You don't have to go to that degree, but you have to become educated. I watch one of my sons with his fantasy football. People who do fantasy football for the most part are fanatics. They know who's injured. They know who's been traded. They know who's been benched. They know who's having a phenomenal year. I think you have to approach retirement with that same sort of fanatical enthusiasm. Do a deep dive, become smart about it.
MARTHA SHEDDEN
The rewards of that are literally going to pay off. You’re going to make the right decisions, and avoid costly or irrevocable mistakes, like Medicare. The penalties for not signing up for Medicare when you're supposed to are severe and lifelong.
ROBERT POWELL
Imagine not signing up for Medicare Part B when you should have. To me, this is one of the cruelest things we do to older Americans. We make them choose a new plan every year. Most people just check the box and keep the same plan they had the year before, not knowing that the formularies change and the doctor's network and so on.
MARTHA SHEDDEN
But it's good that we can change because our health is going to change.
ROBERT POWELL
Yes, I think it's marvelous that we can change plans. I think it's also a shame that as our cognitive abilities are declining our confidence in our decision making is going up, we're asking older Americans to make decisions that may be wrong for them. This is one of those decisions that could have really costly effects if you choose the wrong plan, or terminate your Medicare Advantage plan and sign up for Medigap, but you get turned down, and now you're without insurance.
There are lots of potholes waiting for people out there in retirement. But if you were knowledgeable about such things, you can avoid those potholes.
MARTHA SHEDDEN
Or at least know where to go to get that knowledge.
ROBERT POWELL
I think that's where you come in. Offering specialized knowledge in Social Security to an advisor. If you ask me where to go, I'd say if you have questions about Social Security, you should talk to someone who has an RSSA. You want to talk to an expert. If you had gastrointestinal problems, you wouldn't go to a cardiologist, you would see a gastroenterologist. The same is true with Social Security. You should go to a Social Security expert.
MARTHA SHEDDEN
The trick is getting that information out there. Let’s shift gears a bit. Every once in a while, there's a world event that affects all our lives, regardless of how far away it is. Right now, we’re all watching the war in Ukraine. Do you see this having an effect on retirees as far as how much it impacts investing, among other things? Is there a financial impact?
ROBERT POWELL
We're living in a unique time in some respects. We have a war going on. COVID is still present. We have supply chain issues. We have rising inflation that we haven't seen in 40 years. We have a Federal Reserve that's gone from being dovish to hawkish. All while watching a lot of market volatility and stocks and bonds declining in ways that we haven't seen in a very long time. I actually just wrote a story about this for MarketWatch. For retirees who had a plan in place, they're not actually worried about what's going on in the world right now, because their plan accommodated these events. Maybe not these events specifically, but they had a plan in place that accommodated things that would have an adverse effect on their portfolio.
They had what I like to describe as risk capacity. How much money can you afford to lose without it affecting your standard of living? They had risk capacity built into their portfolio. For folks who didn't have a plan, my goodness, this is the time to get to the starting line.
MARTHA SHEDDEN
Yes, to be aware of that. This must be hitting some people hard.
ROBERT POWELL
It reminds me a little bit of the year 2000, when I would talk to people who had that run-up in the bull market that had just ended. People were retiring because they thought, “I met my accumulation goal. I have enough money now to live the life I wanted,” but then the market crashed for the next two years. Many of them didn't have risk capacity in their portfolio so they had to go back to work because their portfolio was now down by X percent, and wasn't able to support their standard of living. Reaching the mountaintop is not necessarily the goal. It's the mountaintop plus.
Having a plan in place that accommodates worst-case scenarios like we're experiencing today is what you need to be thinking about as you build your plan. The good news for retirees is, maybe the impact isn't as great if they built a nice plan. My children who are in their twenties have 40 years of investing in front of them and then some. I think this will be hard, but it's not going to affect their quality of life, because they're still in their early years.
For those people who are on retirement's doorstep, maybe in that 50 to 65 or 67 age range, this is really giving them a chance to look at their portfolio, their savings rate. You asked me what people can do if they're within five years. If they haven't gone through the process of crunching the numbers to see if their portfolio is big enough, they can use some heuristics. Fidelity, T. Rowe Price and others have created these charts that say, "By the time you reach 65, you should have 10 times your salary set aside in your 401(k) or IRA, or 12 times, or whatever the number is."
Just do a check-in and see what’s the size of your portfolio relative to your salary. If it's within a couple points, great. If it's not, you have some things to consider and you have some work to do.
MARTHA SHEDDEN
How about the philosophical part to retirement? How can people change their mindset or philosophical approach towards retirement to ensure that it's the best time of their life, as opposed to a letdown?
ROBERT POWELL
Take this with a grain of salt, but I read this study which said we’re almost hardwired. If you're a happy person, you're going to be happy in retirement. If you're kind of an unhappy person, well, that's your fate in retirement. I would say, “Okay, so you're unhappy. How do you get happy? How do you move the needle?” There are a couple things. JP Morgan just published a guide to retirement and it talks about going into retirement with a purpose. We talked about that earlier. Making sure that you're retiring to something.
It also talked about having social circles in place. If you haven't built a network of friends, either through churches or synagogues and civic organizations or whatnot, you’d better start doing that now before you retire. Go down to the senior center or join the local sailing club or whatever it is. Get out of your house. This is more problematic for men than it is for women. My wife has a million friends and I sometimes think I'm a loner. I'm always introduced as Amy's husband, not Bob, because I don't know any of her friends. She has a huge circle. I don't worry about her in her retirement in the least, because she'll have this network. Men on the other hand, tend to collapse their social networks as they get older, and at great cost. They need to start expanding it, start thinking about, “How do I create a community, so I have different things to do with different people? I think that would be helpful.
Here’s one other thing. There was another study, by the Boston College Center for Retirement Research, which talked about what drives satisfaction in retirement. One was retiring on your terms. Not being laid off. Another was being in good health. I think that is something that people really need to think about as they age. “How do I stay healthy? Should I start riding a bike or playing pickle ball, or lifting weights, or paddle boarding, or whatever?” You can't disregard your health as you get older. The third thing, although I joke sometimes that I don't believe it, was being married.
MARTHA SHEDDEN
There are times we would say that depends.
ROBERT POWELL
I think so, but I think there’s a lot of truth to those three factors being important. Retiring on your own terms, being in good health and being married. Then, having a purpose and civic engagement or social outlets will be really important to folks. So, you can go from being unhappy to happy.
MARTHA SHEDDEN
Yes, I believe so too. Thank you so much for sharing your knowledge. You had a lot of very interesting things to say.