Yesterday's AAII/Baltimore Chapter meeting featured a talk on "Retirement Income planning" by Michael Anselmi Jr. of Morgan Stanley Smith Barney. It turned into more of a discussion rather than a structured presentation, and a couple of subtle issues were raised.
First off, by a show of hands, it was determined that more of the audience were retired government than probably most people expected. Their pension and medical benefits puts them in a different boat than most retirees.
Secondly, Mr. Anselmi stressed the need to figure on spending as much in retirement as in one's working years. One of the audience members pointed out a subtlety different way of looking at it. He said he retired and figured out a conservative income by looking at his social security, pension, and a reasonable withdrawal rate from his "nest egg." He then lived within his means. This, he said, is how he did it throughout his working years. To me, this is a bit different from the way financial planners tend to look at the problem. Let me explain a bit further.
A financial planner will seek to determine how much a person is spending in his working years. Next, s/he will estimate sources of income in retirement. Then s/he will try to figure out how to get that level of income. So, suppose the number is $90,000, adjusted for inflation and all of that, and suppose you need to get there; but when everything is considered, you are not quite going to make it. What then? The solution is to take more risk. On average, if you take more risk, i.e. increase allocation to stocks, move bonds into high yield bonds, etc., the software will spit out results to get you to where you want to be - at least on paper. This is how financial planners tend to approach the problem.
The viewpoint expressed above, I believe, is somewhat different. It is more along the lines of saying I can conservatively generate $80,000, so that's what I'll do; and I'll learn to live on $80,000. Trying to reach $90,000 entails some risk (no matter what the Monte Carlo results produce), and this alternative pushes back against taking that risk.
The discussion also brought out that retirees are probably more flexible than financial planners give them credit for. At least this particular audience indicated an awareness of constantly reevaluating and making adjustments in down markets.
Mr. Anselmi did point out that retirees spend more when they first retire, then it falls off, and picks up again in their 80s due to medical costs.
A third point had to do with sequence of returns, a subject the audience was well aware of. Relying on averages can be harmful to the retiree. Most people have seen the diagram of the river crossing where the water on average is 3 feet deep, but most of the way the depth is 2 feet with one spot at 8 feet. Walking across, the person drowns. In the same way, relying on past results, that show markets return 8% on average, can be harmful if the lowest returns occur in the first few years of retirement.
There was some mention of variable annuities but, on the whole, audience members didn't seem to have much interest - understandable in a crowd that does its own investing.
The meeting also discussed long-term care insurance, assisted living facilities, and different investments for generating income in retirement.
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