How to Enjoy a Guilt-Free Retirement

How to Enjoy a Guilt-Free Retirement

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This article was originally published in, and has been reprinted with permission from, Retirement Daily. 

Tilney, a highly-regarded financial planning firm in England where workers are automatically enrolled in employer pension plans unless they opt out, surveyed 1,300 employees in 2018 regarding what they planned to do with their pension when they retire. The results were as follows:

  • 40% said they didn’t know what they would do.
  • 22% said they expected to keep most of it invested, taking some withdrawals.
  • 10% would potentially cash it all in.
  • 10% would use the pension to buy an annuity.

When the word “annuity” was removed as an option and replaced with a “pension that provided a guaranteed income for life,” 79% of respondents said that this was more appealing than a plan where the value and income varied each year. This was the result despite the disclosure that a traditional investment plan offered the prospect for higher returns.

Annuitized Income Enables Guilt-Free Spending in Retirement

David Blanchett and Michael Finke’s recent research paper, Guaranteed Income:  A License to Spend, confirms Tilney’s survey results. Their ThinkAdvisor article, Why Annuities Work Like a “License to Spend” in Retirement, which summarizes their research, discusses the behavioral costs that may be experienced by retirees who fail to annuitize. Two of their key findings are as follows:

  • Retirees who are behaviorally resistant to spending down savings may better achieve their lifestyle goals by increasing the share of wealth allocated to annuitized income.
  • An annuity can not only reduce the risk of an unknown lifespan, it can also allow retirees to spend their savings without the discomfort generated by seeing one’s nest egg get smaller.

Annuitized income, whether the source is pensions, fixed income annuities, or Social Security, enables guilt-free spending in retirement. To the extent that the start date for Social Security benefits is delayed resulting in a higher lifetime benefit, this increases the enjoyment.

Income Annuities May Give Retirees a Psychological License to Spend

Perhaps Blanchett and Finke’s most interesting finding, which also confirms Tilney’s survey results, is that annuities may give retirees a psychological “license to spend” their savings in retirement. Blanchett and Finke cited the fact that “Surveys reveal a clear preference among retirees to live off income, and many don’t feel comfortable spending down assets to fund a lifestyle.”

Blanchett and Finke found that retirees who hold more of their wealth in guaranteed, or sustainable, income spend significantly more each year than those who depend on traditional investments. Specifically, retirees with similar wealth who have sustainable income will spend twice as much each year in retirement. Per Blanchett and Finke’s article, “every $1 of assets converted to guaranteed income will result in twice the equivalent spending compared to money left invested in a portfolio.”

Timing of Converting Assets to Sustainable Income

Assuming that you don’t want to depend exclusively on an investment portfolio for your retirement needs and you would like to include a “psychological license to spend” strategy with sustainable income as part of your retirement income plan, when should you purchase fixed income annuities?

The timing of fixed income annuity purchases, as well as purchase amounts, types of annuities, and location, i.e., nonqualified vs. qualified account, is best determined as part of a holistic retirement income plan. The objective of a retirement income plan is to optimize projected after-tax lifetime income to pay for projected inflation-adjusted expenses during different stages of retirement.

Income optimization, rather than investment return, is the appropriate benchmark that should be used when evaluating fixed income annuities for inclusion in a retirement income plan. The goal is to design a comprehensive strategy that uses the least amount of assets to purchase the greatest amount of sustainable after-tax lifetime income that’s projected to pay for expenses not covered by Social Security, pensions, and distributions from investment and other assets.

Enjoy a Guilt-Free Retirement

My personal experience as a financial advisor specializing in analyzing, recommending, and implementing retirement income planning strategies for clients for the last 12 years confirms David Blanchett and Michael Finke’s research. Clients who have retirement income plans that include a sustainable income component are more confident about their prospects for a successful retirement, less fearful of running out of money, and more likely to enjoy a guilt-free retirement.

In the unsolicited words of one of my long-time clients, “At 70 years old it’s good to reflect back on how a great financial advisor has set my wife and I up for a steady income stream so we can enjoy these senior birthdays very comfortably regardless of the stock market or politics that can affect a person’s retirement years.”

Furthermore, the earlier a “psychological license to spend” strategy with sustainable income is implemented as part of a holistic retirement income plan, the sooner pre-retirees and retirees are able to sleep better at night. The title of a recent Kiplinger article, Retirees with a Guaranteed Income are Happier, Live Longer, says it all.

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