Solutions to the Retirement Income Dilemma

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Morningstar's Christine Benz outlines both agreed-upon and hotly debated strategies for sustainable income generation in retirement.

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Solutions to the Retirement Income Dilemma Christine Benz morningstar retirement finance retirement financial advice retirement income solutions retirement planning saving for retirementSolutions to the Retirement Income Dilemma

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Solutions to the Retirement Income Dilemma

Morningstar

Retirement Focus with Christine Benz

Jason Stipp:	I’m Jason Stipp for Morningstar building a sufficient and sustainable 
retirement income stream is a critical issue in any environment but it’s a 
especially difficult in today’s tough environment for retirees. Here with 
me to talk about some agreed upon solutions and also some open questions 
in the retirement income arena is Morningstar’s Christine Benz she’s 
Director of Personal Finance. Thanks for joining me Christine.

Christine Benz:	Jason nice to be here.

Jason:	So at the Morningstar conference recently you posted a panel about 
retirement income some of the issues around that and some of the possible 
solutions. A good place that I would like to start is just why is today’s 
environment so difficult and for folks who want to retire and get that 
income stream going?

Christine:	Well the raw materials are really challenging Jason so you’ve got a very 
low interest rate environment. You’ve got still depressed values following 
a bear market you’ve also got a lot of retirees who have not saved enough. 
In fact there is some data showing that the typical retiree blows through 
his or her 401k plan and less 5 years and you’ve also got retirees who 
want to spend more than they have so all of this adds up to a very 
challenging environment for retirees and pre-retirees and one other thing is 
that the economic downturn has hit the pre-retirees sort of post 55 set 
harder than the younger populations and that has made it more difficult for 
them to put in place that right footing for retirement.

Jason:	So did somebody say she’s been around for a little while some of them are 
very new or depending on the economic environment but a lot of folks 
have been thinking about what are some things that we can do, what are 
some solutions that retirees can take and there are some agreed upon 
solution so what are the things that a lot of folks are sort of coming in the 
same conclusion about.

Christine:	Well one thing and its an out growth of the currently low interest 
environment is that idea of being able to live off of the income portfolio 
generate to maybe not touch principle. This is something that our grand 
parents were able to do perhaps in their retirement years when yields were 
much higher that’s just not a realistic possibility for most retirees except 
for those who have an awful lot of wealth so the only alternative is to take 
a total return approach, focus on building that NASDAQ and then 
periodically invading principle to make living expenses. It seems that for 
most retirees that’s the way it ahs got to be.

Jason:	And a potential down side of only wanting to focus on that income. You 
might actually end up stretching for more income by going the higher 
yielding investments that could actually be much more risky than you 
expected them to do.

Christine:	Exactly and that’s a concern I have right now that you could investors 
really reaching into this securities for a big share their portfolios its not the 
end of the world if you might use MLPs or perhaps preferred although I 
don’t love the asset class for a small portion of portfolio but I hear from a 
lot of retirees where they’re looking to these vehicles for the lion share of 
their investment assets and that does entail certain amount of risk.

Jason:	So even if you do take a prudent total return approach for some retirees 
that they still might not be enough are their portfolios really been hit as 
you said in the down turn so it seems like I might have some difficult 
decisions to make.

Christine:	Well that was one thing that came out of the panel to Jason. It seems that 
there was a consensus for you that most retirees don’t have to make some 
hard choices so if they cannot keep the withdrawal rate to that safe level 
usually agreed upon as 4% or so and that’s hard to generate a lovable 
income unless you have a lot of money. You can’t keep your withdrawal 
rate below that level working longer is going to be part of the solution for 
a lot of pre retirees.

Jason:	So maybe thinking of an eraser to some of your expenses are trying to give 
that down to a more manageable size and extended your time in the work 
force so I have to say that neither of those really seem like great solutions 
is there any way to kind of you know make that a little bit silver lining 
there?

Christine:	Well I agree its not an appealing prospect but Christine from T Rowe 
prices saw the panel and she presented some Research that T Rowe has 
done about this concept of working longer so what T Rowe found was that 
additional retirement plan contributions ones you’re passed the age of say 
55 or 60 do not add a lot to your overall portfolios so you don’t benefit a 
whole lot from compounding if you’re going to be taking the money out in 
10 years or so.

So what they found was that one compromise for people on this 
predicament is to keep working but forego those additional retirement plan 
contributions and then start to spend them. So kind of start enjoying some 
of the benefits of retirement, start enjoying those vacations with the kids 
and grand kids. Spend some of that money but continue working and 
continue building wealth and also defer taking social security which is 
another important lever that people can take advantage of.

Jason:	So maybe it’s a way pre tire while you’re waiting to actually retiring.

Christine:	I like that word.

Jason:	Given that the retirement income there still a lot of folks who are thinking 
about solutions to this and there are still some open questions out there 
and some differences of opinion about some of the solutions and though 
some of us came out in your panel can you talk about some of the big 
ones.

Christine:	Annuities were one of the key flashpoint areas where one of the spectrum 
frank Armstrong who is a financial planner said that he would never touch 
his annuities for client portfolios mainly because he’ concerned about the 
insurance company solvency and I think the whole spectacle of the 
financial sectors downward, spiral, and 2008 probably exacerbated his 
work but he does not use them at all. Tom Zurick from Ibbotson was also 
on the panel and Tom and the folks at Ibbotson he had actually done some 
research that points to variable annuities with guaranteed minimum 
withdrawal benefits actually being very positive in terms of prolonging the 
life of portfolios and making a portfolio sustainable so differing opinions.

Jason:	And there’s also obviously the interest rate environment of something that 
has a lot of folks concerned and you know the interest rates can’t go much 
lower than they are if at all so they really will have one direction to head 
and that could be bad news for bond holdings. However what’s the 
thinking about adjusting portfolios to kind of prepare for this rising rate 
environment that should eventually hit us.

Christine:	Yeah well there again we head a variety of opinions Frank Armstrong 
actually as a matter of course keeps client portfolios quite short client 
fixed income portfolios so his view is of this sleeve of the portfolio is 
there and not to be lost so he keeps high quality and he keeps it short term. 
It’s not necessarily response to the current interest rate in – its something 
eh does always. Tom said at Ibbotson they do stake big share fixed income 
portfolios and intermediate terms bonds and its not something they 
monkey with based on whatever is happening with the interest rate 
environment in fact that was one thing that came out from this panel it did 
see like there was some consensus around the idea of not actively jocking 
interest rate exposure depending on what you think rates are going to do.

Jason:	Well certainly some interesting perspectives on a very tough problem 
thanks for your insights Christine.

Christine:	Thank you Jason.

Jason:	For Morningstar I’m Jason Stipp thanks for watching.