How To Not Run Out Of Money In Retirement

Apr 27, 2016
Originally published on April 27, 2016 5:33 pm

Investing for retirement doesn't have to be hard. You read up on how to put together a diverse mix of low-cost index funds, bonds, etc. Then keep setting aside all you can into that retirement account. Easy.

But when you actually retire and start spending that money, that's like going from playing checkers to playing chess. It can get a lot harder.

Here's the big pickle: You don't want to run out of money. But how can you know how much it's safe to spend when you might live for another five years — or 25 years?

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Is It All A 'Crapshoot'?

Liz McMunigal and her husband, Harry, are getting ready to retire so they're well aware of this Catch-22.

"My father died when he was 52 of lung cancer and he was never a smoker; my mother is 95 and still living," McMunigal says.

She and her husband are both lawyers in Wyomissing, Pa. They say they're not super-rich corporate lawyers, but they have saved a nice nest egg.

And like millions of other Americans, they're facing this puzzle. They want to enjoy retirement and not be so overly frugal that they miss out on traveling and having fun. But they don't want to blow their savings too soon, either.

"It's all a crapshoot because we don't know what our life expectancy is going to be; we don't know what our stock market is going to do," Liz McMunigal says.

The couple recently sat down with some financial advisers to try to figure this out. McMunigal laughs when she recalls the booklets the advisers prepared based on their analyses.

"I think I could probably build a nuclear bomb easier than understanding these things," she says.

Solving The Retirement Puzzle

To get a better understanding, we went to Yale University to talk to David Swensen. He manages Yale's $26 billion endowment and has written a book on investing for everyday Americans. And he hears this same question all the time: How much can I spend in retirement?

It's a really hard question, Swensen says. But he's gotten interested in one thing that can help: an advanced life deferred annuity.

Annuities have been around for a long time. They have a bad reputation for high fees and being hard to understand.

The basic idea is this: You pay a company (often an insurance company) a chunk of money upfront, and it agrees to write you a check every month to give you an income for the rest of your life.

These days, you can tell the company when to start paying you on the annuity — and wait until you are, say, 85.

Of course, Swensen says, "there's a chance you're not even going to make it to 85."

And that's exactly the point. For not so much money upfront, you should be able to get a pretty nice monthly payment after age 85. You'll have that, plus Social Security. And it becomes much less of a brain-bender to figure out how much of your life savings you can safely spend.

"Let's say you're 70, and you've got this deferred annuity that starts at age 85," Swensen says. "That's a simple problem to solve. The longevity risk is taken care of by the deferred annuity."

Dean Takahashi is the senior director managing Yale's endowment and works with Swensen. And Takahashi has been thinking about this, too — to help school employees figure out retirement.

"The nice thing about the deferred annuity is that it allows one to spend money when they really want to," he says.

In other words, earlier in retirement — when you're healthy and depending on your budget — you might feel you can visit the grandkids more or take that Caribbean cruise, because you've paid for financial security later on.

Annuities: The Good, The Bad And The Ugly

In general, annuities can be a smart move, economists say, because the longer you live, the more you get what's called a "mortality credit." That is you can benefit a lot from people who paid in and died sooner.

Swensen and Takahashi would like to see more of these advanced life deferred annuity products for people — but, they stress, with more competitive and transparent pricing. Opacity and complexity are big problems with many kinds of annuities.

"There are variable annuities and fixed annuities and life annuities and so many different types of investments or vehicles combined with the word 'annuity,' and it's extraordinarily confusing," Takahashi says.

One expert we spoke to said to stay away from variable annuities — they're supercomplicated and it's easy to get a bad deal. Fixed annuities are more straightforward and easier to shop around for.

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The plan for investing for retirement can actually be pretty straightforward. First, you read up a bit on how to put together a diverse mix of low-cost index funds. Then, you keep setting aside all you can into that account and leave it alone for 30 years - no problem. But when you actually retire and start spending that money, that's when things get complicated. NPR's Chris Arnold reports.

CHRIS ARNOLD, BYLINE: When you retire, you definitely don't want to run out of money. But the problem is, how can you possibly know how much it's safe to spend when you might live for five years or 25 years?

LIZ MCMUNIGAL: My father died when he was 52 of lung cancer, and he was never a smoker. My mother is 95 and still living.

ARNOLD: Liz McMunigal and her husband, Harry, are getting ready to retire. They're both lawyers in Wyomissing, Pa. They're not super-rich corporate lawyers, but they've saved up a nice nest egg. And so, like millions of other Americans, they're facing this perplexing puzzle. They want to enjoy retirement, but they don't want to blow their savings too soon.

MCMUNIGAL: It's all a crapshoot because we don't know what our life expectancy is going to be. We don't know what the stock market is going to do.

ARNOLD: So the couple recently sat down with some financial advisers to try to figure this out.

MCMUNIGAL: Oh, my gosh. They gave us these booklets that they prepared based on these analyses that they've done that I think I could probably build a nuclear bomb easier than understanding these things.

ARNOLD: So to get a better understanding of these things, we went to Yale University to talk to David Swensen. He manages Yale's $26 billion endowment. He's written a book on investing for everyday Americans. And he hears this same question all the time - how much can I spend in retirement?

DAVID SWENSEN: Well, so it's a really, really, really hard question.

ARNOLD: But Swensen says he's gotten interested in one thing that could help with that - something called an advanced life deferred annuity. But that's kind of a mouthful, so let's just call it...

SWENSEN: A deferred annuity.

ARNOLD: OK, so annuities have been around a long time. They kind of have a bad reputation for high fees and being hard to understand. But the basic idea is this - you hand over some or all of your retirement savings and you purchase an annuity. The annuity company agrees to write you a check every month to give you income for the rest of your life. But these days, you can also do something else. You can say, I don't actually want you to start paying me anything anything on this annuity until I'm 85 years old. Now, of course...

SWENSEN: There's a chance you're not even going to make it to 85.

ARNOLD: And that's exactly the point. For not so much money upfront, you should be able to get a pretty nice monthly payment after age 85. You'll have that plus Social Security, and so it becomes much less of a brain bender to figure out how much you can spend when you first retire.

SWENSEN: I mean, let's say you're 70 and you've got this deferred annuity that starts at age 85. Well, that's a simple problem to solve. The longevity risk is taken care of by the deferred annuity.

ARNOLD: Dean Takahashi is the senior directing managing Yale's endowment with Swensen. And he's been thinking about this, too, to help school employees figure out retirement.

DEAN TAKAHASHI: The nice thing about the deferred annuity is that it allows one to spend money when they really want to.

ARNOLD: That is, he says, earlier in retirement, when you're healthy, when you want to travel, enjoy life. Swenson and Takahashi would like to see more of these deferred annuity products for people, but with more competitive and more transparent pricing. And this gets back to the problem with annuities in general.

TAKAHASHI: There's variable annuities and fixed annuities and the life annuities and so many different types of investments or vehicles combined, you know, with the word annuity, and it's extraordinarily confused.

ARNOLD: One expert we spoke to said to stay away from variable annuities because they're super-complicated, he says, and it's easy to get a bad deal. Fixed annuities are more straightforward and easier to shop around for. We've got a lot more about annuities, retirement and investing at npr.org and on our Facebook group, npr.org/moneyandlife. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.