Five Critical Retirement Planning Decisions You Need to Consider Today

Kathy Bergstrom, CEBSApril 15, 2021February 17, 2023

Retirement planning is an important exercise for everyone. And when you have only a modest retirement nest egg, there is little room for error when planning for how to make those savings last.

So what are the most important items for preretirees to consider, and how can employers and retirement plan sponsors help plan participants with retirement planning decisions?

Steve Vernon, FSA, MAAA, tackles those questions in his “Critical Decisions” two-part series in the January and February issues of Benefits Magazine. Vernon is a research scholar at the Stanford Center of Longevity, and he based the articles on two research reports prepared by the center in collaboration with the Society of Actuaries. The reports identify and analyze the Spend Safely in Retirement Strategy, which Vernon explains can work effectively for most middle-income retirees and can be implemented using most traditional individual retirement accounts (IRAs) or 401(k) plans.

In the first of the two-part series, Vernon points out that one-third of older workers approaching retirement in the United States have no savings, and the median balance for those with savings is only about $200,000. This means that middle-income preretirees can’t afford to make mistakes when planning for how they will deploy their retirement savings and build a retirement income portfolio, he writes.

When making their plans, preretirees must make the following five decisions.

When and how to retire, including whether to work part-time for a period of time. There may be advantages for older workers to downshift to a part-time career if they don’t want to or can’t continue working full-time but haven’t saved enough for complete retirement.
When to start Social Security benefits. Optimizing Social Security benefits through a careful delay strategy provides increased protection against longevity, inflation and investment loss risks.
How to deploy retirement savings to generate retirement income. Depending on each retiree’s situation, strategies to consider include a Social Security bridge strategy, buying an annuity or investing savings with a systematic withdrawal plan.
Which living expenses, including the cost of housing, to reduce in order to live on less income in retirement. Many preretirees haven’t accumulated enough savings to generate total retirement income, together with Social Security, that replaces 70-80% of their preretirement income—the conventional wisdom goal that we often hear. As a result, those with modest savings may need to find ways to cut costs. Housing often represents the largest target for many people.
Whether to deploy home equity by realizing capital gains and reinvesting the proceeds to generate retirement income or by purchasing a reverse mortgage. If retirees’ Social Security benefits and income generated by savings aren’t enough to pay for their living expenses, they may need to explore ways to deploy their home equity.

Employers and plan sponsors are in an ideal position to help their older workers make these decisions as they transition into retirement, Vernon contends. For more details on employer and plan sponsor strategies, see the second of the two-part series in the February issue of Benefits Magazine.

“By helping older workers with these critical retirement planning decisions, employers and retirement plan sponsors can better manage an aging workforce and evolve their savings plans into true retirement plans,” Vernon concludes.