(PUB) Morningstar FundInvestor

June 2 014

Morningstar FundInvestor

17

now relative to where you need to be, plan to build your positions gradually rather than dramatically increasing them all at once, as market valuations aren’t what they once were.) Mistake 2 | Not Delaying Social Security Filing Because it provides an inflation-adjusted income stream for the rest of your life, Social Security ensures that you’ll have at least some money coming in the door even if your investment portfolio runs low (or out) during your later years. If you file early— you’re eligible to do so as early as age 62 —you permanently reduce your longevity hedge, your annual benefit from the program, by as much as 25% . Meanwhile, delayed filing has the opposite effect, amping up the value of your hedge: Not only will your benefits last as long as you do, but they’ll be higher as well, perhaps even substantially so. Those who delay filing until age 70 will receive an annual benefit that’s more than 30% higher than what they would have received had they filed at full retire- ment age (currently 66 ) and more than 50% higher than their benefit had they filed at age 62 . More- sophisticated filing strategies—including the (poten- tially endangered) “file-and-suspend” strategy— help couples maximize their benefits during both partners’ lifetimes. Just as our savings rates are the main determinant of success during the accumulation years (much more than investment selection, in fact), the spending rate is one of the central determinants of our retirement plans’ viability. The 4% rule—which indicates that you can withdraw 4% of your total portfolio balance in Year 1 of retire- ment, then annually inflation-adjust that dollar amount to determine each subsequent year’s portfolio payout—is a decent starting point in the sustainable withdrawal-rate discussion. But it’s important to tweak your withdrawal rate based on your own situa- tion. If you have a sparkling health record and it looks likely that you’ll be retired longer than the 30 -year withdrawal period that underpins the 4% rule, you’re Mistake 3 | Not Adjusting Withdrawal-Rate Assumptions

better off starting a bit lower. (The fact that bond returns are apt to be meager in the coming decades is another argument for veering toward the conservative side on the withdrawal-rate front.) On the plus side, you may be able to live on much less than standard rules of thumb (such as 80% of preretirement income) would suggest. In a similar vein, it’s important to not set and forget your retirement-plan variables, such as your spending rate and your asset allocation, because retirement progresses and new information becomes available about your health and potential longevity, market valuations, and so forth. There are a lot of reasons many investors avoid prod- ucts that promise guaranteed lifetime income, such as annuities. They can be high-cost, it can be difficult to part with a large sum of money in exchange for a guaranteed lifetime income stream, and transparency is often lacking. (I’m often surprised by the number of people I run into who own annuities but don’t know what they have.) There’s also the matter of current interest rates, which have a depressive effect on the payouts of fixed-type annuities. That said, guaranteed lifetime income is a huge attraction on the longevity-protection front, and not all annuities are complicated and costly. Single- premium immediate annuities, while the most beholden to the current interest-rate environment, are the least complicated, most transparent, and most cost-effective annuity type. Deferred-income annuities, meanwhile, provide an even more direct hedge against longevity risk by enabling you to start up your income stream at some future date— when you hit age 85 , for example. œ Contact Christine Benz at christine.benz@morningstar.com Mistake 4 | Reflexively Dismissing Guaranteed Products