Here’s How to Think About Retirement Income Today

Christine Benz: Hi, I'm Christine Benz for Morningstar. So far in 2022, it seems like almost everything that could go wrong for retirees, has. We've had a falling stock market, falling bond prices, and rising inflation. Joining me to discuss how retirees should approach this environment is David Blanchett. He is director of retirement research for PGIM.

David, thank you so much for being here and also thank you for taking part in the Morningstar Conference this year.

David Blanchett: Sure thing.

Benz: Let's start by talking about the current environment. Of course, all retirees are different, but do you have any thoughts about what retirees should bear in mind as they're thinking about the current market environment?

Blanchett: Yeah. To your comment, it's almost like alarm bells are going off everywhere, right? You've got a wild stock market, you've got interest rates rising, so you've got bonds losing value, you've got inflation. I think that right now the key is just to make sure you have a plan. What worries me about investors, especially older investors, given some research I've done looking at, for example, 2008 and 2020, is they react to these negative market events. And so, I'd say that for those that are watching, just be prepared. Obviously, things change. It's hard to know what the future is going to hold. But the last thing you want to do is to see a big inflation spike, a big market drop, and not have a plan or at least an idea of how you'd react to that event.

Benz: Right. Now, I want to delve into withdrawal rates because a lot of your research has centered on that idea—how much retirees can safely take out of their portfolios without prematurely depleting them. Your research, other research has shown that if you can be a little bit variable in your withdrawals and take less during market downturns that can be really beneficial. Let's just talk about the benefits of doing that, and then I want to get into whether that's possible in an inflationary environment.

Blanchett: Yeah. I think the concept of dynamic withdrawals is incredibly intuitive. I think the big disconnect in the industry is that a lot of the tools that advisors use, that individuals use assume that someone follows this constant path adjusted for inflation for 30 years, and no one is going to do that. I think a really important question, though, when it comes to things like withdrawal rates and everything else is: What is your level of flexibility? If the markets do drop, if something does happen, are you able to cut back? And if the answer to that question is "no," I think it's either important to readjust where you are if you're taking out too much from your portfolio or ask yourself if I should allocate more to guaranteed income, because again, if you don't have that flexibility, it effectively increases the cost of retirement.

Benz: You referenced guaranteed income, and that's obviously a huge topic unto itself, but I think a risk is potentially inflation and how that affects products that deliver that guaranteed income stream. Can you talk about that?

Blanchett: Most Americans can get all the guaranteed income they need from delaying claiming Social Security. And as everyone knows, Social Security is explicitly linked to changes in inflation. It uses the CPI-W. Some could argue it's not perfect. But I think that that's actually, especially for individuals who are concerned about inflation, just the best place to think about guaranteed income. Now, it is certainly an issue, though. There are no other guaranteed lifetime income products that have benefits that are explicitly linked to inflation. And some of them you can invest in things that should do well if inflation, for example, goes up. But that could be an issue. If you buy an immediate annuity that has a fixed payment, well, if that's just in today's dollars and no future adjustments, that can be worth a lot less in 10 or 15 years if inflation is material.

Benz: I want to talk about rising yields a little bit because that's been, as you mentioned, a vexing issue with falling bond prices. Short term, certainly there's a dislocation that we've been seeing in bond prices, but long term, do you think that there's potentially benefits for retirees if we see yields begin to trend up as we have?

Blanchett: Yeah. So first, I've been shocked. I mean, if you had told me three months ago, we're going to have 10-year governments around 3%, I would have said you were nuts. I think the question is—no one knows where obviously things are headed. They could keep going up. There's indications they may. And collectively, higher yields are good for more-conservative investors. There was a time when the 10-year was less than 1%—that is not going to help you have a portfolio that beats inflation if you're invested conservatively. That being said, as interest rates rise, it's going to negatively affect the performance of a portfolio of bonds, especially long duration bonds. I think in the long term, higher yields are going to be better for investors, but they're obviously worse for borrowers. You see 30-year mortgages now at over 5%. I think that with interest rates, there's clear winners and losers. Older investors who tend to invest more in bonds are obviously winners the higher interest rates go.

Benz: We've talked about people who are in retirement and the implications of the current environment for their planning. I want to talk a little bit about people who are in that preretirement mode, perhaps two or five, or maybe even 10 years from retirement. They're looking at this environment. Many of them are surely spooked by what they are seeing. Can you offer any guidance for people who are at that life stage who haven't yet begun to draw from their portfolios?

Blanchett: Yeah. There's no silver bullet that's going to fix someone's retirement strategy, but to the extent that an individual can delay retirement, it's phenomenal for any kind of retirement outcome. You have an extra year to save, another year for markets to grow, one less year to fund, another year to delay claiming Social Security. There's significant economic benefits to delaying claiming Social Security and delaying claiming retirement. And I think why that's important right now is just—the markets have been on fire for the last decade or so. We've got the possibility of rising rates. There's high inflation. There's never necessarily a time to retire that's obviously great. But if you have flexibility to put it off, I would say, do it if you can but also, again, start thinking about, "What is my strategy? What am I going to do? How am I going to fund delay claiming retirement. How am I going to invest?" Because the last thing you want to do is get to retirement and not be prepared for what you're going to do.

Benz: David, it's always great to get your perspective. Thank you so much for being here.

Blanchett: Sure thing.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.