Robert Powell: ‘How Do I Generate Income?’

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Our guest on the podcast today is financial journalist and certified financial planner, Robert Powell. His work appears regularly in MarketWatch.com, USA TODAY, TheStreet.com, The Wall Street Journal, and AARP. Bob also serves as the director of Retirement Education at Sensible Money and as editor in chief of the Investments and Wealth Institute’s Retirement Management Journal. He is also an instructor in Salem State University’s Online Elder Planning Specialist program. In addition, Bob hosts two podcasts himself: the Investments and Wealth Institute’s Exceptional Advisor podcast and the Callaway Climate Insights podcast. He received his bachelor’s degree from Marquette University and a master’s degree from Boston University.

Background

Bio

Twitter handle: @Retirementpedia

The Exceptional Advisor podcast

Callaway Climate Insights

Current Environment

“60/40 Portfolio—Dead or Alive?” by Robert Powell, marketwatch.com, Jan. 11, 2023.

Tony Davidow

“Common Retirement Questions: Should I Be More Conservative With My Portfolio?” by Mer Brown, the street.com, Dec. 23, 2022.

“Estimating the True Cost of Retirement,” by David Blanchett, Morningstar.com, Nov. 5, 2013.

“The Bucket Approach to Building a Retirement Portfolio,” by Christine Benz, morningstar.com, Nov. 23, 2022.

“Spending Trajectories After Age 65,” by Michael Hurd and Susann Rohwedder, rand.org, 2022.

Decumulation

“Why Target-Date Funds May Be Sabotaging Your Retirement,” by Robert Powell, marketwatch.com, Aug. 17, 2022.

“What Is the Average Retirement Age?” by Emily Brandon, money.usnews.com, July 26, 2022.

“2018 Retirement Confidence Survey,” Employee Benefit Research Institute, ebri.org, April 24, 2018.

Retirement Income Style Awareness Profile (the RISA®)

“Managing Post-Retirement Risks: A Guide to Retirement Planning,” Society of Actuaries, soa.org, 2011.

“Saving for Retirement Is Easy Enough—Spending It Is More Complicated,” by Robert Powell, marketwatch.com, March 26, 2022.

Annuities

Moshe Milevsky

“Retirement Spending and Biological Age,” by M.A. Milevsky, H. Huang, and T.S. Salisbury, moshemilevsky.com, Sept. 20, 2017.

“Retirement Income for Life: 4-Box Strategy,” by Robert Powell, marketwatch.com, Nov. 8, 2012.

Social Security

“How to Claim Social Security at the Right Time,” by Robert Powell, marketwatch.com, Aug. 28, 2021.

“Do the Math. Here’s Why You Shouldn’t Claim Social Security at Age 62,” by Robert Powell, usatoday.com, Aug. 9, 2019.

“Who Does Social Security Provide Benefits To? It’s Not Just the Elderly Who Qualify,” by Robert Powell, usatoday.com, Jan. 10, 2023.

Long-Term Care

“Planning for Unexpected Health Care Costs in Retirement,” by Sudipto Banerjee, troweprice.com, March 2022.

“A New Way to Calculate Retirement Health Care Costs,” by Sudipto Banerjee, troweprice.com, February 2020.

“Cumulative Out-of-Pocket Health Care Expenses After the Age of 70,” by Sudipto Banerjee, ebri.org, April 3, 2018.

“Are Healthcare Costs in Retirement Overwhelming?” by Robert Powell, fa-mag.com, Nov. 1, 2022.

“Planning for Health Care Costs in Retirement,” Vanguard Research and Mercer Health & Benefits, vanguard.com, June 2021.

Other

Elder Planning Specialist Program

Transcript

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Jeff Ptak: And I’m Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is financial journalist and certified financial planner, Robert Powell. His work appears regularly in MarketWatch.com, USA TODAY, TheStreet.com, The Wall Street Journal, and AARP. Bob also serves as the director of Retirement Education at Sensible Money and as editor in chief of the Investments and Wealth Institute’s Retirement Management Journal. He is also an instructor in Salem State University’s Online Elder Planning Specialist program. In addition, Bob hosts two podcasts himself: the Investments and Wealth Institute’s Exceptional Advisor podcast and the Callaway Climate Insights podcast. He received his bachelor’s degree from Marquette University and a master’s degree from Boston University.

Bob, welcome to The Long View.

Robert Powell: Thanks for having me, Christine.

Benz: Well, thanks for being here. So, we want to start out by talking about the current environment. A hot topic in the wake of last year’s simultaneous selloff in the stock and bond markets was whether the old 60/40 portfolio is dead. We heard a lot of people sounding the death knell for the 60/40. Where do you come down on that question?

Powell: I wrote about this a little bit ago. I interviewed people like David Kelly and Tony Davidow and a couple of others, and I came away thinking that the 60/40 is not dead. It was a bit of an anomaly what happened last year that both stocks and bonds, the negative or near-negative correlation between those two asset classes were nearly identical. And there have been other times in history where that has occurred as well and no one rang the death knell bell for 60/40 portfolios back then, and I think the same is true now. It was a rare occurrence. But what I think it does do is, it gives us the opportunity to maybe revisit how we think about asset allocation. And so, maybe what one might consider doing is not necessarily having a portfolio of 60% S&P 500 and 40% AGG or something to that effect, but they might look at diversifying further their portfolio to make sure that they have large and small value and large and small growth and international, and maybe to the degree that they can stomach it, maybe some illiquid assets, private equity, private credit, and so on. And so, I think that’s where I come down is that it’s not dead, but it may need to be refined so that you can accommodate the potential for another happening like we had last year.

Benz: You referenced private equity, private credit instruments potentially. I’m curious, are there any ways that you would suggest that investors obtain exposure to those assets assuming that we’re talking about retail investors who do not have millions and millions of dollars to throw around?

Powell: That has historically been a problem that average investors might not have access to these kinds of instruments. The good news is, I think there’s more and more of these private credit, private equity instruments becoming available. They’re becoming more democratized. I don’t have any to recommend off the top of my head. But I think folks should be on the lookout for these kinds of instruments if what they want is to maybe diversify further and perhaps increase the potential for their risk-adjusted performance.

I would caution you. When I did talk to Tony Davidow about adding these kind of instruments to your portfolio, the notion is to not think of them as, say, 55% stocks and 40% bonds, and then 5% alts, but to think of them within the context of your stock and bond portfolio, and it wouldn’t necessarily be a third asset category. And the other is to think of them in terms of liquidity. So, for many people, that’s the biggest problem. You might look at interval funds, for instance, would be one example. And knowing full well if you wanted your money right away, you wouldn’t be able to get it. You might have to wait three months or even longer in some cases, depending on the period in which they open the fund to have liquidations.

And so, that means that for certain people, they need to really think about, can I afford to lock this money up? And obviously, if you’re a pension plan, you can. If you’re an individual investor, you may need to think long and hard about, one, the illiquidity factor. And two—I talked to Tony Davidow about this is—how do I measure the performance and to make sure that this is adding to the portfolio. Adding 1% of an illiquid investment may not necessarily increase your performance that much. So, you may be looking at adding 5% to maybe 10% for it to make a difference. You wouldn’t necessarily want to add these things without some sort of plan in place to say here’s what my expected return might be and here’s what I think the effect will be on my liquidity needs.

Ptak: Focusing specifically on retirees, what additional assets belong in their portfolios, in your opinion?

Powell: I think folks need to think about how they’ll generate income in retirement, ultimately, and what kind of risk they want associated with that income. I’m always a fan of suggesting that one maybe look at their retirement income plan much the same way a pension plan looks at how it meets its obligation to its pensioners, which is, we need to have a certain amount of assets to fund the liabilities that we have, and there can be no uncertainty that we meet those liabilities. So, I would say folks probably need to think about what assets do I need to fund my desired lifestyle and the lifestyle that can’t be put at risk. That might be for some essential expenses; for others, it might be essential and discretionary. But whatever it is that there’s an asset there to cover that expected expense. For some, that may mean bonds or zeros, or perhaps it might mean single-premium immediate annuities. For others, it might mean a bond ladder. But whatever it is, I think, people need to think about adding the assets that will fund their necessary expenses at a minimum.

Ptak: Sometimes when the markets fall, we see investors overcorrect in one way or another. After the great financial crisis, for example, we saw a stampede into bonds, even though yields were very low and equities were cheap. Are you seeing anything you would characterize as an overcorrection today?

Powell: At least on the retiree side, I haven’t seen that kind of overreaction. What I have seen though is, at least for folks who are saving for retirement, this notion of higher yields in the bond market and that long last, maybe the desire to go out a little bit longer on the yield curve in order to capture some of the higher yields. I wouldn’t necessarily call it an overreaction. I think it’s more a reaction to a decade-plus of a zero interest-rate policy period in which people stayed very short with their money because there were no other places to go except maybe the stock market. So, I have seen people maybe get a little bit more aggressive in terms of going out on the yield curve and taking advantage of higher yields.

It’s an interesting discussion though, because I think sometimes there are—you have written about this, others have written about it—this notion of nominal and real returns. So, while folks might be getting a higher nominal yield with interest rates as high as they are, they’re still getting a negative return at least on their interest income. So, I think people also need to think about just because yields are high, it doesn’t necessarily mean that it’s better. It’s certainly better than 0% for sure, but I think people need to be conscious of the fact that their real return is still negative.

Benz: Right. That’s such a good point. And I know inflation has been top of mind for a lot of retirees, a lot of people in general. It’s declined a little bit, but it’s still really quite high relative to the previous few decades. So, thinking about retirees specifically, how should they protect their plans in case inflation stays elevated? Maybe you can talk about at the portfolio level and also at the total-plan level, what people should be thinking about who are in retirement or about to retire?

Powell: As I mentioned, I’m a fan of bond ladders or income ladders or asset/liability-matching for people who are building retirement income plan, or the bucketing approaches you’ve written about—people describe it in different ways. For many who are worried about inflation, it might be a case of where you shorten the first bucket, the safety bucket per se, and instead of maybe it being three or five years, maybe it’s three to one year so that you’re putting less of your money in instruments that would suffer the most from at least a higher rate of inflation in the short term. And should inflation remain elevated, that second bucket where you might have a mix of stocks and bonds presumably would be used to hedge against higher inflation rates. And then, maybe keep that bucket just as short as well instead of, say, maybe a five- to 10-year bucket for that middle bucket, maybe that is five to seven years. And then, your third bucket, the bucket that’s really designed for long-term expenses and the bucket that’s really designed to hedge against inflation, maybe instead of it being set at 10 years, maybe it’s now set at seven. So, I would probably just shorten the bands on my buckets as I was thinking about what amount or percentage of my assets need to be in these various buckets in order to protect against both in the short-term a higher range of inflation, but also a persistently higher range of inflation.

The other is, when I think about inflation with it, obviously people think about the loss of purchasing power and what that could mean, a dollar being worth $0.50 over the next 30 years. I also think people need to think about retirement. At least according to the research I’ve read, and perhaps that you’ve read as well, Christine, is that spending, real spending, declines in retirement. So, David Blanchett, when he was at Morningstar had that famous study that looked at the smile. Michael Hurd at the RAND Corporation recently published a paper that echoed the same. J.P. Morgan, also with real clients looking at their spending patterns over the course of retirement, consistently show that spending declines over the course of retirement from the go-go years to the slow-go, and then may or may not increase in the no-go years.

I think people also need to not put inflation in the context of what their actual spending will be in retirement. So, while inflation may be high today, it’s likely, perhaps I’m willing to bet, that it will return to maybe its 3% average over the course of the next three decades or so. And be mindful of the fact that as you’re entering retirement, it won’t be necessarily a 3% inflation-adjusted expenses that you’ll face in retirement. It might be 1% or 2% real. So, again, it’s like thinking about, well, I can read the headlines, but I also need to think about how this applies to my own plan and the plans of many other retirees. It’s one thing to think that inflation is high, and you’ll forever have a loss of purchasing power, but it’s a whole another thing to think about what will actually happen in reality.

Ptak: You referenced bond ladders earlier. But is there a risk to people building portfolios of individual bonds that smaller investors might have trouble finding a way to be adequately diversified, for instance?

Powell: I often start my retirement speeches by talking about how complicated it can be, how confusing it can be, how contrary it can be. I’m often reminded of the famous example I often use is that you have folks who might say that stocks are great for the long run. And then, on the other hand, you might have someone like Zvi Bodie saying stocks are always risky. So, how do you navigate a world in which you’re getting two different opinions from two different esteemed subject-matter experts?

For anyone to do this on their own, I think it can be done, but I think it would require becoming a student of the subject and taking full advantage of all the tools that might be out there at Morningstar or other places in order to build a bond ladder, or to be knowledgeable enough. When I began writing about retirement exclusively in 2003, reverse mortgages weren’t a thing. Secure Act 1 and 2 were not a thing. So, for people who have to understand all the products, regulations, strategies, pros and cons of strategies, I think it becomes really difficult for someone to do it on their own.

If nothing else, I think having someone go to an advisor to act as a sounding board would be helpful. I’ll give you an example. Yesterday I got an email from a family member whose advisor had recommended to them that they switch out of an investment they had into an annuity. And the only contacts I had was a product sheet on the annuity. I had nothing from the advisor to say why we’re doing it, what are the pros and cons of doing this, how does it fit into the family member’s portfolio. And mind you, this is a person with an advisor seeking out a sounding board. Imagine a person without an advisor trying to figure out whether to buy this or that product and how it fits into their plan, I think is a tall order. It can be done. Like I said, I think you need to become a student of the subject and become a student of the subject perhaps in the same way that you become a student of your job to actually get a good feel for whether something or not makes sense for you—what investment to add, what strategy to consider and how to go about it?

Powell: Does that help?

Benz: I’m curious, what did you end up counseling your family member to do?

Powell: I ultimately said we have to have a phone call. I can’t answer your question in an email. Because what I want to do is understand what problem this product is trying to solve or what goal it’s trying to achieve and how it fits in with the family member’s portfolio. He is five years away from retirement. And it just doesn’t seem to me like I could answer off the cuff whether or not someone should invest in this without necessarily understanding full well, have they done a retirement plan to estimate what their expenses will be in retirement? Have they looked at what their sources of income will be in retirement and when they plan to claim Social Security? Or will they work part time in retirement, or whether their spouse will continue working? So, it gets fairly complicated fairly quickly to give a one-off answer to whether someone should do a 1031 exchange or whatever the advisor was recommending. So, I just feel like this person this family member was looking for a sounding board to an advisor, giving them what may or may not be good advice, I don’t know.

Benz: You’ve referenced that this can all be incredibly complicated. And one thing that I’ve wondered, I’m curious to get your take on, is whether it’s possible to think of a simplified product or service for decumulation. I think many of us would look at target-date funds. It’s kind of a home run for the accumulation mode, just in terms of solving asset allocation and then making that asset allocation more conservative as the goal date draws close. There’s no real equivalent for decumulation and decumulation is so much more complicated. Could there be a product, or is there a service that you know of that addresses the complexity and makes it simple for the end user?

Powell: That’s a great question, Christine. So, I think target-date funds or target-income funds have never really taken off and I think it’s perhaps because it is difficult to create a one-size-fits-all solution for people who are in decumulation. Everyone’s income needs are different. I often like to use the example of someone might be retired with a huge, concentrated stock position from a company that they’ve worked at, someone else might have owned 12 rental income properties, someone else might have a defined-benefit plan from work, someone might have retiree healthcare insurance, someone else won’t. So, it’s really a matter of trying to say how do I generate the income? So, it may that a target-income fund does generate income, whether or not it is enough to meet someone’s desired standard of living is a whole another thing and to determine that one would have to go through that exercise of, for better or worse, creating a spreadsheet that looks at one’s expenses row by row and over the years column by column, and to adjust it for inflation and then figure out whether that income from your target-income fund or any other source of income matches what your needs will be.

I think that’s the hard part is there are certainly software packages out there that people can get a rough idea. Maybe if you have a custodian, Fidelity, Schwab, TD, whomever, and you’re doing it yourself, they certainly have retirement income calculators out there that can help you. The challenge, I think, is when things become very specialized and individualized. And so, it’s not possible for every software package to take into account unique circumstances—a large inheritance or like I mentioned, a rental income property or royalties from a book. I wish I could say that there’s a solution out there. But I think the good news is there are things that people can use, and I would say that what people need to do then is also maybe triangulate around the different things that they could be doing.

What I’m fond of telling people when they create their plan is to make sure that they’re doing some scenario planning around what’s the best-case, probable-case, and worst-case outcome to whatever it is that they’re doing and to try to accommodate for all the potential things that could go right and all the potential things that could go wrong. For instance, not to go off on a tangent, but a lot of times people want to continue working in retirement either full or part-time and either out of want or need or both. But, according to the Employee Benefit Research Institute, only half of people who say they want to continue working in retirement are able to do so, half aren’t able to do so because of some healthcare shock, perhaps, or perhaps they’ve had a layoff, or they can’t reenter the workforce after they retired. And so, there’s all these things that software can’t necessarily accommodate. But at least if you take, like I said, a worst-case, best-case, and probable-case approach to some of these tools that you can find online, at least that might give you a better sense of whether your plan will succeed or not.

Ptak: Researchers Wade Pfau and Alex Murguia have developed what they call the RISA style matrix. The goal is to help people develop a retirement plan that’s specific to their personal preferences, like their desire for certainty and safety, for example. Is that sort of reflection important and what are the types of questions that pre-retirees should be asking themselves?

Powell: I think the profile is helpful. I’ve talked to Wade about it. I’ve written about it. I’m fond of it. When I wrote a story about it, my profile was a safety first and optionality, I think, was where I came out. And in essence what that meant was I wanted reliable cash flows to fund my essential retirement expenses and that my investment portfolio be used for discretionary expenses. And what I think is interesting, I think everyone should go through what their preference is. And two things that can be done with this.

One is to understand maybe I already have a good degree of safety first in my portfolio, in which case, that would match up with my preference. And it would also, if I’m talking to an advisor or if I’m doing it myself, I could then say, well, do I need more safety first in my portfolio in order to meet my preference? Or do I have enough safety first and don’t need any more of it? Maybe I need more optionality in my portfolio. So, I don’t think necessarily it’s a tool that says this is what you should be doing. You may already be doing it, but it may not be prescriptive in the sense that this is what you should be doing with the rest of your money.

And I think what’s important too, at least if you are using an advisor, I’m often critical of advisors for whom they’re the hammer and everything looks like a nail. We know that many advisors have a style that they use with their clients. It might be the 4% rule. It might be the bucket approach. It might be income annuities. And what we know is based on our conversation and your long history of writing about this is, not every one solution is going to work for every client. And so, what advisors, I think, need to be conscious of is the fact that someone might have a different preference and might have a need for a different solution than the one that they might offer. So, I think this helps at least the advisors and the client connect a little bit better around what plan would be best for them given their preference and given their current asset allocation. So, it’s a good tool.

Benz: You referenced your own personality, your own placement on this matrix. I’m curious, more broadly, you’ve been focusing on retirement planning for so long, how has it affected how you think about your own retirement plan and your own retirement portfolio?

Powell: So, that’s a great question. Everyone is always asking me when I plan to retire, and I think there’s a couple …

Benz: I wasn’t asking that.

Powell: No, I know. But I think about it in those terms because it weighs heavy on me. I think a couple of things. One is, having a sufficient income to fund a desired standard of living for a very long time horizon, not just for myself but for presumably my surviving spouse since men tend to predecease their wives. First of all, I think it about it in terms of the household and I also think about it in terms of risk, Christine. I spend a lot of time thinking about how to manage and mitigate all the potential risks that one might face in retirement.

So, you’re well familiar with the Society of Actuaries has a chart, a table that looks at the 15 or so risks that you might face in retirement. Some of them are well-known, like longevity, and inflation, and healthcare shock; but others are perhaps less well-known like bad advice, and theft, and death of a spouse, or divorce or remarriage, and so on and so on. And what I think is really important as I think about my retirement is, I want to be somewhat assured that I’ve at least addressed those 15 risks in some form or fashion that either I have decided to self-insure them or I’ve decided to insure against this, or I’ve decided to self-insure and hedge it or something like that. So, there’s that element of it.

There’s also the psychological element, and I think this is the hardest part. Time and time again people have to get used to moving away from the saving stage of their life to the spending down that pool of assets that you’ve saved over the course of 30 or 40 years and giving up the paycheck, the steadiness of a paycheck. And I think there’s that psychological hurdle that one has to go over—myself included—that says having a paycheck is nice; I don’t have to worry about spending down my assets. So, I think, for many people, it’s getting through that barrier that says I’m going to live the rest of my life off my assets as opposed to my human capital. And I think that’s a hard one, right?

Benz: Right. And we see that. I encounter people who I believe are probably quite underspending relative to what they could because it makes them nervous to pull from their portfolios. And I think additionally, you’ve got people who just don’t want to retire for that reason that it’s just too scary, the idea of actually turning their portfolio on, turning it into income mode after a year of accumulating.

Powell: It is scary, and I think that’s where the role of the advisor can come in, with someone who does a comprehensive look at income and expenses and is using a reasonable life-expectancy calculation to say that we have a fairly good chance that you’ll be able to fund your retirement from your portfolio. And I think that’s where—again, this is where the advisor can come in—this is a sounding board for some, and for others it might be someone that you hire. But I think ultimately someone needs to have the comfort to know that it’s OK to retire and that they’ll be reasonably OK.

One of the interesting things, it strikes me that the advisors rely on maybe too much so on Monte Carlo, and we’ll tell a client that they have a 70% chance that their portfolio will survive to the end of their life or 90% chance. And to me, I always think, well, I want 100% chance. Why would I only want a 70% chance that my portfolio will survive the entire time. So, we look at Monte Carlo as this magic bullet in the industry. But I think what people need is a year-over-year expectation that where they are is they’re still in good shape or that they need to make adjustments in some form or fashion to their lifestyle, or maybe they can spend more because things are turning out far better than they thought. And oftentimes, I think that’s more often the case is, a lot of times people won’t spend in retirement because they have this fear of outliving their assets, or they have a fear of healthcare shock. And the role of the advisor can be one that says we’ve managed the risk of longevity and we’ve managed the risk of a healthcare shock, so there’s no need to worry about either of those risks and you’re free to spend that money to go on a trip, or to spend it on grandkids, or to build an addition on your house, or buy a second home or whatever it might be. That’s something an advisor, I think, can do. It’s hard for, I think, software to tell someone that you’ve been given permission to buy a vacation home.

Ptak: Michael Finke has that interesting research that points to the value of an annuity in helping people feel comfortable spending from their portfolios. Are annuities underutilized by retirees, in your opinion?

Powell: It’s an interesting question. The answer is, they may be, and they may be by certain segments of the population. I once had the luxury of interviewing Bob Merton, Nobel Prize winner, who said that for the vast majority of middle Americans, annuities and reverse mortgages will be the two products that allow them to have a standard of living that they desire in retirement. So, I’d say, for many folks that are middle income, annuities probably are underutilized. For the highest-income, highest-net-worth folks in the world, they may not be utilized at all, but may not need to be, because folks who are in the upper-income quintiles and the upper-net-worth quintiles have probably more than enough assets to fund their desired standard of living and can suffer sequence of return risk, perhaps. And then, for folks who might be in the lowest-income quintiles, for them, Social Security is their annuity, if you believe some of the research, tends to replace 80% or so of their preretirement income. So, there’s no need for annuity there because they have an asset that is 80% of their assets and is an annuity.

So, I think the answer is, ultimately it depends. But I’d say, middle America, it’s probably underutilized, and it’s probably underutilized for good reason. There’s a lack of understanding of these products and how they’re used and when they’re used and how they’re sold. As you know, no one ever buys an annuity. More often than not they’re sold. And so, people have a distrust of people who are selling these annuities because there’s a commission associated with the sale of those products. And it’s also really hard to understand whether what you might need is a fixed annuity or a single-premium annuity, or maybe you need a variable annuity, or maybe you need a registered index-linked annuity, and on and on and on—or maybe you need a deferred income annuity. We use the term “annuity” broadly, but we do not necessarily know which annuity would be the best one to use for the goal that we’re trying to achieve.

Benz: Well, that’s a great point. So, I’m wondering if you can home in on that group that you earlier identified as being especially good candidates for an annuity purchase? If they’re to try to shorten up the list of things that they need to know about on the annuity front, are there any annuity types that you would say, well, this would be the most logical place for you to start, at least, if you’re pondering some sort of an annuity purchase?

Powell: Yeah. So, I think for folks who are on the cusp of retirement and if they were to go through the RISA profile and it turned out that what they wanted was safety first and they had no other source of safe income other than, say, Social Security, no pension, a single premium immediate annuity might be an option. I wouldn’t necessarily say it’s the only thing that you should use in order to create safe income if that was your preference and your desire. But I would certainly start there.

On the other hand, if you were someone who was saving for retirement and you were 10 to 15 years away and you wanted to have the benefits of an annuity, a fixed payment at some point, but didn’t mind putting your money at risk, you might consider a variable annuity or a registered index-linked annuity, and that might help you build the sufficient enough nest egg and also create some sort of income for you in retirement when the time comes to annuitize that product. So, I think it really depends on your life stage, which product you might consider and what your risk profile is.

There’s an interesting product. Moshe Milevsky has written about this and I’m sure you have as well. And I often think about when I’m planning for retirement too, there’s this notion of how do we take the uncertainty out of managing the risk of outliving our assets or longevity? And for some, it might mean saying I’ve created a planning horizon to age 95, but on the odd chance I live past 95, well, I still need income and there may be places for some to use a deferred-income annuity, an annuity that doesn’t necessarily start providing income until you reach age 85 or age 90 or whatever the case may be. And I look at that product as, if what you’ve done is created a certain date of death for yourself, that deferred-income annuity then becomes the product that at least covers you on the odd chance that you live beyond your presumed date of death.

So, there’s another potential annuity that one could use if they’re looking to, again, manage many of the risks that they’ll face in retirement. But it’s not for everyone. Again, if you were in the parlance of the retirement management advisor program, if you were overfunded, you might not need a deferred-income annuity. On the other hand, if you were constrained or perhaps underfunded, you might consider that product to fund your lifestyle.

The other thing I’ll mention, Christine, if you don’t mind, too, is I often think back to—you probably had interviewed him at one point in your life—Farrell Dolan, who had worked at Fidelity and had created the four-box strategy back in the early 2000s maybe or so. And I think that’s an interesting way for people to also think about building a retirement income plan is to match their guaranteed sources of income with their essential expenses and match their risky assets with their discretionary expenses. And if there’s a gap to take a portion of the risky assets and to use it to purchase a single premium immediate annuity or some other guaranteed source of income.

Ptak: You referenced earlier that an annuity is a crucial source of lifetime income. You’ve written a lot about Social Security over your career. What are some of the most common mistakes people make about Social Security?

Powell: I’d say the primary one is using the breakeven age as the age to determine when you should claim Social Security. The breakeven age for many people is roughly about average life expectancy. And as Dallas Salisbury used to say, was fond of saying, half the people are going to die before life expectancy and half after, and you don’t necessarily know which half you’re going to be in. So, people who use their breakeven ages as their decision-making tool are putting at risk the potential to live past life expectancy. And more importantly, especially if they were the higher earner in a couple, they’re also putting at risk their surviving spouse’s survivor’s benefit.

Again, I mentioned I like to think about it in terms of the household. I think for folks who are using the breakeven age and not considering the impact it might have on the household, are doing a huge disservice to their family, because obviously, the longer you wait to claim Social Security, the higher your benefit will be, the higher the COLAs will be on your benefit and then ultimately, the higher the benefit and higher the COLAs will be on the surviving spouse’s benefit. And I think that’s where it makes a difference. If you look at claiming and what the one-year benefit will be relative to what it might be if you waited a year, mask the true benefit of what delaying claiming could be, especially over the course of a 25- or 30-year horizon.

I think the other sort of mistakes that people make are, we often think of Social Security as an irrevocable decision. But it’s not. And for folks who might claim and feel like they made a mistake within the first 12 months, they can reverse their decision. And then, for folks who have claimed Social Security and have reached full retirement age, they can suspend their benefit and then begin to enjoy delayed retirement credits. And so, for folks who might say, “Oh, I claimed Social Security, I can’t get out of it.” That’s not necessarily true. You’ve got two opportunities: one in the first 12 months and one after full retirement age to perhaps increase your Social Security benefit. And most people that you’ve spoken to, that I’ve spoken to, say that there’s few better investments than to generate an extra 8% on your potential benefit by delaying Social Security until age 70. So, those are two of the common mistakes that I see.

Benz: That’s helpful. I wanted to ask about long-term solvency and viability of Social Security. The nonpartisan Congressional Budget Office forecasts that the balance in the Old-Age and Survivors Insurance Trust Fund, the Social Security Trust Fund, will be depleted by 2033, so in about 10 years. Do you have a favorite remedy, or perhaps a combination of remedies, for addressing that?

Powell: I don’t have a favorite one. But I think what needs to be done is tinkering with all the inputs that we could tinker with and making modest adjustments so that no one type of person, age of person bears the brunt on what solution there needs to be to at least avoid the possibility of someone getting $0.80 of their scheduled benefit. So, I think increasing the taxable maximum could go a long way toward that. Changing the bend points might help in terms of the formula. I’m not a fan of necessarily increasing the age at which you reach full retirement, because I think, again, it might be beneficial to white-collar workers but not necessarily to blue-collar workers for whom retiring earlier is probably something and retiring at 67 to get your full retirement benefit seems like it’s high enough age at the moment.

And ultimately, we can only do a couple of things. We can reduce benefits for some, so that may mean changing the taxation of retirement benefits after full retirement age. So, maybe it’s not 85%, maybe it’s 90%. We can reduce the benefits for some. We can also increase the taxes for others and maybe, like I said, we increase the taxable maximum. Ultimately, it’s curious—everyone keeps saying, “Congress will do something by 2033. We don’t have to worry about the possibility of people only receiving 80% of their scheduled benefit.” But I fall in the camp that Congress may or may not fix it. I don’t know. They may or may not fix it to 100% of scheduled benefits. Wouldn’t it be far better to—and I’ve written about this—wouldn’t it be far better to plan for the possibility of that to incorporate that into your financial plan?

I think what’s interesting is, again, when we say 80% of scheduled benefits as a potential outcome for this, a couple things come to mind. One is, Social Security benefits represent different portions of someone’s retirement income. So, for the people in the highest-income quintile represents maybe 15% of all their retirement income. The effect on them will be far less if we have a reduction than it would be on someone who is in the lowest-income quintile where Social Security represents maybe 80% of their retirement income. So, I think people need to think about who this potentially could affect and think about it in those terms. So, if you’re in the highest-income quintile, maybe you can afford a 20% haircut in your Social Security benefit. For others, it would be unlikely, but I suppose it could be an across-the-board cut for people of all income quintiles.

And then, we have to think about who it will affect in terms of ages. I can’t imagine that anyone who is 67 or older and collecting Social Security benefits, they will appreciate seeing a 20% cut in their benefits. So, it may be that my children who are in their 20s will suffer the brunt of having this shortfall, in which case—my kids are already mad at me anyway. So, I guess, it’s OK to begin with. But I think people do need to plan for the potential and the people who will be most affected, and I think the people who will be ultimately most affected will be if there’s no solution. Or even if there is a solution, the people who will be most affected will be younger people under age 45 and certainly folks who are in the upper-income quintiles.

Benz: Earlier in the conversation, you ticked off a number of risk factors that people should think about for their later years and having a big long-term-care expense later in life is one of those risk factors, especially for upper- or upper-middle-income people who have decent but not lavish retirement nest eggs. So, this is a really troubled part of the whole retirement planning landscape. What’s the best course of action for people who are in that situation?

Powell: This is one of the hardest ones in the world, Christine. So, I think a couple of things. First of all, I would recommend that people, if they haven’t done so already, there are at least two research papers—maybe four depending on how you look at it—that have been written about planning for healthcare costs in retirement in general. One was written by Sudipto Banerjee at T. Rowe Price. There were a series of three papers that they published on the topic. Sudipto had been at the Employee Benefit Research Institute for many years examining healthcare costs in retirement. And the other was written by Vanguard Mercer about what healthcare costs in retirement will be.

I would say, at a minimum, everyone should read these papers so that they can stop thinking about what has become a very scary number for folks when they’re told that they’ll need $300,000 set aside at age 65 to pay for a lifetime of healthcare expenses, not including long-term-care expenses. And what those papers do is, the least for me anyway, make healthcare costs a little bit more manageable in retirement. They talk a lot about using fixed sources of income to pay for expected expenses in retirement and maybe risky assets to pay for out-of-pocket expenses and nonpredictable expenses.

And then, they also take a look at what is the realistic percent of people who will have huge long-term-care expenses in retirement. And at least according to their research, it’s a few in number. It’s a relatively small percent. You don’t know if you’re going to be in that 3% of people who have a $300,000 nursing home bill or you’ll be in the 97% of people that won’t have that bill. So, how do you plan for that? And I think that’s the dilemma for many people is, well, for many people, long-term-care insurance has not become the product of choice for lots of reasons. One, it’s expensive. You’ll never know if you’re going to use it. And oftentimes, you hear horror stories about people having their coverage denied because they don’t meet all the requirements of the policy.

And so, I think that leaves people with a couple of things. One is to try to do the best they can with self-insurance. Potentially, although many people do, they try to become Medicaid eligible, they buy Medicaid annuities, they gift assets away, and so on and so on. I think that’s a lot of gymnastics to perform to avoid the possibility of having a long-term-care expense. I think the better thing for people, and it’s a little bit harder, is thinking about the hybrid products, Christine, thinking about long-term-care insurance matched up with an annuity or matched up with a life insurance policy. And I think that at least accomplishes a couple of things. One, it removes this fear that what if I don’t need my long-term-care insurance policy? I just spent all that money on something I never needed. Of course, no one ever feels that same way about when they buy property and casualty insurance. If they never get into a car accident, no one ever really regrets not having car insurance. So, that’s how they feel about long-term-care insurance: “Oh, I didn’t need it, and I spent all that money.”

I think at least then when you’re looking into hybrid policy, there’s this notion that, well, “If I didn’t need it for long-term care, at least there was a death benefit or at least there was an income stream that was generated because I didn’t need it.” So, at least it satisfies that person who says, “Well, what if I don’t need long-term care?”

On the other hand, those products are definitely more complicated than a traditional stand-alone long-term-care policy or a stand-alone life insurance or annuity policy. So, you’ll definitely need someone to walk you through the prospectus on whether that makes sense or not. But for many people, I think that’s one answer.

The other is, for many people who own a home, they often think of their home as their break-glass asset and the break-glass asset is there’s a healthcare event and I need to tap the equity in my home in order to pay for a long-term-care expense. I think for some people, thinking about a reverse mortgage with a line of credit, a HECM with a line of credit, might be the answer to folks who are worried about having a long-term-care expense and needing money to pay for home health aides or assisted living or skilled nursing. Unfortunately, I think, those are the only options that people have. Medicaid at the worst end for many, self-insurer for those in the highest-income quintile, and then a mix of products maybe, like I said, a mix of hybrid policies and reverse mortgages could do the trick. And the other is, I think, when I think about long-term care is also to think about playing the odds and thinking about, well, how long you might need a long-term-care funding. And for some, the average stay in a nursing home with memory service is around three years. And so, for some people, it may mean not necessarily buying a policy that covers a lifetime of being in a skilled nursing facility, but maybe it’s a three- to five-year policy. And so, there are certain things that you can do, at least perhaps to make it more affordable.

Ptak: I wanted to ask about a program that you’re involved with at the Financial Planning Association that has recently rolled out. It’s called the Elder Care Planning Specialist Program. What are the aims of the program?

Powell: Many advisors, we know they’re aging, their client base is aging, and the needs of that client are changing. And so, among other things, it’s a 10-week course. It’s a hybrid course. It’s a combination of on-demand webinars and then live lectures with the subject-matter experts from that week’s session. And just by way of background, Bob Mauterstock, Annalee Kruger, and myself are the founders of the online program, and we’re taking the students through a series of topics: understanding the aging process; what is the caregiver’s role; what are the legal issues of aging; what kind of documents do caregivers and recipients of care need to have in place such as healthcare proxy or living will or DNRs, and so on. What is it like to deal with clients who have diminished capacity or might be subject to elder abuse? How do you create an end-of-life plan? One of the more important things that advisors have to become involved in is typically structuring and conducting a family meeting where they might, among other things, talk about who the agent will be on a healthcare proxy and who the successor agent will be, who will be on the HIPAA releases. All these topics that, in the past, someone might have talked about, oh, we have a 60/40 portfolio, and we have an expected rate of return of 8%. That might be fine when people were accumulating assets. But as people age, they start to need to think about having it an aging plan in place. And the notion is, you as an advisor and as a client would rather have an aging plan in place far before there’s a crisis. And that’s what this course is designed to do is ultimately help advisors create aging plans for their clients and how to create an elder planning team.

I think one of the interesting things that’s happened of late is, for many years, advisory teams might have an investment specialist, a tax specialist, an estate planning specialist. Increasingly, they will need to create an elder planning team around them—elder law attorneys, geriatric care managers, and so on—become familiar with all the facilities that might be in their client’s area, continuing care retirement communities, skilled nursing, assisted living, become involved with the financial aspects of these facilities and what a deposit means and when someone might get a deposit back on their money. And so, it’s all the elements of what occurs with an aging client from the financial aspects to the emotional aspects we talk. There’s one session, Susan Turnbull, who you may be familiar with, she instructs the students on how to create an ethical will or a legacy letter, and it’s not financial, but it’s important for people who may want to pass down what they valued and what they stood for separate and apart from their money. So, it’s a great course. The price point for FPA members is $1,195. It’s 10 weeks. It’s a very personalized course, and at the end of it, you get, in essence, a template to use with your clients in terms of creating an aging plan.

Powell: Sorry, didn’t mean to go on forever.

Benz: No, no, no, that sounds super helpful. Bob, for our last question, I just wanted to ask, you’ve been focusing on retirement planning for such a long time. As you reflect on the whole landscape, which aspects of retirement planning haven’t gotten enough attention, in your view?

Powell: I think there’s two aspects of it. One is on the saving side. I’ve long thought that when we made the transition from defined benefit to defined contribution, it was the near equivalent of giving people the keys to a car without having them gone through drivers’ ed, and I still feel that way. I think target-date funds have solved some of the problem that people had in terms of how they should invest their money. It certainly helps, but it hasn’t made them necessarily more educated about what they’re doing and why they’re doing it and what the end game is. So, I still think there’s a need for financial education that can help people plan for their retirement far better than what we’ve done today.

And we’ve made great progress. But also, when I think about the results of the Employee Benefit Research Institute, Retirement Confidence Survey and how I think for all the years I’ve been writing about that survey and all the years I’ve been writing about retirement, the percent of people who are very confident about their retirement hasn’t really changed all that much. So, that means I think we haven’t done necessarily a great job of helping people become confident about what they’re doing. So, that’s on the saving side.

Then I think on the income side, again, it’s really a matter of people not having the tools that they need to analyze in a comprehensive fashion what their expenses will be, what their sources of income will be, whether they’ve managed and mitigated all the risks that they might face, what are the right products or what are the right accounts that they should be in? I think we’ve got a long way to go to help people figure out how to create the best plan for themselves, given all the tools that are out there and all the strategies that they could take advantage of.

Benz: Well, Bob, I think we could talk for another hour, maybe two. But thank you so much for taking the time to share your insights with us today. We’ve really appreciated hearing from you and hearing your thoughts.

Powell: Thank you, Christine. Really appreciate the chance to chat about my favorite topic. Thank you.

Ptak: Thanks so much.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. While this guest may license or offer products and services of Morningstar and its affiliates, unless otherwise stated, he/she is not affiliated with Morningstar and its affiliates. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)