5 Must-Know Statistics About Retirement

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five. This week: five must-know statistics about retirement.

Sitting in for Jeremy Glaser is Morningstar's Christine Benz, our director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: You have five somewhat surprising statistics, in some cases, that you should know about retirement. The first one is 1.5%. What is that?

Benz: That's the percentage increase in cost-of-living adjustments that Social Security recipients will get in 2014. It's reflective of the fact that we've seen gas prices trend down, and while we haven't seen medical costs trend down, we've actually seen the rate of increase decline. Those are two reasons why the rate of increase in cost-of-living adjustments is just about 1.5%--not high, but not particularly low, either.

The other thing to bear in mind is that we are not seeing increases in Medicare Part B premiums for 2014, and we're also seeing deductibles for Medicare stay the same in 2014. It is not as though this increase is giving with one hand and taking away with the other, which we have seen in previous years.

Stipp: Given that this seems like a pretty low rate of inflation, what should I think about the amount of inflation protection that I might want to have in my portfolio?

Benz: I think it's really important to look at the rate of inflation in your own personal basket of goods. If you do have portfolio assets that you're relying on to supply additional living expenses, if you see that your personal rate of inflation is a lot higher than this 1.5%, you might think about adding more explicit inflation protection in that part of your portfolio or, in fact, maybe having a little more in stocks, because stocks, as we know, have the potential to out-earn other asset classes over time.

Stipp: The next statistic, also related to Social Security, is 8%.

<TRANSCRIPT>

Benz: This is the percentage increase that you're able to pick up by delaying receipt of Social Security from your full retirement age until age 70. I am really happy to see that some of these different Social Security strategies are getting a lot more attention. People are really seeing how, if you are able to delay Social Security until later in your life, until age 70 if you can, that you can see a potentially much higher dollar payout during your lifetime.

One way people can sometimes look at this is to look at some of these creative strategies: Couples, for example, can use a lot of different strategies to try to maximize their benefits from the program. One really popular strategy is called "file and suspend," and that's where the higher-earning part of the couple files for Social Security at his or her full retirement age, then suspends immediately, but turns on that benefit for the partner, and then the higher-earning person, or the person who hasn't taken benefits yet, does file again at age 70. This can be a very powerful strategy.

I'm just happy to see this whole area getting a lot more attention, and I know Mark Miller, who's a contributor on Morningstar.com, has written a lot about some of these strategies.

Stipp: 8% is that baseline [return] that I can get if I wait, but the market has done pretty well the last couple of years, better than 8%. What if I just take Social Security early and then invest that money? What do you think about that strategy?

Benz: Well, investors sometimes ask that, and I think that may have been a good strategy, say, five years ago when the market was at a real low point. I think now it's really hard to think about potentially out-earning that 8% on an investment portfolio, particularly given where we are with bond yields currently, as well as where equity valuations are. That 8% looks like a very high mark to me.

Stipp: Especially year after year after year.

Benz: Yes.

Stipp: Speaking of bonds, your next data point is 45%, and that is related to an area of the bond market. What is that?

Benz: That's a category of investments, bank loan funds. That's actually the percentage of increase in asset bases that we've seen in those funds just over the past year.

This bank-loan category, sometimes called the floating-rate category, has been very, very popular, and you can really see why investors have been attracted to it, mainly because these funds tend to be pretty impervious to rising bond yields. A lot of people are very concerned about what rising yields will mean to their bond portfolios.

Floating rate funds actually have the ability to adjust their yields. Their yields keep up with what's going on with LIBOR. That tends to mean that they're pretty well insulated when yields are going up.

My concern, though, is that some of the people buying into this category maybe aren't as clear as they should be on what they're actually getting, and what they're getting is a fair amount of credit sensitivity. I'm afraid that some investors are trading one type of risk--interest rate risk--for another. So they're getting credit risk and they're also getting an investment type that will tend to behave a lot like equities, and when equities are going down, so will bank-loan funds. We saw in 2008, for example, the typical bank loan fund in our database lost about 30% of its value that year.

Stipp: These funds are certainly not something that would be the core of your bond portfolio?

Benz: I don't think so, or certainly not a cash substitute, which I'm afraid some people perhaps have been using bank-loan funds for.

Stipp: Your next must-know statistic for retirees is 112%, and this is related to something we have at Morningstar called Investor Returns, in this case for a specific type of mutual fund. What is that figure? It's a pretty good one.

Benz: Yes, it is. This is what we've been calling the Investor Return capture rate, in this case for funds that are target-date funds geared toward people retiring between 2026 and 2030. Investor Returns attempt to look at the timing of investor dollars in and out of a fund. The goal is to try to see how well the typical investor did in this particular product due to the timing of his or her purchases and sales.

What we see when we look at inventor returns is, unfortunately, a pretty disappointing picture for a lot of categories. But for target-date funds, we tend to see that investors actually out-earn the fund's published total returns, because their timing is really good. I think in the case of target-date funds, one reason they have been so good is that investors are oftentimes investing in these products through a 401(k) plan, so that means dollar-cost averaging, that means their money is going [into the funds] in good markets and bad.

I think it's also beneficial that target-date funds are typically rebalancing back into those unloved asset classes at times when inventors themselves may not feel like doing that. A target-date fund, for example, was probably adding to equities in late 2008, early 2009. That set up their investors for some very good returns in the subsequent recovery.

This is a category that I think we all need to give some credit where it's due, because it does look like investor outcomes in these funds are very, very good--not just for this particular age band, but also across the board for various target-date products.

Stipp: Your last statistic is also a capture ratio of those Investor Returns, but it's a lower one at 71%. What category does that apply to?

Benz: That applies to our total taxable-bond group, and this is a group where we saw very strong flows really continuing until sometime last year, when, despite the fact that we saw equities going up and up and up, we saw lot of investors gravitating to bonds. Unfortunately, you see that investors can mistime their purchases even into a seemingly placid asset class like fixed income.

I think what happened was that a lot of these bond-fund types had very good returns early in the period. Unfortunately, the investor dollars didn't flow in until later on, so investors undermined their own returns by buying late, essentially, into the category. Only recently have investors been flocking back to equities.

Stipp: Very interesting dichotomy on those two figures for sure.

Christine, these are five interesting, and in some cases very surprising, statistics. Thanks of joining me today.

Benz: Thank you, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.