I love coming across these research papers from 3rd party sources that confirm what I’ve been saying for the better part of a decade. In June of 2023, BlackRock sponsored and contributed to a research project called, “Paving the Way to Optimized Income”, that looks at different scenarios of people retiring using the standard 60/40 portfolio vs. using annuities in conjunction with their investment portfolio.
I may have been one of the few people who was not surprised by the results. Again, it has been proven that annuities not only improve the safety of a person’s retirement but also the spendable amount of income available in retirement.
In this week’s ATLAS Annuity Newsletter, I’m going to walk you through some of the highlights of this research paper and provide a link to download it in its entirety if you have the desire to read it yourself.
Let’s jump into this…
First, I am completely shocked that BlackRock published this. As far as I know, BlackRock does not offer annuities. So, it appears they are being genuine in wanting people to know the truth. Regardless, I’m glad they published this research paper because BlackRock is a powerhouse in the financial world.
Starting in the Executive Summary, the authors write:
“Financial advice often focuses on boosting personal savings rates and maximizing return on investment during savers’ working lives, known as the accumulation phase of retirement planning. Equally important, however, is the decumulation phase, when households seek to generate sufficient income in retirement to meet their spending needs.”
Here’s another quote mentioned in the research paper from Economic Nobel Prize winner, William F. Sharpe:
“[T]HE INDIVIDUAL’S DECUMULATION PHASE… IS THE NASTIEST, HARDEST PROBLEM I’VE EVER LOOKED AT.”
This is a topic I’ve been talking about for years. There is a huge difference between saving for retirement and spending for retirement. I’ve used the analogy of climbing a mountain – the accumulation phase, saving for retirement, is like ascending the mountain. The decumulation phase, spending for retirement, is like descending the mountain.
I remember reading a story about those who died on Mount Everest and how the vast majority of them died on the way back down! Think about that. All the planning and strategy that went into getting to the top of the mountain, but no real strategy to get back down. In today’s environment, our society is so obsessed with saving and chasing interest rates that they don’t take time to consider what the other side of the mountain will look like when they get there.
It’s my understanding that those who perished on the way back down Mount Everest either ran out of oxygen, which would be like running out of money in retirement by living too long. Or they stayed too long and were trapped in inclement weather, which would be like staying in risky investments too long and watching your money disappear.
Either way, the result was the same. I find it interesting that this is the first thing that BlackRock’s research paper mentions.
The authors continue:
“To do this, savers and retirees must treat retirement as a phase of life rather than a destination and develop a retirement income toolkit made up of multiple potential income sources and strategies that will diversify and increase retirement income.”
You can go back and read my newsletter about cash flow. It serves no purpose to have a big pile of money when you retire if you have no idea how to spend the big pile of money. It’s all about cash flow. And more importantly, guaranteed cash flow.
The authors continue:
“Savers face a wide variety of risk factors throughout their lives, including longevity, declining health, market volatility, behavioral biases, and disparate access to financial guidance. These risks combine and manifest differently over time, but they typically correspond to three broad phases of the retirement planning journey: early career, near retirement, and retirement.”
Let’s look at these emphasized parts one at a time:
This is another topic I have harped on in the past. This is one of the biggest, if not the biggest, risks most retirees will face.
“Longevity is unpredictable, and individuals routinely underestimate how long they will live. In part, this is because each additional year of life increases the likelihood that a person has traits that positively affect longevity (such as good cardiovascular health), meaning one’s life expectancy increases as they age. For example, a woman’s life expectancy at age 65 is 20.7 more years—or living until 85.7. If she reaches age 75, however, her life expectancy is 13.1 more years—or living until age 88.1.7 Mitigating longevity risk is especially challenging because the tools available to address it diminish over time as labor options become increasingly limited and assets are spent down.”
There are 3 questions that no one can seem to answer for me:
- Who killed Jimmy Hoffa?
- Was there a second gunman on the grassy knoll?
- How long are you going to live?”
If anyone can answer any one of these questions, please leave a comment below.
“Asset allocation throughout one’s life, including in retirement, makes a sizable impact on financial security in old age. Individuals routinely overestimate the likelihood of significant downturns in equity valuations, potentially leading to overly conservative portfolio choices during their working years. Market volatility also poses a risk during retirement; returns that are even modestly lower than projected, especially early in retirement, can severely reduce the retirement security of those with overly optimistic expectations. Moreover, although older investors tend to have more investment knowledge and experience than younger investors, research shows that, on average, older investors earn a 3% to 5% lower return on a risk-adjusted basis than their younger counterparts—even accounting for other factors such as a more conservative portfolio in retirement—due to cognitive decline that accelerates notably near age 70.”
This is known as the “Sequence of Returns Risk”. It doesn’t matter what your returns are in retirement, but the order of those returns in retirement. Early losses in retirement can have an extremely negative impact on your retirement over the long term. Most retirees are scared to death of running out of money, so they either become too conservative in their investments, or they are scared to spend their money.
What is the point of sacrificing all of those working years if you’re not going to be able to enjoy the money you have saved???
This is why I take an educational approach at ATLAS Financial Strategies, Inc. No one cares more about your money than you do. You must learn about this stuff!
My comments on that statement are regarding “The Fragile Decade”. That is the 5 years before your retirement and the 5 years after your retirement. This is where market volatility plays a pivotal role. Severe losses in this time frame could have severe negative consequences.
The author continues:
“Three principles for decumulation can help focus this strategy: (1) maximizing spending ability, (2) maximizing spending certainty, and (3) addressing longevity risk.”
I literally feel like I’m writing this research paper…
This is where it gets good!
“Adding guaranteed lifetime income combined with a more aggressive asset allocation (“Strategy 1”) generates 29% more annual spending ability from one’s retirement savings (excluding Social Security) and reduces downside risk by 33% when compared to a standard retirement portfolio of 60% fixed income and 40% equities (“Base Case”). In the first year of retirement alone, this strategy increases spending from retirement savings by 35% as the guaranteed income stream affords individuals more flexibility to spend early in retirement.”
“Incorporating Social Security benefits into our model to analyze total income and spending in retirement underscores the power of delaying retirement and the claiming of Social Security benefits. (We refer to this delay combined with Strategy 1 as “Strategy 2”). A delay from age 65 to age 67 generates the income to support 16% more annual spending than Strategy 1 alone and further reduces downside risk by 15%. In total, then, Strategy 2 results in 22% higher average spending throughout retirement than the Base Case with a 21% decline in downside risk.”
“The increased spending generated by both strategies extends well beyond the average life span, providing a significantly higher spending floor into a retiree’s 90s and beyond.”
Blahahahahahahahahaha! I’m so glad the giant financial company with over $9 trillion, yes trillion, in assets under management finally agrees with the dumb fireman!
I’ve been saying this since 2016 when I started ATLAS Financial Strategies and introduced my “20% More Spendable Income in Retirement” series. As you can tell from the numbers listed above, I was being modest in the claims. I have always known that it was more than 20%, but my marketer and I agreed that throwing around numbers that large could be offputting since they seem unbelievable.
Well, now I have one of the largest financial institutions in the world saying it for me…
In all seriousness, this is an excellent paper provided by BlackRock. I’m glad they produced it and made it available to the public because this is a very important topic.
Here is a link to download the entire report if you would like to read it for yourself:
The remainder of the paper goes on to show the actual examples and other recommendations they believe the government and employers could take to encourage people to acquire guaranteed income streams in retirement.
Having given you a 30,000 ft view of what one of the largest financial institutions on the planet thinks, I would encourage you to watch my landmark video series, “20% More Spendable Income in Retirement” so you can see for yourself how and why this philosophy works for those in, or near, retirement.
Then take the time to see what a customized ATLAS Annuity Strategy would look like for you. All you have to do is find a convenient time by clicking the “Schedule a Call” button in the top right corner.
All the best,