CHICAGO—Steve Vernon is an expert on numbers—but please do not ask him for your “number”—that is, the amount you need to save to ensure a successful retirement.
Vernon thinks that is the wrong question. A leading retirement educator, by training he is an actuary—meaning he is an expert in measuring and managing risks and uncertainty.
In a new book, Vernon lays out a strategy for developing retirement security that begins by thinking beyond your “retirement number.” Instead, he focuses on how to cover basic living expenses by setting up a series of “retirement paychecks” that are guaranteed to last the rest of your life. Any remaining savings are the gravy—use them for discretionary expenses like travel and entertainment.
Vernon worked for years as a consultant to large corporate retirement plans before starting his own California-based firm that provides consumer retirement education. He is a research scholar at the Stanford Center on Longevity, and writes a column for CBS MoneyWatch. In “Retirement Game-Changers: Strategies for a Healthy, Financially Secure, and Fulfilling Long Life,” he focuses on helping older workers navigate the critical decisions they need to make as they transition from employment to retirement.
The challenges are mounting. Rising longevity, declining availability of traditional defined-benefit pensions, and rising healthcare costs make navigating retirement more complicated than it was for previous generations.
But Vernon’s formula is straightforward. “The big picture is to get a feel for what your basic necessities are each month, and your discretionary expenses,” he told me in an interview. “Then, you want to ensure an income that exceeds your basic expenses.”
Many retirement planning software programs and advisers focus solely on income generation—very often this is expressed using the rule-of-thumb that you must replace 70 to 80 percent of pre-retirement income with retirement income. But a careful look at expenses is warranted, too, Vernon thinks. “The rule of thumb doesn’t take into account the ways that your living expenses can change during the course of a long retirement,” he said. “It also assumes that you won’t, or can’t, make any changes in your lifestyle.”
Instead, Vernon recommends evaluating whether it is possible to reduce spending. “Ask yourself what you’ll need to be happy in retirement,” he said.
Next, match up your projected living expenses with a series of what he calls “retirement paychecks.” Here is a look at the key paycheck types, along with Vernon’s tips on how to manage them.
For most retirees, Social Security will be the foundational paycheck—especially for those who can delay their claim beyond full retirement age to maximize monthly benefits.
Vernon subscribes to the “money ahead” approach to claiming strategies, which goes beyond the “break-even” point many people want to analyze—that is, the age when their total lifetime benefits received would be equal to using a different claiming age. Taking benefits early works out to your advantage if you do not live to the break-even age. You also come out ahead if you delay benefits and then live beyond the break-even point. The losing scenario is delaying benefits and dying before reaching the break-even age.
In most cases, a thoughtful money-ahead claiming strategy can boost lifetime income by $100,000, Vernon estimates.
Additional paycheck sources can include any defined benefit (DB) pension you might have coming. Most state and local government workers still receive traditional pensions, but they are on the decline in the private sector. If you do expect a DB pension, ask your employer for an estimate of the future monthly benefit. Many plans also offer online calculators these days that let you estimate how much your benefit will increase by delayed claiming.
Finally, if your employer offers a lump sum benefit, Vernon urges you to resist the temptation. “Most people will receive more lifetime income by electing the monthly annuity payments,” he said.
Annuities and Reverse Mortgages
If you still face a paycheck shortfall after factoring in Social Security and pension income, Vernon recommends checking into a low-cost, no-frill annuity from an insurance company, such as a single premium income annuity. Vernon even thinks that a reverse mortgage, structured to make monthly payouts, can make sense. Taken together, these checks should match monthly nondiscretionary expenses.
Get an Early Start
No matter how you build your retirement paycheck portfolio, it is critical get an early start, Vernon said. “We all know there are medical procedures you’re supposed to do when you turn 50, and there is a similar set of financial diagnostics you should do about five years before you retire—or by the time you turn 60,” he said.
A realistic assessment, he thinks, will prompt many to revise their plans. “A lot of people will realize they need to try to work longer, or reduce their standard of living,” he said. “The choices are not easy, but people should be thinking about it.”
By Mark Miller