29 November 2021

How To Make Your Money Last In Retirement

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The Problem 

As longevity continues to increase, it gets harder and harder for investors without large fixed benefit pensions (which are becoming rarer and rarer) to come up with a "foolproof" plan for being sure that they do not outlive their money. This problem is compounded by the fact that – as the length of retirement increases – the potential for large-scale inflation over the course of the retirement period grows. In addition, massive changes in the economy can occur over such a long period, leading to unpredictable portfolio returns.

These problems are relatively "new" in that many of our parents did not really have to address them. First of all, there has been a massive increase in longevity (living beyond 90 is increasingly common) without much of an increase in the average time at which retirement commences and this results in a much, much longer expected period of time that has to be financed.

Secondly, there has been (partly for the very reason of increased longevity) a dramatic decline in private defined benefit pension plans. More and more private employers have switched to defined contribution plans such as 401(k)s and have phased out the old defined benefit plans.

There is no easy answer to the problems created by this new situation but there may be some utility in organizing one's thinking and focusing on some of the more important decisions that one will make either explicitly, or implicitly by inaction.

Social Security Timing 

A big issue for many retirees is the question of when to take social security. As a general rule, once full retirement is reached, a retiree can elect to defer social security for a term up to age 70 and will receive an additional 8 percent per payment for each year of deferral.

Many pundits come down strongly on one side or another of this issue. In fact, there are a number of individual circumstances that may vary the result in different cases.

As an example, take an individual entitled to receive $30,000 per year at age 67. If he defers, he foregoes the $90,000 he would have received between ages 67 and 70 but will receive an additional $7200 per year for the rest of his life by waiting. Is it a good decision to wait? An economics professor of mine always asked the question "compared to what?" And that is a big consideration here. Just what will our retiree be doing with the $90,000 if he does not wait? Depending very much on the answer to that question, it can be a good decision or a terrible decision to wait.

For example, our retiree may take the $90,000 and buy an annuity. If he does, he will be essentially exchanging the $90,000 for a lifetime stream of benefits. The only problem is that that stream of benefits obtainable in an annuity will almost invariably be considerably less attractive than the additional $7200 per year (plus inflation) that the Social Security Administration will pay him for waiting. So, for that retiree, the answer is almost certainly that it is better to wait.

As an alternative, our retiree may be one of the very large number of investors who like to keep a large portion of their portfolios in cash or cash-like assets returning a taxable rate of less than 1%. Once again, if our retiree plans to do that with the $90,000, then he is probably better off waiting and getting the higher social security payments.

On the other hand, if our retiree plans to invest the $90,000 in a well-designed portfolio of dividend investments and preferred stocks, it is very possible that he can earn a yield of 7% or more. Thus, by age 70, he may have piled up as much as $100,000 with compounding. At this point, he can earn $6,000 a year in yield, and - while this is less than $7200 - he has the advantage of holding the $100,000. Unless he sets some new records for longevity, he is quite likely to come out ahead.

So, there is no real answer to the question. It all depends upon what the retiree is planning to do with the $90,000 if he or she does not defer social security.

It should be noted that there are other considerations that vary - the health of the retiree, the age of the retiree's spouse, and the spouse's social security situation. A very healthy retiree or one with a much younger spouse who will assume the retiree's level of social security may lead to a situation in which the higher benefit achieved by waiting is collected for 40 or even 50 years. As this becomes more probable, the case for waiting gets stronger.

The Housing Decision 

One of the most important decisions in retirement is housing - the choices between owning and renting, staying and moving, paying off the mortgage or not, etc. Again, individual circumstances vary and lead to different optimal choices. For many retirees, with a home that they have owned for 20 or more years in a metro area with rising real estate prices and a paid-off mortgage, the home may be their most valuable asset. It may be possible to raise a considerable amount of money by selling the home and moving to a less expensive area or a smaller residence.

This decision should be approached with care and there often is not necessarily a big rush. Especially now, homes in desirable metro areas are appreciating in value so that - although delaying a year or two while you research some alternatives may increase out-of-pocket costs - it is also likely to lead to a higher sales price.

Rent or Own 

I have seen some retirees make decisions they regret in this area. Some retirees forget some of the disadvantages they experienced as renters in their younger years. The annoyance of getting repairs arranged, the dilemma of an improvement that would really enhance your lifestyle but that the landlord is unwilling to pay for, the noisy neighbor, and the risk that you may be required to move at just the worst time are all distant memories for people who haven't rented since they were in their twenties.

So, a choice between owning and renting has a lot of "hidden" factors that don't necessarily show up on a spreadsheet. If you are unhappy with a series of rentals and move frequently, moving costs may eat up a lot of your savings.

Where to Live 

Another key consideration is the choice of venue. Some very inexpensive choices are inexpensive for good reasons - in some situations, there isn't easy access to top-notch medical care, and certain "amenities" you have become used to are not available at any price. Then, there are choices that seem idyllic but require flood insurance, expensive fire insurance, and other protections.

On the other hand, there are some wonderful locales with reasonable prices. Living in or near a university town can provide access to a top-notch hospital, great amenities, inexpensive lectures and events, and other satisfactions. Unfortunately, the "secret" seems to be out and prices have begun to move up in some of these locales.

The choice to change the area in which you and your spouse live has to be a joint one and should be considered carefully. You should ideally spend some time in the new location and be sure it really works for both of you. It helps a great deal if you have friends or relatives in the new area and can look to them for guidance and a "soft landing" when you migrate.

The possibility of living overseas is also worth some consideration. I have seen comments by retirees indicating extraordinarily inexpensive housing and other costs in reasonably safe and modern foreign countries. This probably works best if the retiree or the spouse has some "roots" - relatives, friends, work experience, etc, in the new venue. But in some areas, there has emerged a vibrant "ex-pat" community that may introduce one to a group of enterprising and interesting individuals.

Paying Down the Mortgage 

Given current extremely low interest rates, the imperative to pay down a mortgage may not hold. If you can get a long-term fixed, 2.5%, then it is very likely that you will be able to take whatever cash drain is displaced by the decision to continue with the mortgage, and use the funds to earn a much higher return. Again, the decision of whether to pay down the mortgage depends upon the key question "compared to what?" If you are just going to hold the cash in money market funds, then it may make more sense to use the cash to pay down the mortgage.

On the other hand, a well-designed portfolio of dividend stocks can generate a return much higher than the interest rate on many currently available mortgages. You can reasonably build a yield of well over 7% with a combination of dividend-paying stocks, preferred stocks, baby bonds, and closed-end funds. So again, it depends a bit on what a retiree plans to do with the funds made available by continuing or even increasing the mortgage.

Returning to our first topic above, let's consider the case of a retiree planning to pay down a 2.5% mortgage using the $90,000 generated by taking social security at age 67 rather than age 70. It may well be the case that he would be better advised to defer social security, continue with the mortgage and take advantage of higher social security payments at age 70. Again this decision may depend upon expectations of longevity and spousal longevity.


It is generally best to manage both social security and mortgage issues in such a way as to generate cash and to then use the cash to invest in a well-designed portfolio of high dividend stocks. This portfolio will generate a better return than the alternatives of delaying social security or paying down a mortgage. However, for retirees who are unwilling to invest in this manner, there may be situations in which it is better to defer taking social security in order to generate higher yearly payments in the future and/or to consider paying down a mortgage.

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