Making Financial Decisions for Retirement

September 11, 2009

Jean SetzfandDirector, Financial Security

AARP

About AARP

• Nonprofit, nonpartisan membership organization for people 50+

• 40 million members (1 in 4 voters in 2008 were AARP members)

• Offices in all 50 states and the District of Columbia, Puerto Rico, and the U.S. Virgin Islands

• Vision: A society in which everyone ages with dignity and purpose, and in which AARP helps people fulfill their goals and dreams.

Background

• Given the new retirement realities, change is needed to improve income management in retirement

• AARP applauds the new policy ideas generated

• Consumer messaging and education is also needed

• AARP commissioned Center for Retirement Research at Boston College to research consumer financial decision making in retirement

Key Financial Decisions in Retirement

• When should I claim Social Security?

• Should I annuitize my retirement assets?

• How should I allocate my assets?

• What should my rate of withdrawal be?

• What should I do with my home?

Claiming Social Security

• What Most People Do:– Claim as soon as they’re eligible (39% claim at age 62)

• Conventional Wisdom:– Delaying retirement may be risky

• Suggested Guidance:– Delay retirement and claim Social Security benefits

until your normal retirement age

Annuitizing Retirement Assets

• What Most People Do:– Avoid annuities

• Conventional Wisdom:– Little attention paid to annuities

• Suggested Guidance:– Including Social Security and pension income,

annuitize enough to cover your recurring living expenses. Consider inflation-protected annuities

Asset Allocation

• What Most People Do:– Place large portion of assets in short-term deposits

• Conventional Wisdom:– Rebalance in favor of bonds as you near retirement

• Suggested Guidance:– Depends on your individual risk tolerance. In general,

moderate your risk as you near retirement to protect your retirement savings

Rate of Withdrawal

• What Most People Do:– Not yet obvious

• Conventional Wisdom:– Don’t withdrawal more than 4%

• Suggested Guidance:– Withdrawal rates should respond to realized returns

Home Decision

• What Most People Do:– Payoff mortgage by retirement. Retain ownership and

sell at ill health or death of a spouse

• Conventional Wisdom:– Conflicting guidance around mortgages

• Suggested Guidance:– Payoff mortgage by retirement. Reverse mortgage

may be appropriate for some, but consider the product’s significant fees

Research Discussion Event

• “Providing Income for a Lifetime: Bridging the Gap between Academic Research and Practical Advice” – Anthony Webb, Center for Retirement Research at Boston College

• AARP Solutions Forum September 14, 20099:30 to 11:30 am AARP Brickfield Center (601 E Street NW, Washington, DC)To register: www.aarp.org (search “Solutions Forum”)