Enhancing Retirement Success Rates in the United States

Leveraging Reverse Mortgages, Delaying Social Security, and Exploring Continuous Work

Chia-Li Chien

• Publisher: Palgrave Pivot
• Year: 2019
• Print ISBN: 9783030336196
• eBook ISBN: 9783030336202
• Topic: Business
• Subtopic: Financial Services
• Index: Business

This book and the underlying research address the questions: "How successful are U.S. retirees at sustaining assets from retirement to death?" and "What retirement strategies will enhance their ability to live a successful retirement?" Taking a hard look at real-world retirement statistics from multiple government surveys to answer those questions, it calculates the effects of specific strategies on retirement sustainability. It also discusses the background to prior retirement planning research and describes the three research groups used: 1) determining the success rates of the base population considering only social capital annual income and distributions from portfolios of financial assets, 2) adding the strategy of home equity conversion mortgages, and 3) increasing annual income through delayed social security benefit claiming and continuing work after retirement. The book then examines and compares the results for each to determine whose retirement will be most enhanced by the strategies. Lastly, it presents case studies applying research to real-world financial planning cases.

© The Author(s) 2019

C.-L. ChienEnhancing Retirement Success Rates in the United Stateshttps://doi.org/10.1007/978-3-030-33620-2_1

Begin Abstract

1. Introduction to the Research Study

Chia-Li Chien¹

(1)

Financial Planning Program, California Lutheran University, Thousand Oaks, CA, USA

Chia-Li Chien

Email: [email protected]

Abstract

Successful retirement per prior research is not outliving or outspending the portfolio of financial assets. Background and introduction to the enhanced retirement strategies of home ownership conversion to income stream and increases in social and human capital assets as they facilitate successful retirement are provided. Three research models (baseline, HECM, delayed Social Security and/or continuing employment) are introduced. Scaling factors, research questions, significance of the study, delimitations, and implications for financial planning practitioners are discussed.

Keywords

Success ratesHome equity conversion mortgagesHECMDelayed social security claimingHuman capital assetsScaling factors

End Abstract

Retirement Planning Reality

In a perfect financial world, a person’s financial life can be viewed as a bell curve where the upward slope is the accumulation stage, and the downward slope is the distribution stage (see Fig. 1.1). Let us assume one starts working at age 20 and consistently saves toward retirement from a salary that consistently increases over time. There is no employment interruption during the accumulation stage. At the peak of the bell curve, one has enough saved in the portfolio of financial assets, is ready to retire, and starts spending down the portfolio. The person spends a consistent amount during the distribution stage. All financial assets are spent by the precise time of death.

Fig. 1.1

Accumulation and distribution stages

(Source Author’s illustration)

Unfortunately, this is not a perfect financial world, and precious few people, if any, experience a financial life in a perfect bell-shaped curve. For starters, life is full of situations that derail retirement savings and force overspending during retirement. During the accumulation stage, adjustments can be made. But once the distribution stage is started, the likelihood of changing course is limited. Retirees face the challenge of turning their portfolio of financial assets into a stream of income during the distribution stage.

There are two common issues retirees must consider. First, the length of retirement can be greater than anticipated, with retirees living longer due to modern medicine and better lifestyle choices. Second, retirement income outside of Social Security benefits may be limited (Pfau, 2017). A retiree’s measure of success is to not outlive or outspend the portfolio of financial assets.

Research on retirement success rates often focuses on the portfolio of financial assets, which includes both qualified and nonqualified account holdings. However, retirees tap into all their assets to manage their retirement expenses. Housing is often the largest asset a retiree possesses—not the portfolio of financial assets (Lichtenstein, 2012; Tomlinson, Pfeiffer, & Salter, 2016). Furthermore, the primary source of income is the Social Security retirement benefit rather than distributions from a portfolio of financial assets (Pension Rights Center, 2017). Therefore, planning for retirement income and evaluating its success should include more than just distributions from a portfolio of financial assets.

This research uses terminology found in the retirement balance sheet (Pfau, 2018) as illustrated in Table 1.1. Assets are on the left side of the retirement balance sheet compared to liabilities on the right. Available asset sources for retirees consist of human capital assets , financial portfolio assets, social capital assets , home equity assets, real estate (rental) assets, and direct business ownership assets. The portfolio of financial assets is limited to qualified and nonqualified account holdings (Pfau, 2018). Most of the past research focuses on determining safe withdrawal rates from the portfolio of financial asset, one of the retirement assets which are shown in Table 1.1. Refer to the Definition of Key Terms at the beginning of the book for clarification of terminology.

Table 1.1

Retirement balance sheet

Assets	Liabilities
Human capital assets	Fixed expenses
Continuing career	Essential living needs
Part-time work	Taxes
	Debt repayment
Home equity assets
	Discretionary expenses
Portfolio of financial assets	Travel and leisure
Checking/savings	Lifestyle improvements
Brokerage
Retirement plans	Contingencies
Insurance and annuities	Long-Term Care
	Health care
Social capital	Other spending shocks
Social security
Medicare	Legacy goals
Company pension	Family
Family and community	Community and society
Rental real estate assets
Business assets

Source Author’s drawing based on retirement balance sheet (Pfau, 2018)

Gaps in Past Retirement Planning Research

The idea of “portfolio success rates” emerged from the Trinity study conducted by Cooley, Hubbard, and Walz (hereafter called CHW ) that was published in the Journal of the American Association of Individual Investors February 1998 issue, titled “Retirement Spending: Choosing a Sustainable Withdrawal Rate .” The study calculated success rates of varying portfolio strategies (Pfau, 2018). CHW or the Trinity study was followed up by subsequent retirement research, leveraging the calculation method in the original study to answer research questions such as what is the safe withdrawal rate for retirees , or should retirees consider the sequence of the returns when performing withdrawal calculations. The calculation method in CHW determined the retirement success rates. How the success rates were defined in CHW is discussed in Chapter 2.

Prior research found that for salaried worker households in the US population, the largest assets were home equity assets (Lichtenstein, 2012). Figure 1.2 illustrates the different types of assets owned by salaried worker households and gives us a glance at potential assets to consider from the retirement balance sheet when planning for retirement.

Fig. 1.2

Past study: asset ownership in dollar value

(Source U.S. Census Bureau’s 2008 Survey of Income and Program Participation [SIPP] Wave 4, calendar year 2009 [Lichtenstein, 2012]. Each asset category shown is the median of the population assets)

Home ownership is an American dream. Individuals or households who own their own homes and are otherwise qualified have the option during retirement to apply for a reverse mortgage to generate income from home equity assets. Home equity assets are the assets with the highest value for most American families (Lichtenstein, 2012). Tomlinson et al. (2016) noted that “Housing, as a percentage of wealth, is even more substantial for some retirees” (p. 28) when compared to other assets in the retirement balance sheet. However, many retirees and practitioners may not understand how one can use home equity assets as a part of retirement income.

In addition to the portfolio of financial assets and home equity assets in the retirement balance sheet, social capital assets , human capital assets , business equity assets , and real estate assets may be considered to fund retirement. Social capital assets include Social Security retirement benefits, Medicare, and company pensions. The present value of lifetime income from Social Security retirement benefits is an example of social capital assets (Pfau, 2018). In 2015, 54.1% of males and 60.8% of females (SSA, 2017a) claimed their Social Security retirement benefits before reaching full retirement age (FRA). When individuals claim before their FRA, they take a permanent percentage reduction in their primary insurance amount (PIA). For most of the retirement population, Social Security retirement benefits are the primary ...

Table of contents

• Cover
• Front Matter
• 1. Introduction to the Research Study
• 2. Prior Research Review and Overview of Enhanced Retirement Strategies
• 3. Research Methodology
• 4. Results: Establishing a Base
• 5. Effect of Adding HECM to the Base
• 6. Effect of Delaying Claiming Social Security Benefits and Continuing to Work
• 7. How to Use This Research
• Back Matter