The retirement researcher and author discusses the benefits and challenges of working longer, the health of Social Security, and what longevity means for retirees' plans.
Our guest on the podcast is retirement specialist and author Steve Vernon. Vernon is president of Rest-of-Life Communications and a research scholar at the Stanford Center on Longevity, where he conducts and directs research on retirement planning and behavioral economics. He is also the author of several books on retirement planning, including his latest, Don't Go Broke in Retirement and Retirement Game-Changers. In addition, Vernon writes a regular column on retirement planning for Forbes. He previously helped large employers design and manage their retirement programs. Vernon retired as vice president and consulting actuary with the human resources consulting firm Watson Wyatt Worldwide and also consulted to Mercer. He graduated from the University of California at Irvine with a double major in mathematics and social science.
Background
The Role of Work
"The Question Many Pre-Retirees and Retirees Will Need to Answer," by Steve Vernon, Forbes, Aug. 25, 2020.
"Redesigning Retirement and Human Resource Programs to Support Longer Lives," by Steve Vernon, Stanford Center on Longevity, third-quarter 2019.
"How To Find Work (After Retirement)," by Steve Vernon, CBSNews.com, March 27, 2013.
"Good News for Older Workers Seeking New Careers," by Steve Vernon, CBSNews.com, April 27, 2015.
Social Security Program Health
"The 2020 OASDI Trustees Report," Social Security Administration, April 22, 2020.
"No, You Won't Lose All of Your Social "Security Benefits," by Steve Vernon, Forbes, April 22, 2020.
Social Security Claiming Strategies
"Boost Your Risk-Protected Retirement Income With a Social Security Bridge Payment," by Steve Vernon, Forbes, May 26, 2020.
"Does Delaying Social Security Really Deliver an 8% Return?" by Christine Benz, Morningstar.com, May 14, 2020.
"When to Take Social Security: The Complete Guide," by Amy Fontinelle, Investopedia.com, Nov. 24, 2019.
"Introducing the Social Security Claiming Decision," by Wade Pfau, Retirement Researcher.
"How the Retirement Estimator Works," Social Security Administration.
"How to Calculate the Break-Even Age for Taking Social Security," by Ken Moraif, Kiplinger, April 7, 2020.
Retiree Investment Portfolio/Holistic Retirement Income Planning
"A Portfolio Approach to Retirement Income Security," by Steve Vernon, Stanford Center on Longevity, July 2015.
"How Much Should Older Workers and Retirees Invest in the Stock Market?" by Steve Vernon, Forbes, March 3, 2020.
"Here's a Foolproof Way To Create Retirement Income for the Rest of Your Life," by Darla Mercado, CNBC.com, June 26, 2020.
"Stanford Analyzed 292 Retirement Strategies to Determine the Best One--Here's How It Works," by Kathleen Elkins, CNBC.com, Aug. 6, 2019.
Housing
"Don't Make This Costly Retirement Planning Mistake," by Steve Vernon, Forbes, June 11, 2020.
"Planning Your Retirement: 10 Ways to Reduce Housing Costs," by Steve Vernon, CBSNews.com, Sept. 4, 2013.
"How Covid-19 Will Shape the Future of Senior Living. New Models of Care, More Aging in Place," by Reshma Kapadia, Barron's, May 29, 2020.
Longevity/Mitigating Longevity Risk
"Rich People Don't Just Live Longer. They Also Get More Healthy Years," by Heather Murphy, The New York Times, Jan. 16, 2020.
“The Risk of Outliving Your Assets Is Real And Defending Against It Is No Small Task," by Martin Pelletier, Financial Post, June 17, 2019.
Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance for Morningstar.
Jeff Ptak: And I'm Jeff Ptak, global director of manager research for Morningstar Research Services.
Benz: Our guest on the podcast today is retirement specialist and author Steve Vernon. Steve is president of Rest-of-Life Communications and a research scholar at the Stanford Center on Longevity, where he conducts and directs research on retirement planning and behavioral economics. He is also the author of several books on retirement planning, including his latest Don't Go Broke in Retirement and Retirement Game-Changers. In addition, Steve writes a regular column on retirement planning for Forbes.com. He previously helped large employers design and manage their retirement programs. Steve retired as vice president and consulting actuary with the human resources consulting firm Watson Wyatt Worldwide and also consulted to Mercer. He graduated from the University of California at Irvine with a double major in mathematics and social science.
Steve, welcome to The Long View.
Steve Vernon: Christine, thanks for having me.
Benz: Let's start with this pandemic, which has had a disproportionate impact on older adults from a health standpoint and the economic effects have also been significant. The unemployment rate for older adults is running higher than it is for the rest of the population. About 7% of people between the ages of 55 and 70 have lost their jobs compared with less than 5% of workers between the ages of 18 and 54. What's driving higher unemployment rates among older adults in your view?
Vernon: What happens in downturns is that older adults sometimes are the most expensive workers and if a company needs to downsize, older workers become targets. That's one phenomenon. And it's a shame because the age at which you retire really will influence your ultimate retirement security. It just means that older workers really need to redouble their efforts trying to maintain their employment.
Ptak: Working longer is one of the single most impactful things that pre-retirees can do to help ensure that their retirement plans come together, and you have a whole chapter about that in your latest book. But working longer has long been the domain of wealthier, better-educated people. My question is, do you think the pandemic will show that to be the case even more starkly?
Vernon: I'm afraid so, Jeff. This pandemic has hit blue-collar workers really hard, whereas many white-collar workers can continue to work virtually. And so, the analogy I've heard is that everybody is in the same storm, but they're not in the same boat, and I think that's appropriate. It's just tougher for people who are in the service industries or blue-collar workers. They've been hit really hard.
Benz: You mentioned virtual work and I guess maybe that's a more positive flip side of what we've been talking about. More people working from home might make it easier for older adults to stay employed longer assuming that their jobs lend themselves to that?
Vernon: Right and I'm doing that. My colleagues are all working virtually. And it actually makes it easier to work. So, that's a blessing in that respect.
Ptak: What advice would you give older adults who are still working, or perhaps looking for work, about how to get and stay employed? How can they enhance their attractiveness to their employers or perspective employers?
Vernon: There's a number of things that older workers could do. Keep your skills up-to-date, network like crazy, learn how to navigate the virtual world if you're a white-collar worker. All of these are easier said than done, but this is the hard work that we face is that we just have to look for all kinds of ways to maintain our employment. And the last piece of advice is, don't give up. It's so easy to get discouraged and just give up and say, “All right, I'm just going to consider myself retired.” But, I like to say I would work as a greeter at Walmart if I needed the income. So, it's just part of the landscape today.
Benz: Are there any creative ideas that you've seen people take advantage of to stay employed longer where maybe they don't, for whatever reason, want to stick it out in their more highly paid career, but they do want to continue to earn an income? Are you seeing people experiment with different patterns of continuing to work, maybe with what are called "encore careers"?
Vernon: Yes, encore careers, bridge jobs, these are all creative ways to continue working. And I'll put one idea out there: Suppose you're working for an employer and you like working there and they like you, you can approach them to do more contingent work, part-time work, or seasonal work. If they trust you and you trust them, having a contingent workforce that's a little more flexible actually has advantages from the employer's perspective as well. And what we see in survey after survey of older workers, people in their 60s, they want to keep contributing and they want to keep working and they might need the money for financial reasons, but they don't want to work at the same intensity or the same pace they did during their career. I think this is actually one opportunity where older workers can downshift and serve as mentors and institutional knowledge without working at that same intensity.
Benz: Let's just define those terms. "Encore career" was one that I mentioned and maybe you can talk about what that means. And then, you also mentioned "bridge work" and I'm curious to know what that means.
Vernon: An encore career is where you've wound up your regular career, but you still have many years of creativity and productivity ahead of you, and you build on your experience, but you go off in a different direction. I'm an example of what you could call what I'm doing an encore career is that I had a 30-year career as a consulting actuary, helping large employers design and operate their retirement plans, and then I went off in the direction of writing and researching on how individuals can prepare for retirement. So, I built on my experience, but I just went into a different direction. And like I was saying earlier, I have more flexibility and I'm helping people. These are all elements of encore careers where you're building on your lifetime of experience and your contacts. And often you go into a direction where you're helping people and that can be very gratifying. So, that's an encore career. And those are intended possibly to go on for another 10 or 15 or 20 years. I've been in my encore career now for 14 years. That's intended to be really a more indefinite career.
Whereas a bridge job--say you're 63 years old, and you think that you might want to wait until 66 to retire because that's when, for current people, your Social Security full retirement age is. So, you think, “I need a job for three more years.” And you find some kind of job that will let you just work temporarily for that period of time. It's a cousin of the encore career. They are all examples of situations where you're just working a little differently than you did throughout most of your career.
Ptak: Let's shift gears and maybe we will tap your expertise on Social Security. For most older adults, Social Security is their most significant source of retirement income. The recently issued Social Security Trustees Report projected that the combined trust funds for Social Security retirement and disability benefits would be exhausted in 2035. The question is, how worried should retirees and pre-retirees be about this? And maybe in answering this you can give some context, perhaps by describing what percentage of Social Security benefits come from the trust funds?
Vernon: Jeff, thanks for asking that because that's an important question. And the reason that's important is that people like me and other analysts continually say that a good strategy is to delay taking Social Security benefits because that will optimize your lifetime income. And a natural fear people have to adopt that strategy is the fact that the trust fund might be exhausted in 2035.
The first thing I want people to know is that the trust fund is just a supplemental source of funding for Social Security benefits, and it funds about 20% of overall retirement checks that are going out to retirees. And the bulk of the funding for Social Security comes from FICA taxes that the government collects from current workers. And if the Social Security Trust Fund becomes exhausted--first of all, right now there isn't much specificity as to what will happen--but if it becomes exhausted (and I think that's very unlikely, by the way), but let me at least go through that scenario. If it becomes exhausted, then the benefits could be paid only from the amount of the FICA taxes that are being collected from the workers at that time. Current beneficiaries would receive about a 20% haircut in their benefit. So, that's the worst case scenario as far as we know, and that assumes that Congress does not act to shore up Social Security, and that whoever is interpreting the vague law just decides the FICA tax revenues are what now supports, in total, the retirement benefits.
Now, let me go into the implications for people in their early to mid-60s now who are trying to decide whether or not to delay Social Security. And the point I'd like to make is that if you decide to start Social Security early because you are worried about the trust fund being exhausted, that's not going to exempt you from the consequences. You'll still get your benefit reduced. I think that having a higher benefit that gets reduced is better than having a lower benefit that gets reduced. That's the simple way of saying it. But I've done the math that says that even if their benefits are reduced 20% in 2035, delaying your Social Security benefit is still the best strategy. And I've done that math assuming that benefits will be reduced. It's still a good idea to delay your benefit. It's still a good idea to set up a Social Security bridge strategy and what that strategy is, is using a portion of your savings to delay Social Security, and you might live off that savings while you're delaying your Social Security benefit. And so, delaying Social Security is such a good deal that even if there's a 20% reduction in benefits in the future, you're still better off setting up some kind of a strategy to delay starting your benefits.
Benz: We want to follow up and ask some specific questions about Social Security strategies. But getting back to that trust fund, which a lot of people might look at and be worried about, the idea of it being exhausted in 2035, that doesn't factor in the pandemic. Let's just discuss the implications of the pandemic of this current downturn for that trust fund. It doesn't seem like it would be a plus.
Vernon: You're right, Christine. And actually, it's accelerating that possible trust exhaustion date. And I've seen analyses saying 2029, 2030. That's almost around the corner from us. So, yes, the pandemic is making that worse.
Ptak: What about President Trump's payroll-tax holiday proposal? What implications would that have for Social Security's funded status?
Vernon: I think that's a bad idea to tell you the truth. I can't see how having a payroll-tax holiday would increase Social Security's finances, and my concern is that it will only undermine financial support for Social Security. And plus, a payroll tax only applies to people who are working, and those people don't have as many problems as people who aren't working. People who aren't working really need the help. And they aren't paying payroll taxes because they aren't earning income. So, it's just hard for me to see the benefit of that idea.
Benz: To follow up on your comment that people who are approaching retirement shouldn't delay filing in the hope of protecting themselves against future benefit cuts. How about people who are, say, 20 years from retirement? Should they think about giving their benefits a haircut to account for potential adjustments to the program? Or how should they approach that?
Vernon: As an individual, if you're 20 years away from retirement, that's actually long enough in the future that we just don't know what will happen with Social Security, and this whole the way the trust fund that will have panned out by the time you're retired. It's hard to make generalizations right now other than to look for ways to continue being employed in your later years. So, all the strategies we're talking about will apply to that person in 20 years, and it will probably still be a good idea to delay your retirement. Just keep your radar out for ways to continue working. If you really believe that Social Security benefits will be reduced, you might increase your retirement savings to make up for those benefits that you think you might lose. That person who is 20 years out can really set themselves to be in a better place 20 years from now.
Ptak: What would you say to those people who might be inclined to file earlier than they might have otherwise planned to because they want to start benefits before any changes to the program go into effect? Do you think that's rational?
Vernon: I don't agree with that strategy, Jeff. When you look at how Social Security has been changed in the past, it was always for either prospective retirees, people who retired in the future. The changes didn't apply to whether you had started your benefit or not. It really applied to your age and your year of birth. And the legislators have actually tried to say we want to affect people the most who are the farthest away from retirement and we don't want to try and put up some kind of incentive to people to rush to file. If you look at how legislators have made changes in the past, they really don't want to drive people to file early. The changes are applying to everyone in a certain year of birth or later.
Benz: Your book Don't Go Broke in Retirement devotes a lot of attention to maximizing income from sources like Social Security. Do you have any favorite tools or calculators that you recommend retirees, pre-retirees use to project their future benefits and model out optimal filing dates?
Vernon: Sure, Christine, and let me take that in two steps actually. The first step is learning what your Social Security benefit might be at various ages. And actually, the Social Security Administration, ssa.gov, has modeling tools where you can see what your benefit might be at various times in the future and it's the MySSA as an account you can set up. That tool actually uses your entire pay history in projecting your retirement benefits. So, it's the most accurate modeler in my opinion for just determining what your benefit might be at various claiming ages. Now, that's step one.
What Social Security does not do is help you analyze, which might be an optimal claiming age. And step two is going to some system that will help you determine an optimal strategy. The input to these optimizing systems are the estimates that you get from ssa.gov. So, step one, get your estimates from ssa.gov. Step two, take them to an optimizer tool. My favorite tool is a tool called Open Social Security. It's free. And what it does is, you input a few items, like your date of birth and your estimated benefit from ssa.gov, whether you're married or not, information about your spouse. And then, it will show you an optimal strategy for you. That's my favorite tool just because it's pretty easy to understand and it's free. There are other tools out there that you have to pay for, and they give you more information. And I think those are good too for people who have the money to spend. They're not very expensive.
I think my overall point of view is that Social Security for the vast majority of workers is their largest source of retirement income. It's well worth their time and their money if they want to buy a system to figure out an optimal strategy. I heartily recommend anybody trying to figure out an optimal strategy for claiming their Social Security benefits.
Ptak: You're using the term “optimal strategy.” It triggers a question: how settled is that concept in the literature or just practically speaking? Those sound like very, very helpful tools and websites, especially given the fact that they're free. But is there still debate about what that optimal strategy looks like?
Vernon: It's kind of nuanced answer--is that if you look at just the concept of delaying, the list of respected researchers who advocate that is long and you have people like Laurence Kotlikoff, Bill Sharpe, Wade Pfau, Joe Thomlinson, Jim Mahaney, and I'm forgetting others, but the list is long. I don't know of any respected researcher and writer who says it's a good idea to claim early.
Now, let's get to nuances, and there can be minor disagreements there, like, what do you do if you're married and you have a spouse; what do you do if you're in poor health? And now it’s--well, the optimal age used to be age 70, but if you're in poor health, some people might say it's 67 or 68. So, now, we're getting into nuances. I just wanted to wrap up by saying that the vast majority of respected researchers saying delaying is a good idea, and then once you get into some specifics with your circumstances, there can be situations where, for example, it might make sense for your spouse to claim early and you delay, or the other way around. And also people in poor health might not want to delay all the way to age 70.
Benz: Sometimes I talk to pre-retirees or retirees and they talk about break-even analysis for Social Security. Can you describe what that means and also address another question that I sometimes get, which is: can I potentially outearn the pickup in benefits that I get from delaying Social Security by investing in the market? And I usually try to tell people that that's not a great idea, but let's just talk through those two things: break-even analysis plus investing in the market.
Vernon: Christine, thanks. Those are great questions and I've thought about them extensively. I would love to chat about it. First, let's talk about break even. And the idea there is that suppose you started at age 62 and you want to compare to starting at age 66, a break-even analysis says what is the cumulative amount of benefits that you've received so far? So, if you started at age 62, you've got your cumulative benefits piling up, whereas at age 66 they aren't starting until age 66. At some point, like at age 67, your cumulative benefits are still higher if you had started at 62 compared to that person who started at 66. But the age 66 starter is having a higher benefit, so they're catching up in the cumulative sense. The idea is, at what point does your lifetime benefits go ahead if you started at age 66 versus starting at age 62?
And that's the break-even point: is how long do you have to live to make delaying starting your Social Security benefits the smart move? And the yardstick they're using is the lifetime benefits you've received so far. And it depends on whether you're comparing starting at 62 versus 66 or starting at 62 versus 70. But it used to be that starting at 62 versus 66, 78 was the break-even age. And then, starting at 62 versus 70, I think it was age 82 or 83. It's been awhile since I've looked at that because actually that break-even analysis has gone out of favor. I don't know why because I think it's interesting tool. Let me just pick that apart a little bit. If the break-even age is age 78, the vast majority of people in their 60s are going to live beyond age 78. Yes, some won't but most of them will. So, the odds are good that delaying from age 62 to 66 is a good strategy.
Now, let's look at thinking about delaying between age 62 and 70, and if the break-even age is 82 or 83, even there, most people are going to live longer than that. But it says to me if you're really worried, particularly if you're in poor health, maybe a compromise is starting at age 66 or full retirement age, which is what it is right now, or age 67.
When I talk about delaying benefits, it's not an all or nothing choice. Age 70 might be the optimal age, but you're still going to get huge benefits if you're in your early 60s and you decide to delay until 66 or 67. That's a good compromise. The whole concept of break even, I think, is a good one--a good analytical technique and it's just one way that you can come to a decision as to what might make sense for you.
Now, let me go, Christine, to your second question. To get a little more specific, if you're deciding between starting at age 62 and age 66, for example, and you don't need that money--you started at age 62 and you decide “I'm going to invest that money.” Then is that a good strategy? I've actually done analyses on this one and my analyses show that to make starting at age 62 and investing your benefits a good strategy, you've got to go all in in the stock market and you've got to get returns that are averages that you've seen historically--8%, 9%, 10%. If someone says, “I'm going to claim early and invest that money,” one of my answers is: Do you have any money invested in bonds? Because if you do, that's a loser.
And if you want to make that strategy work, you've got to go all in on the stock market. And Social Security benefits, delaying that is a risk-free investment, whereas we know the stock market has risks. For me, the idea of starting early and investing it doesn't make sense to me. But if you decide to go ahead with that, then my advice is then you got to go all in on the stock market to have a chance of making that a beneficial strategy.
Ptak: Maybe to go back to the overall health and durability of the system itself, what do you think the most likely fixes for Social Security are? Or does it completely depend on who is president and the composition, and I suppose legislative priorities of Congress?
Vernon: Well, Jeff, you've said a mouthful there. Yes, the eventual solutions are going to depend on who is in power. I do look back though. Last time we had a funding crisis in Social Security was 1983. And there we had a Republican president, Reagan, and a Republican Senate and a Democratic House. And they adopted a compromise package which had some tax increases and some benefit reductions. And to me, that's actually the example that we should be looking at. Because when you're looking at balancing the system financially, it is going to take some combination of tax increases and benefit reductions, and there's just no way around that.
When you look at the proposals, there have been plenty of proposals on how to improve the finances of Social Security. And predictably, the Republicans all have a package of benefit reductions and predictably, the Democrats all have a package of tax increases, for the most part. That seems to be their opening positions. And I dearly hope that whoever is in charge at that time can forge some kind of a bipartisan compromised solution, because I think that's really what we need to do.
Benz: Switching over to portfolio structure, which you referenced--one thing that seems to make your approach to retirement portfolios quite different from some others is that you're not a big believer in retirees holding stand-alone bond funds or cash. It doesn't seem like you'd be a big believer in the bucket strategy. You think retirees can reasonably hold target-date funds, balanced funds, or even equity index funds and just call it a day. Can you discuss your general thesis there in terms of what retiree portfolios should look like?
Vernon: Let me start though by saying that the strategies in my book Don't Go Broke in Retirement are really targeting middle-income retirees. And my definition of that is pretty simple. It's just if you have under $1 million in retirement savings, and by the way, that describes the vast majority of older workers. Surveys show a lot of those folks do not work with financial advisors, and what I'm trying to do is show them how they can use the funds in their 401(k) plan or their IRA to build a portfolio of retirement income.
And although the strategies that I'm about ready to say, I think, apply that even more affluent savers, is that the mistake I see too often is people setting asset-allocation decisions in isolation only looking at the savings that they are deploying and not considering other sources of retirement income. When you look at this middle-income retiree that I was just describing, anywhere from two thirds to three quarters of their total retirement income comes from Social Security, which is already protected against inflation risk, longevity risk, and investment risk. And to set asset allocation ignoring that is just a mistake in my opinion.
What I encourage people to do is look at their total retirement income portfolio and allocate their investments with that in mind. Suppose you've got three quarters of your total retirement income coming from Social Security and it's already risk protected, that means 25% is subject to risk. Well, if you go into a target-date fund for retirees, that's about 50% in equities. So, right away then 12.5% of your total retirement income is subject to stock market risk. Is that acceptable? I have maintained that for a lot of people that probably would be acceptable, particularly when you look at the potential for growth and your benefits.
It's that rationale why I think that for people with under $1 million in savings, they've got target-date funds, they have balanced funds. Those are useful tools for them to use and they really don't have access to sophisticated strategies that someone with more money might have.
But then, Christine, let me just say, if you've got more than $1 million in savings and the more you have over that, the more likely it's going to be beneficial to come up with a more robust retirement strategy and a more robust investment strategy. You might be working with a financial advisor. And so, then it makes sense to come up with a strategy that's more robust than just a balanced fund or a target-date fund. But even still in that situation you still should be setting your asset-allocation strategy with your total retirement income portfolio in mind. And people who are more affluent, they might have sources of retirement income--in addition to Social Security, they might have a pension still, they might have income from rentals or other sources. I still think the idea of setting your asset allocation for your invested assets, you need to set that keeping in mind all the other sources of retirement income that you have.
Ptak: Do you think that people tend to overrate the risk, in particular, sequence-of-return risk that people in the early years of retirement are vulnerable to from a bad market? Do you think they tend to overrate that risk by not following the approach that you just articulated?
Vernon: Sequence-of-return risk is significant risk you ought to pay attention to, but it shouldn't be something that paralyzes you. I'll just talk about a couple of best practices to address sequence-of-return risk. And one of them is to adjust your withdrawal up or down depending on how the market is doing. That's a great way to address the fear or the risk that, while you're retired, if the stock market goes down, if you keep withdrawing fixed amounts in a down market, you're going to deplete your savings more rapidly than if you just adjust your withdrawals downward. Having a withdrawal strategy that, instead of withdrawing fixed-dollar amounts, you withdraw a percentage of your assets at any given point in time--that, to me, is best practice to try and address sequence-of-return risk.
Now, when I say reduce your withdrawals if the market goes down, that means you have to be prepared to reduce your spending, and this gets to a very basic strategy that I like to advocate is that as much as possible cover your basic living expenses, you--the roof over your head, utilities, food, and so forth. Cover that with sources of retirement income that won't go down if the stock market crashes. And for most part, as much as possible, your discretionary living expenses are covered by investing in the stock market and those discretionary living expenses might be hobbies and travel and spoiling the grandkids. These are expenses that, in theory, you could reduce if you had to. Setting up your spending patterns in retirement to reflect your sources of income I think is another good way to address that sequence-of-return risk.
Benz: In the book you do talk about the required minimum distribution approach--using that to guide withdrawals. It seems like the biggest risk in that approach, even though it elegantly addresses the portfolio balance as well as the person's age, is that there can be these consumption shocks. So, if the market drops substantially so does the retiree spending. What's your push back to that? Why do you think that the RMD strategy can work and not result in unpleasant consumption shocks?
Vernon: Christine, let me say again, the whole point of the RMD strategy is it's a baseline strategy for middle-income people to consider that is quite simple to implement. The more money you have, the more likely you are to want a more customized strategy. I think the RMD is a nice baseline strategy from which you might make some adjustments.
But let's just address your specific question is some kind of spending shocks. And it comes back to what I was saying earlier is that if 75% or 80% of your total retirement income is coming from risk-protected sources of income, that shock is applying to a small part of your overall retirement income portfolio. I think people just need to be aware that there is a small part of their portfolio that might be subject to spending shocks.
Now, what do you do about that? One thing that I like is that if you look at how investing in the stock market might play out over your retirement, we've done a series of analyses that are in the studies that we conducted to support this strategy. And if you invest in the stock market long enough, it always outperforms other investments. Now, sometimes you have to wait a long time. But it outperforms other investments and sometimes significantly. What that says to me is that if you've been invested in the stock market and your income from the RMD has been going up significantly, well, maybe you don't spend all that income. And actually it mirrors a strategy a lot of people had while they're working is that if you had a particularly good year and got a big bonus or a lot of overtime, a lot of people banked that extra money.
An example of that is, right now is that if you had been invested in the stock market throughout the teens and experienced the nice runup that we had--even in 2019, we had a 30% return in the S&P 500. If you were taking out RMDs under that period, you would have been continually getting increases in your retirement income. Well, maybe just don't spend it all. You have to take it out of your 401(k) account or IRA account but set it aside in some kind of an emergency fund that can then be a cushion in some kind of a spending shock. It's good to pay attention to the possibility of spending shocks and plan ahead for that possibility.
Ptak: Let's shift to another important category of spending, which is housing. Many pre-retirees wrestle with whether to pay down their mortgage or invest in the market. How would you advise people to approach that question when they're thinking about how to deploy their capital in the years leading up to retirement?
Vernon: That's a good one. And I haven't mentioned yet, but I'm aged 67, and so, all the strategies I'm talking about, I've had to think through for ourselves, and including do you pay the mortgage off or not. And from a pure financial perspective, you can look at what's the interest rate on the mortgage versus what is the rate you might earn if you invested that money instead. And here's a mistake, though, that I think some people make is that they say, "Yeah, I've got a 60/40 portfolio or a 70/30 portfolio and I've been earning 8%, 9%, 10% per year. That's way higher than the mortgage payment." That's not the right way to look at it.
Do you have any fixed-income investments? What are they earning? Because if you're thinking of taking some of your savings and paying off the mortgage, you might want to take those investments that are in bonds. And right now, as low as mortgage interest rates are, interest rates on high-quality bonds are even lower. I think the proper financial analysis is to look at the rate of return you're earning on your fixed-income investments, because paying off the mortgage really is kind of like a fixed-income investment.
That's just a pure financial argument. Then there's the emotional argument, and I think that's equally as important is that, do you want to owe anybody any money? And I can tell you, in our case, I ended up paying off the mortgage. I went through this whole analysis and I paid off our mortgage in about 2007-08, which turned out to be prescient. And when the market was crashing in 2008-09, I just thought, "You know what, we still have the roof over our head." I think there's a psychological benefit to paying off the mortgage as well.
But anyway, just to wrap up, I acknowledge there are financial arguments, there are emotional arguments, and you really want to take into account both. In my view, I can make arguments either way. I don't think you're making a huge mistake either way. It's just what's most appropriate for your own situation.
Benz: And how do reverse mortgages fit into retirement planning? Many retirees seem to have them marked with a skull and crossbones. But should they update their assumptions? Can they be a fit for some retirees?
Vernon: Yes, I think we ought to try and erase that skull and crossbones, but it's not a wholehearted endorsement either. I think reverse mortgages should be some of the tools that people consider when they're trying to plan for their retirement. And I've seen surveys that show about somewhere like three quarters of Americans, older Americans, have more wealth in their homes than they do in their IRAs and their 401(k) accounts. I think it's a good idea to at least consider a reverse mortgage.
Now, there have been abuses of reverse mortgages in the past and high costs, and that's what's given them the poor name. And some of those abuses have been corrected. I'm hearing from the reverse mortgage industry that you can shop around and try and reduce your costs. I think it's a tool that people ought to consider and go in there with your eyes wide open.
Ptak: How do you expect the pandemic will change retirees' views of where they want to live in retirement? Do you think aging in place will become more popular versus moving into some kind of institutional setting?
Vernon: Yes, the pandemic has been kind of a sea change in people's views about nursing homes and assisted living. And that's just the repercussions that are going to go on for quite a while and this is a hard situation because you'll really only go into assisted living or nursing homes if you need some kind of help. That's a tough one. But definitely, I think people are going to want to age in place. And we do have tools that can help with that. The whole virtual world--you have telehealth now. And so, there are tools to help make that more possible.
But I think that people are just going to have to really think hard about where they want to live and what kind of help they might need in their later years. And it's very important to think through these issues as you're transitioning into retirement and not wait until you reach some kind of a crisis. I've seen recently too many older friends and families--they hit their late 70s or early 80s and they just can't afford to live in a place where they've been living or they need some more support and now their back is up against the wall and they have to make hasty decisions. I really think that as you transition into retirement, that's the time to start thinking about where should you live that's sustainable both financially, but also can give you the support that you need in your later years.
Benz: You're part of the Stanford Center on Longevity. What are some of the key factors that contribute to longevity? Genetics obviously play a role, but level of wealth is right up there, right?
Vernon: Right and what we're seeing is that the debate between the genes and your lifestyle goes on, but your genes have somewhere like 25% to under 50% of the impact on longevity and really the higher impact is on your lifestyle decisions. And so, those are things like what kind of exercise you get, what kind of food you eat, how engaged are you socially. These are all factors that we've studied that can increase your expected longevity.
Now, who are the people who are more likely to eat better, exercise better, have access to health insurance and health providers? I didn't mention that earlier. What we're seeing is that the people who have more money and the people who have higher education are more likely to live longer than people who don't. We've heard a lot about the income inequality and the wealth inequality. And right alongside that is the life-expectancy inequality. At the center of longevity we like to study the factors that can enable people to live longer. And then, how can we distribute those beneficial strategies for all the population, and not just those that have more wealth and more income and the higher education?
But Christine, let me at least add one more afterthought to that is that if our listeners here are in that higher education, higher-wealth category, then you need to factor that into your retirement planning. If you just read about average life expectancies in the media, that's for the whole population. You want to bump up your expectations of your life if you're in that higher category. I think just because the listeners, most of your listeners, are probably in that category, just because you're listening to us today probably means, on average, you're going to live longer than the averages you might read in the media.
Ptak: If someone listening is concerned about outliving their assets, what are some of the key steps to consider?
Vernon: Let me just make a basic point: Suppose you're in your 50s and 60s and you're planning your retirement and you're in this higher wealth, higher-education category, it's highly likely you're going to live in your 90s. So, does it really make a lot of sense to retire in your early 60s and have another 25, 30 years in retirement when so much can happen and go wrong? And I like to say, if you're going to have a long retirement you’re going to withstand multiple financial crises, not just one or two. I think when you just sit back and look at this, does it make sense to be retired that long? That is one basic idea to not outlive your money is just find out ways of working longer, like, we were talking at the beginning of this podcast.
Then you might have just a 20-year retirement, not a 30-year retirement. So, I think that's the basic starter is figuring out how to delay your retirement. But if you're in your late 50s and early 60s and you're just tired of that grind, it doesn't mean you have to continue that grind. That's why so many people want other ways of working in their later years that are more enjoyable and more flexible. That's just one idea about not outliving your money.
But then now, let's look at your financial assets. I think it's important to have retirement income strategies that are designed to last the rest of your life no matter how long you live. That's one good reason why we like to optimize Social Security, because that's paid for the rest of your life, no matter how long you live. If you're going to invest your money and draw it down, then having a conservative drawdown strategy is important. And actually, I think it's important to have some money in the stock market, because if the history repeats itself over long periods of time, you will get a higher rate of return with the stock market. And then, finally, there are other sources of lifetime income like annuities or pensions.
It's just important to set up your retirement-income portfolio with the idea that you need to generate income for the rest of your life no matter how long you live, even if you live to 100. That's the other way to consider not outliving your assets.
Benz: Steve, this has been such a helpful, illuminating discussion. Thank you so much for taking the time to be with us today.
Vernon: Christine and Jeff, thank you. It's my mission to help people with these decisions. So, thank you. I'm glad to be able to get some good ideas out to your listeners.
Ptak: Thanks again.
Benz: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.
You can follow us on Twitter @Christine_Benz.
Ptak: And at @Syouth1, which is, S-Y-O-U-T-H and the number 1.
Benz: Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)