A new study has crunched the numbers to find a way to help would-be retirees to turn their retirement savings into retirement income.

The study “How to ‘Pensionize’ Any IRA or 401(k) Plan,” a collaborative effort between Steve Vernon, consulting research scholar at the Stanford Center on Longevity, and the Society of Actuaries, sought to find a way that middle-income workers could beef up the effects of their retirement savings on their own and even use the information to decide whether they were financially prepared to retire or whether they should work longer, or even part time.

That middle-income group seldom consults a financial advisor, the study points out, and are ill equipped to make the sort of decisions either an advisor or an actuary would make to turn their defined contribution retirement savings into income that will support them similar to the way a defined benefit pension would.

In the study, researchers reviewed 292 different retirement income strategies and conducted efficient frontier analyses to see which offered the best ways for most people to withdraw their money in retirement.

After narrowing the field to 21, they reduced the field to one—and christened it the “Spend Safely in Retirement Strategy."

In the course of their work, researchers devised eight metrics to help retirees and planners compare different retirement income solutions as they seek to annuitize retirement savings—including ways to account for various tradeoffs that workers must decide on, as well as which options might provide the most or most easily accessible funds, so that they get the most bang for their retirement bucks.

Here are the eight metrics the study found:

8. Average annual real retirement income expected during retirement.

Although just one part of this metric, Social Security represents a large part, with analysis demonstrating that for many middle-income retirees, Social Security benefits will represent half to two thirds of total retirement income if they begin to draw benefits at age 65, and from three fourths to more than 85 percent of total retirement income if they optimize benefits by waiting till age 70.

The study’s “Spend Safely in Retirement Strategy" includes delaying drawing Social Security benefits till age 70, at least by working long enough to pay for living expenses until then. “To make this method work,” cautions the report, “retirees may also need to significantly reduce their living expenses.”

7. Increase or decrease in real income expected during retirement (inflation protection).

While Social Security can provide some protection against inflation protection through cost-of-living increases, adjusting required minimum distribution (RMD) amounts to recognize investment gains or losses is also part of the picture.

Under this strategy, withdrawals are increased after years with favorable returns, and vice versa, as well as accounting for remaining life expectancy.

Automating RMDs is also a beneficial strategy for older retirees in their 80s and 90s, when they might not be as interested in—or as capable of—managing their finances.

6. Average accessible wealth expected throughout retirement (liquidity).

Researchers, the report says, “used an efficient frontier to analyze the tradeoff between expected income and expected accessible wealth (liquidity).” They defined accessible wealth as the amount of savings a retiree can access to address emergencies or change the method they use to generate retirement income.

Some retirement income strategies increase the amount of income a retiree can expect to receive over their retirement, but then also have the drawback of decreasing the amount of savings that retiree can then access throughout retirement.

This can apply to some annuities or to using savings to optimize Social Security benefits—after all, if savings are accessed and spent, the study points out, those funds are then not available to generate retirement income.

5. Rate at which wealth is spent down.

The rate at which a retirement income solution allows money to be spent affects its suitability as part of the “annuitized” solution. Analysis determined that using the IRS RMD and fixed index annuities “did the best job of keeping up with inflation.”

The study’s analyses compare how quickly remaining savings are spent, with retirement income solutions with a high withdrawal percentage—7 percent—spend down savings more quickly than a 3 percent withdrawal rate.

Some of the retirement income solutions considered included, in addition to RMDs and FIAs, single premium immediate annuities; systematic withdrawal plans; guaranteed lifetime withdrawal benefits; combinations of SPIAs and SWPs; combinations of FIAs and SWPs; and tenure payment from a reverse mortgage.

4. Average bequest expected upon death.

This is the average amount of real remaining savings projected at each age throughout retirement, weighted by the probability of dying at each future age and adjusted for future inflation.

This only considers bequests funded by retirement savings, the report points out; other possible sources of bequests, including life insurance, home equity, and assets not considered retirement savings such as businesses, and personal assets, were not considered.

3. Downside volatility (the estimated magnitude of potential future reductions in income).

This, explains the report, “measures the average annual decrease in total retirement income when such a decrease occurs, due to poor investment performance or excess inflation.”

This quantifies the potential need for retirees to cut spending in a future year, thus helping them to understand the “comfort margin” they might have with their budget for living expenses.

Such decreases, it adds, can be offset by past or future increases in income.

2. Probability of shortfall relative to a specified minimum threshold of income.

This metric examines the chance that total retirement income will fall below a specified minimum threshold, thus failing in its purpose of supporting a retiree throughout retirement.

Plan failure, says the report, means not generating enough income in one or more years to pay for guideline expenses.

The probability metric is the percentage of Monte Carlo projections that experience failure at each age, weighted by the probability of surviving to each future age.

The magnitude of failure measures the average lifetime dollar shortfall for those cases that fail.

1. Magnitude of shortfall.

If the plan falls short, this metric seeks to investigate by how much it could do so.

The amount of assumed threshold expenses will have a big impact on both the probability and the magnitude of any shortfall.

“All other things being equal,” the report says, “the larger the difference between the initial amount of retirement income and the guideline expense, the lower the probability and magnitude of shortfall will be.”

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8 metrics to aid in annuitizing a DC retirement plan

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