Julie Jason:
Making decisions in retirement.
How do you make decisions? Tools can be very helpful for simple situations — and potentially less useful for more complex cases when more data has to be considered, as in the case of someone transitioning into retirement.
Consider this situation: Imagine you are a single person, age 60, with $250,000 of retirement savings, earning $55,000 a year and planning to retire in two years.
Say you were asked to focus on three key retirement issues: 1) Age at which you would claim Social Security from ages 62-70; 2) A general withdrawal progression (increasing, flat or decreasing) from retirement savings and whether you would like to take extra withdrawals from your retirement savings prior to claiming Social Security; and 3) Whether to purchase an annuity.
This was the case study presented to 400 participants recently by a team at UCLA and Cornell University. When the participants were divided into two groups and used a custombuilt financial decision tool, the results differed based on how they considered the elements.
Group one, or the “separate condition,” assessed each of the three retirement issues one at a time as if each was an isolated decision. Each decision was independent of the others. For example, when to start Social Security was isolated from retirement savings withdrawal strategies and annuities. Participants saw the results of only one decision at a time.
As a result, when the participants selected a plan for withdrawals from retirement savings, they only saw the age when that money would run out, but nothing about the cumulative effect related to Social Security or an annuity.
Group two, or the “aggregated condition,” was permitted to take in all three aspects in a larger, bigpicture context. For example, they were given the effect on the 60-year-old’s annual income from all sources. And, they saw the probability of having sufficient resources at the age of 85.
Intuitively, the second group had more data to deliver more holistic advice. That makes sense in the practical world of investment management that I can attest to. One would say that the bigger-picture approach wins probably in all cases, unless, of course, a single issue is all that needs to be addressed (for example, in this case study, the individual does not have a retirement plan or enough in savings to buy an annuity). That person can use a tool to isolate the Social Security timing question. In this case, the SSA’s calculator at tinyurl.com/ b2wma32c can be very useful indeed.
With a set of tools that can take in a bigger picture for a more complex financial situation, one can better evaluate the financial trade-offs of each isolated decision point, as the study concluded. The study, “Broad Framing in Retirement Income Decision Making,” can be found at tinyurl.com/p2p8rjza.
Effective tools can be an important part of planning for (and living in) retirement. If you have any favorite online tools, email me at readers@juliejason.com and your suggestions may be discussed in a future column.
On another note, I invite you to attend a virtual talk I’m giving at the Greenwich Library, “Giving to the Next Generation,” on Wednesday, May 5, at 1 p.m. EDT. To register, go to tinyurl.com/y29wzrwv or email Yang Wang at ywang@greenwichlibrary.org. If you are interested in 401(k) investing, I will be giving a series of short virtual talks on “How to Be a 401(k) Champion.”
For the schedule, see www.juliejason.com/ events.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2020 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.