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Planning to Boost Retirement Income

Everyone knows that individual investors tend to time the market all wrong, buying high and selling low. Recent research suggests that workers fall prey to the same tendency when timing their retirement, leaving the workforce just as the market is peaking. A study by Rui Yao and Eric Park from the University of Missouri in the Journal of Personal Finance found the probability of retirement increased when Standard & Poor’s 500-stock index posted positive returns. In fact, the more stocks went up, the more workers were likely to retire, the authors found through an analysis of data collected by the University of Michigan’s Health and Retirement Study. Just like buying high and selling low, this has its dangers: “Given market variations, the possible downside of retiring at the market peak is twofold: 1) Reaching target retirement wealth when the market is up does not provide the same security level as achieving the target amount of wealth when the market is down, and 2) the probability of retirement wealth experiencing a market correction is higher when the market is at its peak,” the authors wrote. The authors conclude that financial education may help keep pre-retirees from succumbing to the “projection bias” of thinking that a rising market can only continue to rise (although they undercut this point earlier in the piece by acknowledging that “professionals and non-professionals alike appear to naively extrapolate current trends into the future”).

And other recent research quantifies just how much a sound financial plan can help boost retirement income (and gives a huge assist to advisers in answering the previously squishy question of how much value they can add for their clients). David Blanchett, head of retirement research at Morningstar, and co-author Paul Kaplan found that making more intelligent financial-planning decisions can result in an annual return increase of 1.82 % a year — an amount the report characterizes as “a significant improvement in portfolio efficiency for a retiree.” The authors tested five different financial-planning decisions: asset allocation, withdrawal strategy, use of guaranteed-income products, tax-efficiency, and investing according to goals. Successfully implementing these five decisions is what contributes that extra 1.82% annual boost. In other words, there’s a lot more to a successful retirement income strategy than picking a market-beating manager or choosing the right mix of stocks versus bonds, the authors write. As Chuck Jaffe reports in MarketWatch,  it turns out that the ability to deliver extra income, unlike the ability to beat the market, is completely predictable.


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    • An extra 1.82% from what baseline? If I’m making really poor decisions, then most likely a good adviser could improve my performance by even more than that, but if I’m generally making good decisions, perhaps they would add little to nothing. Without digging through the whole study, it seems a bit much to believe this can be measured so precisely.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.