Americans worry about affording retirement, but that doesn’t usually translate into hard-core financial planning. Then there’s David Littell, the 61-year-old director of the retirement income planning program at the American College of Financial Services, a nonprofit that educates financial advisers. If anyone ought to have a well-thought-out plan, it’s this guy.
So we asked him what’s in it.
It’s a little intense—this is one well-prepared pre-retiree, and one who knows his insurance products, since the college’s focus has historically been on educating insurance agents. While the challenge of ensuring he won’t outlive his money isn’t unique, his attitude may be. “I find this fun,” he said. A sign of how into this stuff he is? Before a follow-up call, he e-mailed a three-page, 1,500-word, bullet-pointed outline of his thinking.
Here’s how a retirement income geek puts theory into practice.
Matching increasing longevity with increased savings is among the biggest challenges facing retirement savers. It’s not an abstract one for Littell, whose father retired at 75 and is 103. His father has managed his own finances well and, when he started spending down assets at 84, bought an annuity with some of his money. “It let him sleep better at night,” Littell said.
Littell’s doing well on the savings side. He earns a salary in the low six-figures and has saved throughout his career, putting 10 percent, on average, into a defined contribution plan.
He said he’s an example of how the defined contribution environment—that’s 401(k) territory, an environment without defined benefit plans, the traditional pension—can work “as long as you contribute, roll the money into an IRA when you change jobs, and invest for the long haul.” A $20,000 rollover made years ago has more than quadrupled and is his biggest retirement asset. Most of the money is in a variety of low-cost stock mutual funds. He also has a small defined benefit plan, which was frozen.
Littell and his 70-year-old husband, Edward Selekman, have been together for 30 years; they married about a year ago. They own their home and have long-term care policies. Edward, a psychotherapist who worked out of their suburban Philadelphia home, just retired. They have no children as a couple; Edward has three children from a prior marriage. If Edward hadn’t retired, Littell said, he probably wouldn’t be thinking about retirement himself. Now he’s thinking he’ll retire in about three years, rather than five or 10.
After training financial reps on the importance of getting clients to really plan what their retirement will look like, Littell is realizing it’s not so easy. “This idea that somehow you have this clear picture of what you want as you approach retirement is kind of a fantasy,” he said. “Life’s more fluid than that.”
For example, the couple might want to move somewhere warmer, but haven’t decided where yet. You have to know the details of housing costs to figure out how much you need to retire comfortably. There’s a “crazy expensive” continuing care retirement community in California they’re interested in, but if they move there, it means much higher expenses than for other options.
Littell’s main retirement objective is one many people share: having the financial freedom to choose how he spends his time. He expects to work in retirement, educating consumers, but work won’t be the highest priority, if his planning works. And he doesn’t want to worry about that work being compensated.
Littell, who was a fencer in the 1988 Olympics in Seoul, would also like to coach fencing; he coached the men’s and women’s varsity teams at Haverford College from 2000 to 2006.
The first consideration
The wisdom of waiting as long as possible to take Social Security is one of the personal finance Ten Commandments2. Here’s how that works in Littell’s situation.
The Social Security benefit paid at the full retirement age of 66 is 100 percent of what’s called the primary insurance amount (PIA). Edward took Social Security at 70, so he got four years of what’s called deferral credits. At 8 percent a year, those credits add up to a 32 percent increase, so he gets 132 percent of his PIA.
When Littell turns 66, he will make a “restricted filing for a spousal benefit.” Doing that gets him half of Edward’s PIA (not half of his enhanced benefit for waiting). Spousal benefits are based on the PIA and age of the partner whose benefit the filing is being made to access, and—surprise, surprise—are complicated. Doing the restricted filing lets Littell get some benefit for four years while deferring his own benefit. At 70, he’ll get 132 percent of his own PIA.
What’s it like living with someone who knows how to make a restricted filing for a spousal benefit? Great, apparently. “He’s not so geeky that it bores me,” said Edward. “He explains it beautifully and brings it right down to the consumer level.” Once in a while, Edward finds his eyes glazing over if an explanation has been going on for a while, “but it’s been very beneficial to me, and I feel very secure knowing that he knows so much about it.”
The balancing act
Lots of people like the idea of guaranteed income in retirement, in theory. But who wants to lock up the bulk of their money? “For me, the real, visceral experience was about how much money I was willing to part with,” Littell said. “It was more about a percentage—15 percent to 20 percent of assets—than trying to get a specific income.”
He definitely does want eventually to create a greater stream of income, but wants to buy it over a period of years. He can eliminate some of the risk of being heavily in equities as he nears retirement by locking in some income now—but doing it gradually means he won’t have locked up his assets and be in a bind if a big health or other issue comes up.
Traditionally, investors nearing retirement with a lot of money in equities would move money into bonds. But low interest rates, which can make buying a future stream of income in an annuity expensive, and the fact that we’re living longer is changing that calculus.
Littell wants the certainty of a floor of guaranteed income from annuities, and he’s particularly concerned about longevity, which bonds don’t really protect against. Another reason he’s not choosing bonds is that when you self-insure, “the uncertainties of the market mean you have to be very conservative in taking withdrawals,” he said, “and you have to avoid making big mistakes when the market is down.”
What keeps him up at night
He knows he’s missing something in all of the planning. He just doesn’t know exactly what it is.
The simpler products
The simplest annuity Littell and his husband own is a deferred income annuity on Edward’s life. They paid $60,000 for it when Littell started focusing on retirement planning late last year, and it will start paying a little more than $500 a month when Edward turns 74, and keep paying as long as he lives. They chose an annuity that doesn’t provide a benefit after Edward’s death because it provides the largest lifetime income payout.3
Another somewhat serendipitous element of his plan comes thanks to a low-costvariable annuity. He bought it long ago with money from a small inheritance, less because he wanted guaranteed income than to defer taxes on the account’s growth. The account balance is invested in low-cost stock mutual funds.
Littell originally figured he’d cash out the old product and buy a deferred income annuity. But the variable annuity uses older mortality tables and has guaranteed interest rates built into it that you can’t get today—its payout of 7.5 percent for a 65-year-old man made it a far better deal than he could find elsewhere. (If the amount you put in is $100,000 and the payout is 7.5 percent, you get $7,500 a year.)
“If you have an older life insurance or annuity product, you might have something of tremendous value, so hang on to it,” he said.
The not-so-simple product
Then there’s Littell’s most complex product, an indexed annuity with an income rider. The account balance is indexed to the stock market. It will never appreciate as much as the market, but the account balance will never drop below zero.
The income rider promises a minimum monthly payout when turned on, depending on the buyer’s age. The guaranteed minimum income payment is comparable to that of a deferred income annuity, Littell said. But the income payments could be higher, since there’s exposure to equities. He also likes that he has flexibility in deciding when to start receiving income.
Unlike a regular income annuity, with this one you still own the account balance even after you turn on the rider. So at your death, there may be money left for a beneficiary. If you live a long time, the balance could go to zero, since each payment reduces the account. The rider ensures that the income stream will continue even if the account balance is zero. Littell pays about 1 percent of the balance, annually, in fees.
Littell will invest more in annuities4 over time. “The older you are, the cheaper it is to buy income, for the lovely reason that the payout period is shorter for the insurance company,” he said. He’ll get more income when he takes his $1,000-a-month pension (the frozen one) as an annuity. “If you have a defined benefit plan that promises an annuity payout, you’ll probably get a better rate with that than if you took a lump sum and bought an annuity from a commercial provider,” he said.
Littell and his partner own their home free and clear. At 62, he plans to open up areverse mortgage letter of credit. That allows him to lock in the ability to borrow against their home. If the stock market goes down, it can be a good way to supplement income without having to sell investments in a down market, or having to take money out of a retirement account early and pay taxes and penalties on it.
The bottom line
“We’re all products of our environment, and having a 103-year-old father affects how I think about planning,” Littell said. “I want to be really, really, really ready.” He is “acutely aware that the costs of retirement are tremendously uncertain, and you can be ready for the average costs—or be really ready for whatever happens.”
He views his plan as conservative in some ways and aggressive in others—aggressive, for example, in how he keeps a significant exposure to equities as he ages. “With the annuities and the long-term care insurance, I can afford to take more risk with my investment portfolio,” he said.
If something goes wrong in retirement, his flexibility means he has options, Littell said. And if things go well? “I look forward to writing bigger checks to my favorite charities each year.”