Reaching retirement is a huge milestone, but it also brings a new set of financial challenges. For years, your focus was on saving and investing. Now the question is: how do I turn those savings into dependable income that will last the rest of my life?
In this Cardinal Lesson, Hans and Tom are joined by Dr. Wade Pfau, one of the nation’s leading retirement researchers, to share insights on how retirees can plan their income, protect against risks, and enjoy their retirement years with confidence.
The Mindset Shift: From Accumulation to Distribution
During your working years, the financial strategy is straightforward: save as much as possible, invest wisely, and let your assets grow. Retirement changes the equation. Now the goal is no longer building wealth—it’s converting that wealth into a steady stream of income.
Dr. Pfau emphasizes that this is a critical shift. Without a clear withdrawal strategy, retirees risk pulling money out inefficiently, paying more in taxes than necessary, or depleting their accounts too quickly. This change in mindset requires careful planning, discipline, and sometimes the use of tools beyond traditional investments.
Sequence of Returns Risk
One of the most dangerous but least understood risks in retirement is the sequence of returns risk. Even if the stock market averages a solid return over 30 years, the order of those returns matters enormously for retirees.
If a major downturn hits early in retirement while you’re making withdrawals, your portfolio may not recover—even if markets bounce back later. For example, those who retired in 1966 faced decades of average returns, but early market struggles left many with significantly less income than expected.
The takeaway? Timing matters. You can’t control the markets, but you can protect yourself by planning for downturns, especially in the first decade of retirement.
Market Volatility and Uncertainty
Beyond timing, retirees must also deal with the reality of market volatility. Markets go up, markets go down, and sometimes they stagnate for years. A “lost decade” with little growth can be just as damaging as a short-term crash, especially if you’re relying solely on investments for income.Hans and Tom stress that no one has a crystal ball. You can’t predict whether the next 10 years will bring soaring returns or sluggish growth. That’s why part of retirement planning involves reducing exposure to uncertainty by balancing growth investments with guaranteed sources of income.
Longevity Risk: Outliving Your Money
While living a long life is a blessing, it also brings financial strain. Every extra year of life is another year of expenses. This is known as longevity risk—the danger of outliving your money.Dr. Pfau explains that many people underestimate how long they will live, often basing their expectations on their parents’ lifespan. But medical advances, healthier lifestyles, and better access to care mean today’s retirees often live years—sometimes decades—longer. Planning only to your “life expectancy” is risky, because there’s a 50% chance you’ll live beyond it.The solution? Use risk-pooling tools like annuities and Social Security to create income you can’t outlive. This gives retirees the freedom to spend without fear of running out.
The Underspending Puzzle
Not every retiree spends too much. In fact, many spend far too little. Researchers call this the retirement consumption puzzle: savers who have accumulated significant wealth but live well below their means in retirement.Hans and Tom see this often. Retirees with large IRAs or 401(k)s hesitate to spend because they fear running out of money or facing future long-term care costs. The result is underspending—retirees forgo travel, experiences, or even simple comforts they could easily afford.Annuities and long-term care insurance can solve this dilemma by providing guaranteed income and covering big risks. With those protections in place, retirees have “permission to spend” and enjoy the fruits of their lifelong savings.
Tools That Provide Security
Retirement planning isn’t about guesswork—it’s about using the right mix of tools:
- Social Security – A foundation of guaranteed, inflation-adjusted income.
- Annuities – Contracts with insurance companies that can guarantee lifetime income, protecting against longevity and market risks.
- Long-Term Care Insurance – Coverage that reduces the need to set aside large sums for future health costs.
- Tax Strategies – Planning IRA and 401(k) withdrawals to minimize lifetime taxes and maximize after-tax income.
By combining these tools, retirees can cover their essentials, prepare for the unknown, and still leave room for growth and legacy goals.
Enjoying Retirement with Confidence
Ultimately, retirement income planning is about more than numbers. It’s about living your retirement years with confidence—taking trips, enjoying family, and spending your money with purpose.
Hans, Tom, and Dr. Pfau remind us that with the right strategies, retirees don’t need to live in fear of market downturns or running out of money. By addressing risks and planning income wisely, you can enjoy the retirement you’ve worked so hard to build.
