Most research on retirement strategies assumes that people have saved adequately. But data on household savings shows that many households fall short, and will need to call on relatives or other sources for support. This raises questions about the best withdrawal or annuity strategies when savings are insufficient. It turns out that which strategy works best is different than for adequately funded retirements.

The motivation for this article came from an Advisor Perspectives commentary by Don Bennyhoff of Vanguard on estimating the return needed to achieve client retirement goals, and deciding on an appropriate asset allocation. In the APViewpoint discussion of the commentary, Larry Swedroe proposed an example of a financially constrained retirement and made the argument for a higher equity allocation to best meet retirement goals. In this article, I’ll use a slight variation of Swedroe’s example and test various asset allocations, as well as options that utilize annuities.

The example

The particular example I use is for a 65-year-old female with a remaining life expectancy of 25 years. I assume that she has $500,000 in retirement savings and will be receiving $30,000 per year from Social Security. I assume her living expenses are $60,000 per year. The analysis will be pre-tax and all dollar figures are in 2017 dollars.

I have deliberately designed this example to have a high probability of failure. I assume her savings are her only source for generating income – she cannot utilize home equity and she doesn’t have options for generating additional income or reducing expenses. An inflation-adjusted single-premium immediate annuity would not provide enough income to fill the $30,000 gap between Social Security and her living expenses, and we’ll see below that systematic withdrawal approaches run a high risk of failure. So unlike most retirement research where we look for ideal solutions, here we will try to find the “least-bad” alternative. I’ll assume that retirement shortfalls will need to be funded by relatives. This will broaden our focus beyond the retiree, since we need to evaluate financial consequences for the contributing relatives.