Paving the Way to Optimized Retirement Income

With Americans living longer than ever and the average retirement age largely unchanged, many households struggle to make their assets last through retirement. Financial advice often focuses on boosting personal savings rates and maximizing return on investment during savers’ working lives, known as the accumulation phase of retirement planning. Equally important, however, is the decumulation phase, when households seek to generate sufficient income in retirement to meet their spending needs.

To do this, savers and retirees must treat retirement as a phase of life rather than a destination and develop a retirement income toolkit made up of multiple potential income sources and strategies that will diversify and increase retirement income. Ensuring this toolkit remains robust throughout the entire decumulation process requires active planning throughout the accumulation phase and keen attention to critical decisions, including when to retire and claim Social Security benefits.

Through a close examination of the literature and a quantitative analysis using BlackRock’s proprietary life cycle model, this paper presents the following framework to help individuals determine how they can generate adequate income from their accumulated assets:

1. Determine retirement objectives. Although individual objectives vary, savers and retirees must understand and articulate what financial success in retirement looks like for them, weighing such diverse factors as wealth and personal preferences, risk tolerance, and bequest motives.
2. Consider key risk factors. Savers face a wide variety of risk factors throughout their lives, including longevity, declining health, market volatility, behavioral biases, and disparate access to financial guidance. These risks combine and manifest differently over time, but they typically correspond to three broad phases of the retirement planning journey: early career, near retirement, and retirement.
3. Formulate a holistic strategy. Optimizing income in retirement requires considering career earnings as well as income from Social Security, part-time work in retirement, and other sources, while also accounting for key risk factors and their evolving significance. Three principles for decumulation can help focus this strategy: (1) maximizing spending ability, (2) maximizing spending certainty, and (3) addressing longevity risk.

Our analysis demonstrates how a holistic approach to retirement income benefits savers. We look at how a few steps—adding guaranteed income, adjusting asset allocation over time, and delaying one’s retirement date—can potentially generate more retirement income and decrease risk. While personal circumstances dictate the exact magnitude of any spending increase and risk reduction, we demonstrate through an illustrative case study how each of these tools can improve the outcomes individuals achieve in retirement.