This session will focus on the probability-based school of thought on retirement income developed by financial planners since the 1990s. The concept of safe withdrawal rates and the 4% rule developed from William Bengen’s analysis of the U.S. historical data. After explaining his approach and further refinements to the core methodology, the session shifts to consider the impacts of a number of key issues and assumptions behind the 4% rule. Ultimately, more sophisticated methods are required and described. Finally, guidance will be provided on thinking more broadly about a retirement income strategy that moves beyond studying sustainable withdrawal rates from a financial portfolio.

This presentation goes into greater depth about two retirement income tools: using an aggressive investment portfolio to seek greater returns through the risk premium, and using an income annuity with a partial annuitization strategy to seek greater returns through risk pooling. My research finds that risk pooling tends to be underappreciated as a unique source of returns that is unavailable for an investment portfolio in which the retiree aims to self-manage longevity and market risk through conservative spending. Risk pooling provides contractual guarantees for income, greater true liquidity, and the potential for a larger legacy over the long term.

In the early days, reverse mortgages were generally treated as a last resort option after other resources were depleted, or as a way to obtain quick access to a large lump-sum of assets. This is not the appropriate way to think about reverse mortgages in a retirement income plan, especially in light of recent research. The reverse mortgage option should be viewed as a method for responsible retirees to create liquidity for an otherwise illiquid asset, which in turn can create new options that potentially support a more efficient retirement income strategy (more spending and/or a greater legacy). After providing an overview of retirement income planning, which sets the context for understanding the potential role of reverse mortgages, this presentation explains the basics for how reverse mortgages work. I then provide an overview of potential uses for a reverse mortgage in a retirement income plan.