Retirement involves making many important long-term decisions, which advisors do after carefully considering each client's needs and resources.
Christine Benz, Morningstar's director of personal finance, outlined three "tricky decisions" for retirement planning that need to be addressed by advisors and investors — and how to handle them — in a recent column.
1. What's the Best Withdrawal Rate?
Although 4% is the standard drawdown amount per year of a portfolio used, Benz notes, that amount is not only debatable — "it's unknowable," as asset returns and inflation going forward are question marks.
"Nor do you know how long you will live; your spending horizon could be 15 years, or it could be 40," she says.
Many papers have been presented on the topic, but in an interview with Michael Kitces, William Bengen, who created the 4% guideline, said that if inflation remains low, people could withdraw up to 5.5%, Benz writes.
Two factors are key: a portfolio's mix of stocks and bonds and an investor's life expectancy. A higher stock mix typically points to a higher withdrawal rate.
But retirees, who have shorter retirement horizons, may want to take a higher withdrawal. She says that "being flexible with withdrawals" is really the key, "especially taking less when the portfolio is down."
2. Is Long-Term-Care Insurance Necessary?
Long-term care can cost $100,000 a year, according to a Genworth survey, Benz says. And except for "rehab" followed by a hospital stay, it's not covered by Medicare, she adds.
