Morningstar - Q4 2020 - 34

Spotlight: World After COVID-19

plan contributions, compounding, and tax deferral.
Meanwhile, withdrawals over a longer time
horizon can force a lower withdrawal rate or
reduce the probability that the retiree's funds will
last over his or her time horizon. Finally, early
Social Security filing can result in reduced benefits
over a retiree's lifetime. People who retire early
may also need to shoulder healthcare expenses
until they're Medicare-eligible.
Of course, the decision about when to retire
is about much more than money. The employee's
own health and that of his or her own family
members, longevity considerations, the physical
and mental strains of the job, and, of course,
economic conditions may also be in the mix. But
advisors can help their clients understand
the stresses that it places on the viability of the
financial plan.
Advisors can also assist clients who retire early
in mapping out a plan for sourcing in-retirement
cash flows, including maximizing nonportfolio
income sources like Social Security and
making decisions about pensions, especially if the
client's employer has offered a lump-sum
pension buyout.

For example, it's often most beneficial to delay
Social Security filing, even if it means
expedited withdrawals from retirement accounts
in the early years of retirement. Retirement
withdrawals in low-tax years may be less costly
than those later in retirement, after required
minimum distributions, or RMDs, have commenced,
and they can also reduce the amount of the
portfolio that will eventually be subject to RMDs
at higher tax rates.
And importantly, delayed Social Security filing can
enlarge eventual benefits, something that's
particularly important for married couples where
the higher-earning spouse (who's entitled to a
higher Social Security benefit) is also older. In that
instance, if the older spouse dies before the
younger one, the younger spouse can continue
to receive the higher benefit for the rest of his
or her life, assuming it's higher than the surviving
spouse's own benefit.
On the flip side, the pandemic's drive toward
remote work could make staying employed easier
and more attractive for older adults who wish
to continue working, are able to do so, and can
take advantage of flexible work arrangements.

EXHIBIT 4

Yields Predictive There is a strong relationship between current bond yields and
10-year bond returns. Today's low yields don't bode well for long-term returns.
Future 10-Year Return
16%

12

8

4

y = 0.9463x + 0.8118
R² = 0.9173

0
0%
Bond Yield

4

8

12

16

Source: Morningstar.

34

Morningstar Q4 2020

Initial Withdrawal Rate

Initial Withdrawal Rate

Working longer may be more palatable if it doesn't
entail a commute, for example, or if the older
worker can live where he or she eventually retires.

Challenge of Low Yields
Finally, retirees of all ages-early or otherwise-
have a huge challenge today in the form of very
low bond yields-the result of Federal Reserve
activity designed to ignite an economy that
would otherwise be struggling even more amid the
pandemic-related slowdown.

To be sure, low yields aren't a complete negative
for retirees' financial plans. They're a big plus
for borrowers, a group that increasingly includes
retirees. In a 2018 survey cited by AARP, 44%
of people between the ages of 60 and 70 said
they expected to be carrying a mortgage
when they retire. Swapping into a lower-rate or
shorter-term mortgage or buying a car with
a very low or even 0% interest rate may reduce
in-retirement expenses for many. Moreover,
the fact that safe securities yield so little
today has contributed to the ascent of higher-risk
assets, especially stocks.
But even as retirees have gained on one side of
the ledger as yields have declined, they've
lost on the other. Not only do low yields reduce
how much retirees can wring from their safe
investments, but yields are also predictive
of what bonds are apt to return over the next
decade ( EXHIB IT 4 ). The Bloomberg Barclays U.S.
Aggregate Bond Index has an SEC yield of
about 1.3%, suggesting that investors will barely



Morningstar - Q4 2020

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