Bob’s Journal for 3/10/22

Most People Want the Guaranteed Paycheck in Retirement

We’re in the first generation of retirees who rely primarily on 401(k)s and other savings instead of pensions for retirement income. But the change wasn’t the idea of employees, and it looks like workers prefer the old system.

The change was instituted by employers and government policies, and workers had to go along with it. After some experience with the new system, retirees and pre-retirees generally prefer a “retirement paycheck” to the lump sum of a 401(k) plan, according to a recent survey conducted by MetLife.

The survey found a great preference for being able to choose between an annuity, or guaranteed income, and a lump sum. Among pre-retirees, 90% believe guaranteed monthly income in retirement is valuable, 89% would like the option of taking part of their retirement benefit as a lump sum and part as an annuity, and 82% said they would pick the regular income over a lump sum.

Retirees who already selected annuities for at least part of their retirement income said it made them better off financially. They said an annuity made their budget more predictable, made it easier to pay their regular bills, and made them feel financially better off.

A benefit of a retirement paycheck that was cited by 87% of annuity recipients is that the regular income allowed them to be more aggressive with the rest of their portfolios.

A disturbing finding of the survey was the percentage of retirees who took lump sums and depleted their lump sums in a fairly short period. One out of three retirees who took lump sum distributions spent their entire distributions within five years.

Of course, you don’t have to rely on your employer to offer an annuity or guaranteed income through its 401(k) or other retirement plan.

You can shop the marketplace and find the annuity that pays the highest income available to you.

Shopping for an annuity also allows you the flexibility to shape the annuity terms to fit your goals and preferences. Shopping also allows you to buy several annuities from multiple insurers instead of restricting you to one insurer.

I’ve long recommended that most retirees receive a portion of their retirement cash flow in guaranteed lifetime income through Social Security and annuities. For more details about the benefits of annuities and guaranteed lifetime income, see the April 2022 issue of Retirement Watch and the November 2021 episode of Retirement Watch Spotlight Series.

U.S. Takes Next Step Toward a Digital Dollar

The White House issued an executive order directing the major cabinet departments to study digital currencies in general and the potential for a digital dollar in particular, according to The Wall Street Journal.

The Federal Reserve Bank already is studying digital currencies and a digital dollar, as I’ve reported in past issues of Bob’s Journal. This executive order is the next step, because the Fed concluded it is up to Congress and other agencies to establish a digital dollar.

Despite rumors, a digital dollar wouldn’t replace the current dollar or be a way to devalue the dollar. A digital dollar would be another way to use the U.S. dollar and would exist alongside the existing currency.

A key focus of the new studies will be of the effects of the digital currencies now in existence and any actions the government should take regarding them.

It’s likely the studies will have recommendations to increase regulation of non-government digital currencies and perhaps eliminate some or all of them. China already effectively eliminated use of digital currencies by its residents.

The Federal Reserve and Treasury Department are concerned that a substantial flow of assets into unregulated and untracked digital currencies will make it difficult to conduct fiscal and monetary policies and could make markets and the economy more unstable than they are now.

Other regulators are concerned about high and rising levels of fraud involving digital currencies. Law enforcement believes increased regulation of digital assets will make it harder for criminals and terrorists to conduct business.

The agencies are supposed to complete their studies within six months. It is possible that late this year or early in 2023 there will be proposed legislation and regulations affecting a wide range of digital assets and currencies.

Most Retirees Should Revise Their Distribution Plans

Most people don’t have a real plan for taking withdrawals from their nest eggs. Those that do often default into a plan developed by the IRS that has a lot of disadvantages.

I’ve long said that one of the biggest gaps in most retirement plans is the lack of a spending and withdrawal plan. That’s supported by a recent survey of retirees by J.P. Morgan Asset Management.

The survey found that most people don’t take distributions from their retirement plans until they reach the required minimum distribution (RMD) age, which now is 72.

Then, the vast majority (84%) take only the RMD dictated by IRS regulations.

There are a lot of problems with this approach. It usually will result in higher lifetime taxes, higher taxes on heirs, and less after-tax wealth for the family.

A distribution strategy should be based on your goals, both lifetime and legacy goals.

Most people spend more in the early years of retirement. Spending gradually declines, even after adjusting for inflation, beginning in the mid- to late-70s and continues declining.

But the RMD rules increase the percentage of the IRA or 401(k) that is distributed each year. That’s the opposite of actual lifetime spending patterns. Since the distributions are taxed as ordinary income, this formula increases taxes over time on income that isn’t needed.

The RMD formula also leaves heirs with a big tax bill. Beneficiaries who inherit IRAs and 401(k)s owe taxes on distributions just as the original would have. They inherit only the after-tax value of the accounts.

Beneficiaries would end up with more after-tax wealth if account owners did more planning, such as distributing more in the early years of retirement, converting a traditional IRA to a Roth IRA, or using the after-tax value of the IRA to buy a permanent life insurance policy.

The survey makes clear that spending and distribution policies are one of the biggest gaps in most retirement plans and leave families with less after-tax wealth than they could have.

The Data

The Small Business Optimism Index from the National Federation of Independent Business (NFIB) declined to 95.7 in February from 97.1 in January. The 48-year average is 98, and February was the second consecutive month below the average.

Inflation was reported as the biggest problem by 26% of small business owners. That’s a four-point increase from January and the highest level since the third quarter of 1981.

Supply and labor shortages also were major issues for small business owners.

The ISM Services Index declined in February but still indicated healthy growth in the sector.

The index was 56.5 in February, down from 59.9% in January.

Any reading above 50.0 indicates growth in the sector.

Factory orders increased 1.4% in January. And orders in December were revised higher to a 0.7% jump from the 0.4% increase initially reported.

Orders for core capital goods, which are considered a good measure of business investment, increased 1.0% in January.

Shipments of the core capital goods increased 1.9% in January.

The number of new jobs created in February was the highest since July, according to last Friday’s Employment Situation reports.

The number of new jobs was 678,000, far more than the 440,000 jobs that economists expected. Monthly job increases have been above 400,000 for 10 consecutive months.

Hourly wages increased only 0.3%, the lowest monthly increase in a while. Over 12 months, hourly wages increased 5.13%.

As a result, the number of Americans employed at the end of February were only 1.14 million lower than before the pandemic.

New unemployment claims declined by 18,000 to 215,000 in the latest week. That’s the lowest level since Jan. 1. Continuing claims increased a little to 1.48 million.

Productivity increased 6.6% in the fourth quarter of 2021. Despite the higher productivity, unit labor costs increased by 0.9% because of a 7.5% increase in hourly compensation.

Unit labor costs increased 3.6% in 2021, down from a 4.3% increase in 2020.

The Markets

The S&P 500 lost 3.19% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 1.99%. The Russell 2000 dropped 2.36%. The All-Country World Index (excluding U.S. stocks) tumbled 5.45%. Emerging market equities retreated 6.55.

Long-term treasuries fell 2.50% for the week. Investment-grade bonds increased lost 2.85%. Treasury Inflation-Protected Securities (TIPS) rose 1.02%. High-yield bonds dropped 1.92%.

On the currency front, the U.S. dollar gained 1.61%.

Energy-based commodities increased 17.13%. (That’s right. Over 17% in one week.) Broader-based commodities rose 12.68%. Gold gained 5.38%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.