When Should Retirees Retrench? Reducing the Need with Part-Time Work and Annuitization

Pye, Gordon B.
January 2009
Journal of Financial Planning;Jan2009, Vol. 22 Issue 1, p48
Academic Journal
• Saving enough to cover living expenses at the beginning of retirement with a 4 percent annual withdrawal from investments is a good, sustainable goal, according to numerous studies. But what should individuals do who have to retire without adequate savings? • An earlier paper (Rye 2008) developed a Retrenchment Rule to answer this question. Using this rule, most retirees will want to withdraw significantly more than 4 percent to avoid painful reductions in their standard of living. Doing so, however runs an uncomfortable risk of very low withdrawals late in retirement But withdrawing less and retrenching more initially is not cost effective. • Nevertheless, most retirees will want to reduce the risk of very low withdrawals late in retirement. This paper develops a cost-effective strategy for doing so. This strategy is to annuitize a large portion of the investment and seek part-time employment. Minimal part-time earnings provide a measurable reduction in the risk of a reduced standard of living, and maximal earnings significantly reduce the risk, as well as increase the future median value of the estate. Annuitizing 25 percent or 50 percent of the portfolio further significantly reduces risk. Investing in fixed-income issues instead of annuitizing reduces the risk of low withdrawals for younger retirees, but fails to for older retirees unless their initial withdrawal is fairly sustainable. There are costs to this strategy But those who have not saved enough for retirement must expect to pay a penalty. This strategy appears to offer the least onerous penalty.


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