4 Ways to Protect Your Retirement, According to a Top Economist

5 minute read

“Out of date.” That’s how Ben Harris, former Assistant Secretary for Economic Policy and Chief Economist with the US Treasury Department, describes the retirement system in the US. He recently co-wrote a book with Martin Baily, also a former White House economist, entitled, “The Retirement Challenge: What’s Wrong with America’s System and a Sensible Way to Fix It.”

“There are some things that work really well in the system and some things that are failures, and some things that are particular failures for women,” says Harris. What’s right, he explains, is that the system allows Americans to accumulate a huge sum of money across a web of retirement accounts including IRAs and 401(k)s. At the end of 2022, Americans had more than $33 trillion socked away – roughly double the amount we had saved in 2010. The system is also, he says, incredibly flexible, allowing some people to work until they’re older and others to retire as soon as they’re able. Finally, he notes, we put a lot of support into our public programs – Social Security, Medicare and Medicaid. “You can look at our budget,” he says, “and [see] proof as a country that we’ve decided retirement is really important, and we’re going to put incredible resources towards it.”

What’s wrong with the system is that it fails certain people, many of whom work their whole lives and end up living in poverty when they’re older – and they’re disproportionately women who are not married and especially women of color who are not married. “Economists tend not to make moral judgments,” he notes. “But no one should be old and living in poverty and struggling.”

Finally, he says, we lack mechanisms for taking all of that $33 trillion in wealth and turning it into security for people of older ages. “Maybe you’re a person who’s got a half million dollars socked away, and you own a home worth a half million dollars on which you don’t have a mortgage,” he says. “We don’t have a way to turn all that wealth into security.”

Where we go from here systematically is a process that will be hammered out in Washington, DC. But where do we go as individuals? What pieces of the puzzle do we have the levers to control – and how should we aim to do that? Harris shared his ideas with Alliance Education Fellow and HerMoney CEO Jean Chatzky in the most recent episode of Your Money Map. We’ve got his biggest tips below.

WATCH Your Money Map: 4 Ways to Protect Your Retirement, According to a Top Economist

Claim Social Security Correctly

One thing that boggles the mind of many economists is why people don’t wait a little bit longer to claim Social Security, Harris notes. He has a point. Anyone who doesn’t need the money for necessities – those basic expenses we have to pay for each month – is forgoing a substantial bump in benefits by not waiting until at least full retirement age and possibly until age 70. If you’re wondering how you could bridge your way to a later claiming age, one method is to lean into a phased retirement, like hanging out a shingle in line with your expertise.

“[We’re seeing] really high rates of self-employment for older people,” Harris says. “If you build up some expertise or experience in certain occupations, it’s pretty easy to become self-employed where you choose the exact hours you want to work…or maybe take a few years off and come back to the labor market. I think it would be good for people to take advantage of that flexibility in many circumstances.”

Acknowledge Your Consumption

Economic models sometimes make broad assumptions that may not be quite up to date. Two of the biggies are that a) people don’t like to work – in other words, it makes them unhappy and b) people do like to spend – in other words, it makes them happy. Yet, what researchers often see among people who have saved their entire lives is that they’re not spending nearly as much as they comfortably could.

“Spending down their savings doesn’t feel quite right,” Harris says. “I think people also have a lot of anxiety around not having any income. They worry about paying bills. And so having this huge nest egg which you don’t spend down provides some solace.”

This may create a disconnect between how economists might advise people to go into retirement and how people actually go into retirement. One way to deal with the imbalance is with a financial plan structured to lay out how much you’re able to withdraw from your savings each year for a comfortable number of decades. Another way is to use part of your nest egg to create your own stream of protected income.

Look At Annuities As Your Personal Pension

That brings us to annuities, a product that economists tend to love because they solve a specific problem – running out of money before you run out of time. Specifically, Harris notes, economists love the simpler forms of annuities – both immediate annuities where you take a chunk of your money at, say, age 65 and use it to buy a paycheck that begins immediately, and deferred annuities where you put the chunk of money to work at 65 but don’t start drawing the income until some years later. With these products, Harris says, “if you live longer than you think, then you make out probably better than the life insurance company expected. And if you live fewer years, then you get less than you expected. But [remember] it really is an insurance product.”

A deferred annuity, he points out, might make a lot of sense for the person who has a half million in their 401(k) and a half million of equity in their house. In that case, you wouldn’t take the whole half million and buy an annuity, but rather use a chunk of it, say $50,000 to $100,000. Then your problem isn’t, “How do I make $500,000 last until I’m 100?” Instead, it’s, “How do I make $400,000 last until I’m 80?” You’ll know that once you hit 80, you’ll get supplemental income from that annuity.

Consider A Reverse Mortgage

Finally, it pays to think about a strategy for getting some of the equity out of your home in case you need it. Reverse mortgages are really complicated – and, as Harris notes, they have an “ugly history” – but they’ve gotten better with improved government regulation in recent years. Basically, he explains, they allow you to use your house like a credit card, with the agreement that whatever money the bank has loaned you against your equity will be repaid when you leave the house, sell the house, or die. Reverse mortgages, which Harris also points out were first invented to help a widow stay in her home, also provide some protection against falling housing prices. If you’re going down this road, it’s imperative to do your homework, but at the heart of it, Harris says, “It’s just a good product for that subset of people who have a lot of money in their home and not much else.”

 

For more insights on how you can turn your savings into income and live the life you want in retirement, visit the Tools and Guide section of The Alliance website.