Courtesy Wade Pfau
Economist Wade Pfau’s views on funding retirement, subject of a recent Barron’s article, spurred a lot of comments from readers, including those who believed Pfau erred by not touting the virtues of stocks or real estate investment trusts that have histories of paying high dividends.
Pfau is dubious. Owning stocks that pay a high dividend doesn’t provide the same secure retirement income as owning safe bonds “because dividends can be cut,” he says.
He adds that if retirees are willing to own a broad market index and live off the dividends, that’s a “pretty conservative” strategy. The problem is that the
stock index yields only around 1.4% currently, and retirees with a dividend-income strategy typically gravitate to stocks with higher payouts.
“As soon as you move away from a diversified market portfolio, you’re taking on more risk,” says Pfau, a professor of retirement income at the American College of Financial Services.
Pfau believes that seniors can’t count on continued gains in the stock market to fund their retirement. He has recommended that they consider products like variable annuities, whole life insurance, and reverse mortgages that will hold their value even if stocks take a dive.
On Delaying Social Security
Other readers took issue with Pfau’s assertion that retirees should consider spending down their portfolio to delay Social Security and receive a higher benefit. One reader said he was starting Social Security at age 62 so he won’t have to tap his 401(k) and will reap the benefits of stock-market returns until his required minimum distributions begin at 72.
Pfau says this approach overlooks that stock-market returns aren’t guaranteed, and that delaying Social Security provides a guaranteed boost in benefits.