3 tricky decisions for every retirement plan

Many aspects of retirement planning are the subject of hot debate, even among experts. Here are three tricky decisions that confront people planning retirement today.

It’s impossible to say at the outset of retirement what the “right” withdrawal rate is. You don’t know what the major asset classes will return or how high (or low) inflation will run during your retirement. Nor do you know how long you’ll live.

But you have to use something, and this is where the disagreements come in. A 4% starting withdrawal rate, with annual inflation adjustments to that initial dollar amount thereafter, is often cited as a “safe” withdrawal system for new retirees. Research we conducted at the end of 2021 suggested that a 3.3% withdrawal rate was a safe starting point for new retirees with balanced portfolios over a 30-year horizon. When we revisited the research in late 2022 , our safe starting withdrawal percentage was 3.8%. By late 2023, that number had popped up to the classic 4% , thanks to rising fixed-income yields and moderating inflation. At the end of 2024, it was 3.7% , and 3.9% at the end of 2025 . Further complicating matters is that retirees don’t spend the same amount, adjusted for inflation, year after year.

There’s a comforting consensus in a few key areas.

According to a 2019 study , about half of people turning 65 will need some type of paid long-term care. But paying for it can be financially devastating. What’s up for debate is whether and how to protect yourself.

The long-term-care insurance market is deeply troubled today. While recent interest rate hikes have improved the economics of the long-term-care insurance industry , premiums have increased and several insurers have gotten out of the business.

That’s why purchasing pure long-term-care insurance is by no means a no-brainer. Hybrid products offer a long-term-care rider bolted onto a life insurance policy or annuity, but they’re complicated and often purchased with a lump sum.

Take a hard look at your retirement portfolio to decide whether your assets are sufficient to self-fund, you’re likely to qualify for Medicaid, or you fall somewhere in between. From there, you can create a long-term-care action plan .

Academic researchers have long championed simple income annuities for retirement, arguing they provide longevity risk protection and a higher payout than would be available from fixed-rate investment products like bond funds. Annuities have been getting even more attention as payouts tend to get better during a period of rising interest rates .

But annuity types vary widely , from single-premium immediate annuities to more complicated products that provide equity exposure, guaranteed minimum living benefits, and death benefits.

Research has demonstrated that the peace of mind that accompanies the purchase of a basic annuity is greater than would be associated with holding the same amount in investment assets. Yet the annuity products that retirement researchers generally like best—the plain-vanilla immediate and deferred-income annuities—have struggled in the sales department. Investors may be reluctant to part with the capital to purchase them, and advisers may not have a strong motive to recommend them.

While there’s no consensus on whether annuities are a must-have or which types to buy, there’s little doubt that the lifetime income they offer is in short supply. That’s especially true given that only about a fourth of baby boomers retiring today have pensions, and that number trends down for the generations behind them.

The starting point when thinking about lifetime income isn’t an annuity. It’s Social Security, which is basically an annuity backed by the U.S. government. Only after maximizing lifetime income through Social Security should an annuity come into play.

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This article was provided to The Associated Press by Morningstar. For more retirement content, go to https://www.morningstar.com/retirement .

Christine Benz is director of personal finance and retirement planning for Morningstar and co-host of The Long View podcast . Subscribe to her free newsletter, Improving Your Finances .

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