The top retirement decisions facing older workers

As workers in their 50s and 60s transition into their retirement years, they face several important planning decisions. But which ones will have the most impact on their finances? 

You might think that finding the very best investments or minimizing taxes are really important. However, those would be the wrong answers for many middle-income workers.

Instead, check out a new study by the Stanford Center on Longevity (SCL), in collaboration with the Society of Actuaries (SOA). It demonstrates that the most important decisions for older, middle-income workers are:

• Deciding when to leave the paid workforce and whether to work part time for a period until full retirement.
• Deciding when to start Social Security benefits, which most workers can maximize by delaying.
• Determining whether to use retirement savings to enable delaying Social Security benefits (if you retire before you start your Social Security benefits).
• Managing and reducing living expenses, specifically housing, transportation and medical costs.
• Deciding whether to move or deploy home equity to help finance retirement, given that many workers have more net wealth in their home equity compared to retirement savings.

For the purposes of this list, "middle-income workers" are people with less than $1 million in retirement savings, which defines millions of older workers.

Two other recent studies confirm the conclusions from this one. United Income recently measured the financial impact of various retirement planning decisions. According to Matt Fellowes, one of the study's authors and CEO and co-founder of United Income, the three most important ones are (in order):

1. Selecting your retirement date.
2. Deciding on the asset allocation for your retirement savings.
3. Deciding when to claim Social Security benefits.

Said Fellowes: "The mistake that many retirees make is investing too conservatively without recognizing Social Security and other sources of guaranteed retirement income. They're leaving a lot of retirement income on the table by not investing a significant portion of their savings in equities."

The United Income study found that making more effective decisions in these areas had the potential to generate seven times more wealth than reducing investment costs by 100 basis points (which is the same as increasing the net rate of return on savings by 1 percent per year).

Fellowes observed that the study's priority order applies more to affluent investors. For middle-income workers, deciding when to claim Social Security benefits would rank first.

The SCL/SOA report confirms Fellowes' observations. SCL/SOA estimates that if a middle-income retiree optimizes Social Security income, it will deliver approximately two-thirds to more than 80 percent of total retirement income. Since Social Security benefits are protected against stock market crashes, that can help justify investing up to 100 percent of a worker's retirement savings in the stock market. 

However, many retirees may be reluctant to devote such a high proportion of their savings to stocks, so a typical target-date or balanced fund could also work well.

A third recent research paper titled "The Power of Working Longer" specifically estimated the financial impact of not retiring as soon as possible. One analysis found that delaying retirement by three to six months had the same impact on your retirement standard of living as saving an additional 1 percent of salary for 30 years. 

Another key observation of the SCL/SOA report was that many middle-income retirees will be in very low income tax brackets when they retire, for two reasons. First, part or all of any Social Security benefits they receive will be excluded from taxable income. Second, many retirees will have modest incomes to supplement Social Security, so their total taxable income will be quite low. 

As a result, strategies to minimize income taxes should take a back seat to the key financial decisions listed above. This conclusion is based on the tax rates that applied in 2017 and will be even more applicable under the new tax law.

These studies can help you decide how best to focus your time and energy to make the biggest impact on your standard of living in retirement. When you reach your 70s and 80s in good financial shape, you'll be glad you spent the time now making careful planning decisions.