Series vs. Parallel Retirement Income Strategies

Title: Series vs. Parallel Retirement Income Strategies
Principal Investigator: John Shoven
Dates: November 1, 2011 - December 31, 2014
Sponsor: Alfred P. Sloan Foundation


Financing retirement has gotten much more complicated for millions of Americans. For the past fifty years, most people reaching retirement age with an employer sponsored pension plan had a defined benefit one. Such plans typically had embedded in them a suggested retirement age and payments were in the form of a life annuity. The suggested retirement age was the age at which participants became eligible for the full benefits, often 62 or 65. Typically, the benefits were not actuarially adjusted for later retirements. The natural thing to do at this age was to commence Social Security benefits and supplement them with the defined benefit plan. Now, we are in a new retirement financing world, where increasingly most workers have a defined contribution plan (a 401(k), 403(b) or 457 plan with the numbers indicating tax code paragraphs) or perhaps an IRA account. In addition, Social Security presents an important set of options in terms of commencing benefits. Another significant factor is that nominal and real interest rates are the lowest in 50 years, with safe, real short term interest rates being negative. Retirees with accumulated funds used to be able to live on the interest and principal. Interest rates have declined so much that interest income is hardly a factor anymore.

What I plan to do with my co-author, Sita N. Slavov, is investigate how people can get the most out of Social Security and their defined contribution balances in this new financial environment. We will thoroughly investigate both the traditional strategy of using defined contribution pension accumulations to supplement Social Security and the less well understood strategy of using the DC assets to provide bridge financing while deferring the commencement of Social Security. We refer the traditional approach as the “parallel strategy” in that both Social Security and DC assets are simultaneously contributing to income support. We call the more unconventional strategy of first depleting the DC balances while deferring Social Security the “series strategy.” People arrive at the age of retirement with many different circumstances in terms of their earnings histories, marital status, race, health histories, etc. We plan to rather exhaustively evaluate the relative advantages of the parallel vs. series strategy for people in different circumstances. I believe that we can show that many people, almost certainly the majority of people, should use their retirement resources in series rather than in parallel.