Three Strategies to Strengthen Household Balance Sheets

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This article is a follow-up to excellent Advisor Perspectives articles by Joe Tomlinson, The Bright Side to 2022’s Annus Horribilis for Investments, and William Bernstein, Playing Inflation Russian Roulette in Retirement. Tomlinson’s article reminded financial advisors to “be cognizant of both sides of the financial planning balance sheet” when advising clients. Bernstein’s article compared the financial benefits and risks of implementing a TIPS ladder versus purchasing a single premium life annuity (SPIA) in today’s economic environment.

In this article, I will use an example and an actuarial model to compare the efficiency of the following three strategies for strengthening a retired or near-retired client’s balance sheet under both a lower and a higher assumed future inflation scenario:

  • Delaying commencement of Social Security benefits until age 70;
  • Purchasing a SPIA; and
  • Implementing a TIPS ladder.

I will make the comparisons on an “apples to apples to apples” basis by assuming the same 30-year lifetime planning period and client costs for each strategy.

Delaying Social Security is more efficient than the other two strategies under both assumed inflation scenarios, assuming no changes in Social Security law. But a client’s investment in this strategy (or cost) is effectively limited to the present value of the estimated extra withdrawals from the client’s accumulated savings during the commencement delay (or bridge) period. As noted by Bernstein, the TIPS ladder strategy can be more efficient than the SPIA strategy during periods of relatively higher inflation and vice versa during periods of relatively lower inflation.