USA TODAY International Edition
Spend safely and avoid outliving your money
Many older adults worry about going broke in retirement, about outliving their assets. But they don’t have to worry if they follow two key steps outlined in new research from the Stanford Center on Longevity and the Society of Actuaries, those chipper folks who study how long you might live. 1. Delay Social Security benefits. Whether you’re the primary wageearner of a married couple or a single retiree, you should delay claiming Social Security for as long as possible, though no later than age 70.
Doing so, the researchers say, does two things:
One, the beneficiary will receive the largest possible monthly benefit. That’s because Social Security retirement benefits are increased by a certain percentage ( depending on your date of birth) if you delay your retirement beyond full retirement age or FRA. So, for instance, those born in 1957 could get 128% of their scheduled FRA monthly benefit if they delay getting benefits from age 66 and six months ( the FRA for someone born in 1957) to age 70.
And two, the increased benefit could represent two- thirds to more than 80% of a retiree’s total retirement income. And for many middle- income retirees, this may represent all the guaranteed lifetime income they need, according to the researchers.
2. Use withdrawal rules. The second step is for you, the retiree, to generate income from your savings using the IRS’ required minimum distribution ( RMD) rules, coupled with a lowcost index fund, target- date fund or balanced fund.
The IRS requires that IRA and 401( k) account owners start taking mandatory distributions from their accounts starting at age 701⁄ 2. Though complicated, the RMD rules say you must start withdrawing a certain amount of money from your retirement accounts each year based on your life expectancy and the amount of money in your accounts.
These two steps, which the researchers refer to as the “Spend Safely In Retirement Strategy” ( SSiRS), are intended as a “baseline” approach for middleincome workers who: won’t have much if any traditional pension/ defined benefit plan income; have accumulated $ 1 million or less in their 401( k), IRA or other accounts earmarked for retirement; and might not work with a financial adviser.
Among the SSiRS’ advantages, the researchers say, is that the approach is easy to understand and implement, and doesn’t require the ongoing involvement of a financial adviser. Plus, optimizing Social Security benefits will mitigate some of the more common retirement risks such as longevity ( the risk of outliving your assets), inflation, and declines in the value of your retirement portfolio.
But this strategy is not without its disadvantages.
SSiRS doesn’t work all that well when living expenses are uneven and vary from year to year. For instance, the decision to use RMD rules for withdrawals – rather than say the 4% rule where one withdraws a fixed percentage per year from retirement accounts – means your income could fluctuate year to year. So, for example, let’s say you are 70 and had $ 1 million in your IRA as of Dec. 31 of the previous year. In year one of the strategy, you would withdraw $ 36,496 from your account. But in year two, let’s say you had $ 950,000 in your account. Now your RMD would be $ 35,849. So, the RMD strategy might not work for retirees who have to cover essential and/ or unexpected expenses with the money in their retirement accounts.
Often, actuaries and others will say essential living expenses ought to be covered by fixed sources of guaranteed lifetime income such as Social Security or a pension.
Got questions about money? Email Bob at rpowell@ allthingsretirement. com.