Here’s how to spend safely and avoid going broke in retirement
Dear Liz: A lot has been written about how much can safely be withdrawn from a balanced investment portfolio so that it will last a lifetime. A popular strategy is to withdraw a percentage, say 4%, in the first year and then increase that withdrawal each subsequent year by the rate of inflation.
What are your thoughts on an alternate strategy of withdrawing a fixed percentage, say 4%, at the beginning of each year? This has the disadvantage of providing a more variable income stream year to year, but has the advantages of simplicity and it can never deplete the portfolio to zero.
Answer: Many retirees would find it hard to cope with incomes that swing wildly from one year to the next. One way to address that volatility is to ensure that retirees have enough guaranteed income — through Social Security, pensions and annuities — to cover their basic, must-have expenses. Retirement plan withdrawals then would provide for their “wants,” such as travel, meals out and so on.
Cutting back on the nice-to-haves isn’t easy, but it’s better than not having enough money to pay the mortgage or buy groceries.
This approach is the core of the “Spend Safely in Retirement Strategy,” created by retirement researchers Wade Pfau, Joe Tomlinson and Steve Vernon with the help of the Society of Actuaries and the Stanford Center on Longevity.
The strategy suggests maximizing Social Security and basing withdrawals on the IRS’ required minimum distribution percentages. Reports detailing the strategy and the research behind it are available on both organizations’ websites, and Vernon’s book “Don’t Go Broke in Retirement” explains the strategy in detail.
Of course, trying to eliminate any possibility of running short means that you may die with a whole lot of unspent money. That may be great news for your heirs, but sad for you if you denied yourself excessively while you were alive. Finding the right balance between security and spending is tough, to say the least.
Don’t bother with max credit score
Dear Liz: I am seeking your advice on how to maximize my credit score. Recently one of my cards was canceled for non-use, which reduced my available credit to $75,000. I use three other cards in rotation, never use more than 3% of my credit limits and always pay the balances off. I have made a few requests to have my credit limits increased in order to elevate my current 835 FICO score, only to be denied.
I want to maintain as high a FICO score as possible (850). In order to do that I need to “play the game” … but I have no idea what the rules are! Could you please help me navigate this?
Answer: There is absolutely no practical benefit to having the highest possible credit score. You’ll get the best rates and terms once your scores are above the mid-700s on a 300-to-850 scale.
Regular readers can recite this next part by heart: Keep in mind that you don’t have one credit score. You have many, and they change all the time.
Even if you did hit 850 with one scoring formula from one credit bureau, you probably wouldn’t keep it for long or achieve the same number with all the other available scores.
You already know the most important credit rules: Use your cards regularly but lightly and pay your balances on time and in full every month. (Credit scoring formulas typically don’t “know” if you’re carrying a balance, so there’s no advantage in doing so.)
If you’re determined to hit 850, however, you could try using even less of your credit limit, applying for a new card to increase your available credit (the initial small ding to your scores would be short-lived) or simply waiting, since often the mere passage of time will add points to your scores.