Editor’s Note: This story originally appeared on NewRetirement.
One of the biggest fears you probably have about retirement is whether your money will last as long as you do.
It is likely that you are also asking: How much can I spend? How much do I need? How much do I actually have? There are so many questions.
Good news: the Stanford Center on Longevity in collaboration with the Society of Actuaries (SOA) has some answers. They analyzed 292 retirement income strategies and are recommending the “spend safely in retirement strategy” as the best way to spend in retirement.
The lead Stanford researchers, Steve Vernon, Wade Pfau, and Joe Tomlinson wanted to figure out which retirement income strategy gave the highest number of retirees the biggest amount of income possible that would last their lifetimes.
They also wanted a retirement income system that:
- Almost anyone could actually implement on their own – without the help of a financial adviser
- Reduces the risk of volatility
- Could keep pace with inflation
- Limits the possibility of failure (falling short)
Here’s what they figured out.
The spend safely in retirement strategy is designed to help middle-income workers and retirees decide when to retire, how much to spend in retirement, and how to best deploy their financial resources.
The main goal of the strategy is to help you turn your assets – Social Security, the ability to work, savings, and home equity – into the most retirement income possible.
You have probably read about hundreds of different retirement income strategies. Why is this one different?
Well, to start, this concept is being proposed by some really smart guys who have done unbelievable amounts of detailed research and calculations to make this recommendation. Not only are these professionals smart, but they also are applying expertise not always used in retirement planning.
As the spend safely in retirement report says: “Professionals with expertise in investing tend to favor investing solutions that generate retirement income, while professionals with expertise in insurance products tend to favor annuities. Both types of professionals might not consider or advise their clients regarding other financial resources such as home equity and reverse mortgages.”
The spend safely in retirement strategy is a more holistic approach. There are basically five parts to the strategy.
Maximizing the value of this benefit means waiting to start until at least your full retirement date. The longer you wait to start Social Security, the greater your monthly benefit will be.
If you are married, learn about the smartest Social Security decision you can make.
Stanford researcher Vernon writes, “Social Security benefits are a near-perfect retirement income generator, protecting you against several risks: living a long time, inflation, stock market crashes, and cognitive decline. It only makes sense to maximize the value of this essential benefit.”
The Stanford researchers recommend that your retirement savings be invested in low-cost mutual funds, target-date funds, or index funds.
And then use the required minimum distribution (RMD) formula to determine your annual withdrawals from these savings. (And don’t make earlier withdrawals. But, if you do, keep it to 3.5% of the value of your accounts.)
RMDs begin at age 72. You are required to withdraw a percentage of your savings at this age and this percentage will increase each year.
Now comes the hard part. You need to see if the income from the above sources – as well as a pension if you are lucky enough to have one – is adequate to cover all of your projected expenses.
The more accurate you can be with projecting your expenses, the more reliable your plan will be. (The NewRetirement Planner enables you to set spending in over 70 different categories and vary your expenditures over time.)
Once you determine how much income you can get by maxing Social Security, any pensions you might have, and modest yearly withdrawals from savings, and have compared that to your projected expenses, you can now start to work out how to fill in for any shortfalls.
The spend safely in retirement strategy recommends you consider delaying retirement, reducing expenses, getting a retirement job, and/or tapping your home equity to fill in the gaps.
If you have sizable savings, you may prefer something more sophisticated with your assets: annuities, a bucket approach, varying your withdrawal amounts based on investment returns (applying floors and guardrails), setting up a bond ladder, or establishing a more sophisticated allocation for your assets.
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