Spending safely in retirement: Why it is important
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As more Americans are living longer, many Baby Boomers worry if their retirement income will last through their lifetime. Once retired and you are no longer receiving that weekly paycheck, you will need to have a plan on how to budget your spending to assure your savings lasts well into your “Golden Years.”
The Society of Actuaries and Stanford Center on Longevity recently released a report outlining the feasibility of the “Spend Safely in Retirement Strategy.”
“This strategy can help older workers make critical retirement planning decisions, such as when to retire, whether to work part-time for a few years, and how to deploy and invest savings in retirement. It can help to ensure adequate income throughout the duration of retirement,” said Steve Vernon, one of the study’s co-authors. Vernon is a Fellow of the Society of Actuaries and a research scholar with the Stanford Center on Longevity. Vernon discussed with Fox Business key considerations for retirees looking to implement this strategy into their retirement planning.
Boomer: What is the “Spend Safely in Retirement Strategy”?
Vernon: The “Spend Safely in Retirement Strategy” is a baseline strategy to ‘pensionize’ IRAs and defined contribution retirement plans to help older workers and retirees understand the amount of lifetime income they can expect in retirement. The strategy includes two key steps:
1. Optimizing expected Social Security benefits through a careful delay strategy.
2. Generating retirement income from savings using the IRS required minimum distribution rules, coupled with either a low-cost index fund, target date fund or balanced fund.
Boomer: What are the best practices for implementing the Spend Safely in Retirement Strategy?
Vernon: The Society of Actuaries and Stanford Center on Longevity recommend the following best practices for implementing the strategy:
1. Develop a plan to enable delaying Social Security benefits until the optimal age, either by working part-time or by deploying a portion of retirement savings to fund a Social Security bridge payment.
2. Decide the appropriate asset allocation for the IRS required minimum distribution (RMD) portion of income, to achieve a reasonable compromise between growth and volatility in retirement income.
3. Refine and adjust the baseline strategy to reflect a number of possible individual goals and circumstances. These refinements include starting the RMD portion of income before age 70-1/2; adjusting for the health status of the retiree (and spouse if married); providing for additional guaranteed retirement income if desired; adjusting for an uneven flow of living expenses; accelerating income to the early years of retirement when a retiree might be more active or vital; or adjusting for working part-time for a few years.
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Boomer: Do the advantages of using this strategy outweigh the disadvantages for retirees?
Vernon: A key advantage of the strategy is that it is straightforward to implement in virtually any IRA or 401(k) plan, without requiring the help of a financial planner. The Society of Actuaries and Stanford Center on Longevity examined 292 retirement income strategies, and found that the Spend Safely in Retirement Strategy compares favorably to more complex strategies that might require working with a financial planner. When implemented correctly, it can help older, middle-income workers make critical retirement planning decisions such as when to retire, whether to work part-time to ease into retirement, and how to deploy and invest savings in retirement. The strategy is designed to help retirees ensure adequate income throughout the duration of retirement.