My recent post summarized a straightforward, two-step retirement income strategy, called the Spend Safely in Retirement Strategy. Although that post provided a brief discussion of the two steps of the plan, it wasn’t possible to provide all the implementation details. This post should help fill that gap.
Step 1: Make your Social Security income as big as possible.
Most people can increase their monthly Social Security income by delaying the start of their benefits, but they don’t need to wait any later than age 70, because there’s no advantage for delaying beyond that age.
However, this advice to delay to start of benefits doesn’t apply to everybody, particularly if you’re married. To find recommendations for effective Social Security strategies that can maximize the lifetime benefits you might receive—and for your spouse if you’re married—you can use an online Social Security planner to help you sort out the best strategy for you. One such free planner is Open Social Security.
If you decide to delay the start of your Social Security benefits after you retire, you have a few options to help you make ends meet until then:
- You can work part time — just enough to replace the Social Security benefit you’re delaying.
- You can set aside part of your retirement savings as part of a Social Security bridge strategy.
A Social Security bridge strategy uses some of the money in your savings to pay yourself a monthly amount equal to the Social Security benefit you’re delaying. There’s respected research that demonstrates that this strategy is a very good use of your retirement savings if you’re trying to make it last as long as possible.
Even if you can’t delay the start of your Social Security benefits all the way to age 70, you can still realize significant advantages by delaying as long as you can, for example to age 66 or 67.
Here’s the reasoning behind this step: By making your Social Security benefits as big as possible, you’re maximizing the retirement income that you can’t outlive, won’t go down in value if the stock market crashes, and is protected against inflation. Knowing you have a significant monthly paycheck you can depend on may help you take calculated investment risks with your retirement paycheck, as discussed next.
Step 2: To supplement Social Security, invest your savings in a low-cost index fund and use the IRS Required Minimum Distribution to calculate a regular paycheck.
This step has two parts.
Part one: Invest your retirement savings in a low-cost target date fund, balanced fund, or stock index fund. These funds typically invest half or more of the money in stocks, so you’ll be accepting some investment risk for the potential to grow your savings — and therefore your retirement income — over time. The higher the percentage devoted to stocks, the higher your investment risk and potential return will be. Be sure to consider the amount of investment risk that you’re comfortable with before making any investments.
One note: There’s a lot of respected research that demonstrates you’ll earn a higher rate of return over the long run by using index funds that don’t spend a lot of time trying to buy stocks that are winners and sell stocks that are losers. They just invest in all the stocks of a particular index; this strategy keeps their operating expenses very low.
Look for funds with annual expenses under 0.20% — the lower the better. For example, Fidelity, Schwab, and Vanguard all offer index funds with very low annual expenses, and many 401(k) plans also offer such funds. All IRA and 401(k) providers are required to give you disclosures that show you the expenses of their funds, so you should be able to track down this information.
Part two: Use the IRS Required Minimum Distribution (RMD) to calculate the amount of your annual retirement paycheck (your withdrawals from savings). Many IRA and 401(k) providers can calculate this amount for you.
Note that the RMD legally applies beginning at age 72, and you may want to receive savings-generated retirement paychecks before that age. To help you determine the RMD amounts for age 60 through 72, visit this web page which includes a table of the withdrawal percentages using the same methodology as the RMD. The web page also contains a link to a white paper that shows you more details and examples of the Spend Safely in Retirement Strategy.
Once you know the amount of retirement income you can expect to receive from both Social Security and your retirement savings, you have an accurate target for managing your living expenses. Both these retirement income sources will last for the rest of your life, so, if you don’t spend more than the amount of your retirement paychecks, you won’t outlive your money. And don’t forget that income taxes are a living expense that your retirement paychecks will need to cover.
It will take a little work for you learn how to implement the Spend Safely in Retirement Strategy, but luckily it’s not rocket science or brain surgery!