How can you responsibly spend your IRA and 401(k) accounts in retirement? This is a mission-critical, complex question for 60-something pre-retirees and retirees who’ve been saving for retirement throughout their working lives.

Technically, this retirement planning task is called “decumulation,” and there are hundreds of articles, research reports, and books written on this topic. They all offer advice on how to use your savings to generate a stream of retirement income that will last the rest of your life.

If you’re a typical pre-retiree or retiree, then most likely you don’t have the training or experience to answer the above question on your own, even with help from articles, reports or books. It might as well be brain surgery or rocket science.

To help you with this challenge, here’s an easy-to-follow, two-step retirement income strategy in less than 35 words, called the Spend Safely in Retirement Strategy:

Step 1: Make your Social Security income as big as possible.

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.

Essential details on Step 1

You can increase your Social Security benefits by delaying the start of benefits as long as possible, but no later than age 70.

FYI you aren’t required to start Social Security when you retire. If you decide to delay the start of your Social Security benefits after you retire, you have a few options that enable you to do that:

  • You can work part time to replace the Social Security benefits you’re delaying.
  • You can use a portion of your savings to create and implement a Social Security bridge strategy. This money will be used to replace the Social Security benefits you’re delaying.

Read here for more details on a Social Security bridge strategy.

Essential details on Step 2

Many IRA providers and 401k plans offer target date, balanced, or stock index funds with annual fund expenses below 0.20%. Read the descriptions of the funds to learn the proportion of the fund that is invested in stocks. The higher the proportion invested in stocks, the higher is the investment risk along with the potential to grow your savings and retirement paycheck.

Who is the target audience for the strategy?

The Spend Safely in Retirement Strategy is intended to help pre-retirees and recent retirees with under $1 million in savings and who don’t work with a retirement advisor who is trained in the specialty of generating retirement income. By the way, this describes the vast majority of pre-retirees and retirees.

The research behind the strategy

Our research team analyzed 292 retirement income strategies, using powerful analyses that large pension plans use to devise funding and investment strategies. We examined strategies that use various types of annuities, strategies that relied on invested assets, and combination strategies.

We used several metrics to compare the pros and cons of the strategies we examined. The Spend Safely in Retirement Strategy compared favorably to more complex strategies when we analyzed how the strategies meet various goals and address common risks, including:

  • protecting against outliving your money,
  • protecting against inflation, and
  • providing the potential for growth in your savings and retirement income.

Social Security benefits meet all these goals. It’s important to understand that for the target audience, Social Security benefits will comprise two-thirds, three-quarters or more of their total retirement income.

If you want to read details on the strategy, here’s a link to the research report that’s on the website of the Society of Actuaries, who sponsored the research. The report also discusses implementation details and straightforward adjustments to the strategy.

Can you do better than this two-step strategy? Possibly, but that will take some effort on your part to research and implement an alternative. For those of you who choose not to get help from a trusted financial advisor who specializes in generating retirement income, consider this strategy to be a baseline plan that you can start with and then modify if you so choose.

Of course, you’ll do best by taking the time to learn about different strategies that might meet your goals and circumstances. See if you can do better than the baseline Spend Safely in Retirement Strategy.