Don't Go Broke in Retirement
Robert Powell, CFP®
In 2017, Steve Vernon and others published a research paper that introduced the spend safely in retirement strategy or SSiRS.
In essence, the SSiRS consists of optimizing Social Security benefits and using the IRS required minimum distributions (RMDs) to generate periodic retirement income, coupled with a low-cost stock index, balanced, or target-date fund.
The strategy calls for older adults to work just enough to pay for living expenses until age 70 in order to enable delaying Social Security benefits. To make this method work, Vernon and his co-authors said retirees may also need to significantly reduce their living expenses.
If a worker isn’t willing or able to delay retirement, Vernon and his co-authors wrote that the next best way to implement the spend safely in retirement strategy is to use a portion of savings to enable delaying Social Security benefits as long as possible but no later than age 70. They would then invest their remaining savings and use the RMD to calculate their lifetime retirement income that’s generated by their savings.
A short time later, the Stanford Center on Longevity published a study in collaboration with the Society of Actuaries that analyzed the feasibility of the spend safely in retirement strategy and discovered the following:
- This strategy compared favorably to 292 retirement income strategies that we analyzed, including various types of annuities and systematic withdrawal plans using invested assets.
- Delaying retirement can significantly increase ultimate retirement income.
Fast forward, and now Vernon has published a book based on the spend safely in retirement strategy research. The book, Don't Go Broke In Retirement, outlines the strategy in plain English.
In an interview, Vernon said the goal is to
1) create a series of "retirement paychecks," monthly income that's paid for the rest of your life, no matter how long you live. "You cover your basic living expenses with those guaranteed paychecks," he said.
2) And a stream of retirement bonuses.
And once you know what your paychecks and bonuses are you, you know the target to which you need to reduce your living expenses, he said.
For the guaranteed paychecks, you would start with Social Security, he said. "It's paid for the rest of your life, no matter how long you live," said Vernon. And, it's indexed for inflation.
The strategy would have you work and delay claiming Social Security until age 70. Social Security retirement benefits are increased by a certain percentage for each month you delay starting your benefits beyond full retirement age. The benefit increase stops when you reach age 70.
But if you don't want to, or can't work to cover your Social Security paychecks till age 70, using your savings to cover what would have been your Social Security check is a good option.
For some, Social Security might be all the guaranteed income they will need, said Vernon. But if not, consider using a bond ladder or a cost-effective income annuity to generate more guaranteed income.
"The spend safely in retirement strategy is a decision-making process where you start by optimizing Social Security," he said. "Then you decide if you need or want more guaranteed income. And then if you do look into alternatives."
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