“Spend Safely in Retirement Strategy” by Steve Vernon
Takeaway #3: What are some refinements to the Spend Safely in Retirement Strategy that might allow some access to savings?
Part One of the “Spend Safely in Retirement Strategy” is optimizing Social Security.
- You want retirement checks that are reliable, guaranteed for the rest of your life, will not go down if the stock market crashes, and those you can use to pay for your basic living expenses or at least get close. The Social Security portion and annuities — those are your retirement paycheck. Then you want to have some bonuses that have some potential to grow, but knowing that because they are invested in the stock market that might go down. SWPs (Systematic Withdrawal Plans) that are invested primarily in stocks become your retirement bonuses.
Part Two of the “Spend Safely in Retirement Strategy” is to take the IRS RMD from your remaining savings to generate retirement income.
- This is what is characterized as your variable retirement bonus. Our forecasts are showing that if you get good returns from the stock market and you are invested significantly in stocks, you will get a real rate of return and a real bump in your retirement income. That is money you might want to use for discretionary living expenses like travel, hobbies, or supporting your grandchildren.
We acknowledge that many people may not want to go 100 percent into stocks with this portion.
Investing in the QDIA (Qualified Default Investment Alternative – certain types of investment services that can be used by employers to provide retirement account management to their employees, intended to encourage investment of employee assets for long-term savings) either a low-cost target-date fund or a balance fund, is also a good way to implement this strategy. This strategy, I think, works best for workers with no significant defined benefit pension and having between $100,000 and one million in retirement savings.
If you have fewer than $100,000 in savings and you are in your mid-60s, that is a tough spot to be in, and I will say that strategies to deploy retirement savings do not work very well when people do not have enough retirement savings. The best options they have are to work longer, delay Social Security, and reduce their living expenses. I am not glorifying that. That is a tough situation in which to be. Retirement solutions from savings do not work for people who do not have savings.
The Spend Safely in Retirement Strategy, compared to 292 other strategies we looked at, delivers equal or greater income throughout the life of the employee or retiree.
It has moderate liquidity in bequests. It produces more liquidity in bequests than most annuity solutions. On the other hand, it produces less liquidity or bequests compared with pure systematic withdrawal strategies that do not use your savings to optimize Social Security.
This kind of information can help people decide maybe if they can find part-time work and not need to save any more money, “All I need to do is delay Social Security and delay drawing down my savings.” This becomes a viable strategy for people in their 60s that could improve their lives by having more time to pursue their interests, only working part-time, and enabling their Social Security and their savings to grow.
Now there is another conclusion to draw from here. Look at these replacement ratios. Even if you optimize Social Security and delay until age 70, there is only have a 60 percent replacement ratio, which is less than what most common retirement advisors recommend. This shows the dilemma that many people are facing as they are approaching their retirement years that they may need to reduce their standard of living significantly.
This is the challenge that is facing future retirees who do not have significantly defined benefit pensions and only have savings.
These workers are going to need to figure out how to live on a reduced standard of living. I am not saying this is desirable. I am saying this is the reality and collectively, this is one of the challenges that workers in this category are going to face.
The Spend Safely in Retirement Strategy is a baseline or a guideline.
We are not advocating the “Spend Safely in Retirement Strategy” as a rigid strategy. It is really a way of thinking. There are refinements that you may find desirable. For example:
- I think everybody should have some emergency fund that is not used to generate retirement income and that would be for unexpected expenses or maybe expenses you are expecting, such as you need to fix the roof or buy another car. You want to set that money aside and do not use it to generate income.
- Think of a travel bucket. I hear some people say, “Yeah, I want to spend more money in the first ten years of my retirement while I am still healthy and able to do that. So, I would like to spend more money than what the RMD would throw off.”
- Some people may want more guaranteed income, and so you might want to buy an annuity, either a SPIA or an FIA or a GLWB (guaranteed lifetime withdrawal benefit).
- Some people may want even more, particularly they want more income, and if they have enough home equity they might want to take out a reverse mortgage line of credit that can supplement their income. That becomes another source of guaranteed income.
Finally, I have been talking about delaying Social Security until age 70. That does produce optimal results, but you still get plenty of boost if you delay Social Security until age 66 or 67 or 68. It does not need to be a rigidly applied strategy. The dilemma that many people are facing is limited retirement resources and the levers that they have to address their retirement situation are limited. They can work longer, or they can save more.
Once you are in your 60s, you are really not going to save your way out of a retirement shortfall. You really cannot afford a mistake or retirement income solutions that are inefficient. You have got to stay healthy if you are going to work. You can spend less in retirement. You have to make every dollar count.
I think that as part of a retirement plan that a plan sponsor offers their older workers, part of that ought to be alternate career paths for their older workers, paths for them to downshift and not work quite as hard as they used to but still enable them to work and delay taking Social Security and delay drawing down their savings.
This Key Retirement Takeaway is excerpted from a recent webinar presented by Steve Vernon, FSA, MAAA, Research Scholar, Stanford Center on Longevity, President of Rest-of-Life Communications.
In both of his roles as Research Scholar at the Stanford Center on Longevity and as the President of Rest-of-Life Communications, Steve is active with research, writing, and speaking on the most challenging issues facing retirees today, including finance, health, and lifestyle.
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©2018, Steve Vernon. All rights reserved. Used with permission.