America's strategies for retirement run the gamut, from meticulously planned to none at all. Hopefully, your plan is more detailed than lottery tickets and blind luck – but what's the best strategy for you? Is there even such a thing as a preferred retirement strategy?
A recent study compared 292 different approaches for managing retirement income and concluded that most people would benefit from a "spend safely in retirement" (SSR) strategy. While the name implies an emphasis on responsible spending – and responsible spending is certainly important to a sound retirement strategy – the real focus is on income and cash flow.
Stanford Study Shows the Best Retirement Strategy
The study from the Center on Longevity at Stanford University, in a collaborative effort with the Society of Actuaries (SOA), attempted to find the optimum way for most retirees to have enough money to last throughout their lives, focusing on withdrawal strategy.
The key is to manage your income as if it were a traditional pension that gives you a reasonably predictable income over the course of your life – or, as the study refers to it, "pensionizing" your retirement plans. An annuity can serve the same purpose, but it does so at a cost. You can manage your own retirement sources to achieve a similar effect.
Consider that you have a range of control over all of your retirement sources and their timing. You can take Social Security at age 62 with reduced benefits, at your full retirement age with standard benefits, or age 70 with increased benefits. You can take withdrawals from your 401(k) at age 55 or your IRA at age 59-1/2 without penalty, or you can wait until age 70-1/2 when distributions are mandatory. You can continue to work either part- or full-time. You can apply for a reverse mortgage or sell unwanted assets for extra retirement cash.
By reviewing all of the income sources — and using the right resource at the right time — you can smooth income over time and identify critical years where spending cutbacks make sense.
"Age 70 is the New 65"
According to the study, the SSR strategy has two primary pillars. Delay your Social Security benefits until age 70 to maximize those benefits, and work "just enough to pay for living expenses until age 70." After age 70, use existing retirement funds to create an "automatic retirement paycheck" to supplement Social Security benefits.
Social Security benefits may be in question over the long term, but they are still a relative bedrock with respect to retirement income. That's why the Stanford Study suggests maximizing these benefits as the starting point. The remaining savings and retirement funds may then be targeted toward relatively low-cost index funds or other funds that are cost-effective and less susceptible to market swings or recessions.
If you can get through to age 70 without tapping into Social Security benefits or IRAs/401(k)s, then you have a solid, predictable income based on those combined benefit streams. If not, you must decide which is the preferred option – working longer, drawing from your retirement funds earlier than age 70 to fill the gap, or filling the gap by other means such as liquidating assets.
What's Right For You?
The Stanford scenario sounds straightforward but contains assumptions that may not fit your situation. What if your retirement funds are low and you must put your investments in riskier stocks to catch up? What if your Social Security benefits are unusually low based on your work record or spousal benefits? What if you simply can't stand your job any longer or are in poor health?
You must alter these options based on your personal situation, but the study gives you a framework to use when making your decisions. Perhaps one of the other 291 retirement strategies works better for you. The main point is that you have a strategy that is well thought out and evaluated periodically.
The Stanford Study provides an excellent framework to lay out your retirement plans over the course of your lifetime. By focusing on incoming cash flow at different points in your retirement years, you can get the best overall picture of whether your income is sufficient for your retirement goals.
Start by checking your estimated Social Security benefits. By signing up for a mySSA account, you can review your expected benefits and check your history for errors or missing years of income that may reduce your benefits. Since benefits are generated by the highest 35 years of indexed income in your career, working a bit longer may increase your benefits as well as provide extra income.
Given your estimated Social Security benefits, use some variation of the SSR strategy to map out the total annual income flows for your retirement years and see how things match up with planned expenses. The sooner you evaluate this strategy, the sooner you can make needed financial corrections.
You may find conducting a retirement cash flow analysis boring, but it's better than the exciting, unpredictable situation of retiring without enough assets.
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