In 2017, the Stanford Center on Longevity analyzed 292 different retirement income strategies and determined the best way for most people to withdraw their savings. It’s called the “spend safely in retirement strategy” (SSiRS) and involves two basic components: delaying Social Security benefits and creating an “automatic retirement paycheck.”
In a new 2019 report, “Viability of the Spend Safely in Retirement Strategy,” the research team took a deeper dive into the SSiRS and explored different ways to implement it.
The strategy is designed to be used by middle-income workers and retirees, which the report defines as those having $1 million or less in retirement savings.
Here’s a closer look at how the two key components of the SSiRS work.
1. Delay Social Security payments until age 70
“Social Security will deliver the majority of retirement income for middle-income workers, even for workers currently in their 20s and 30s,” Steve Vernon, co-author of the report, tells CNBC Make It. It’ll be anywhere from 60-80% of their total income, he says.
Social Security is “a nearly perfect retirement income generator,” he continues, because it protects against inflation, doesn’t go down if the stock market crashes, is paid automatically into your checking account and some of it isn’t subject to income taxes. “No other retirement income generator has all of those positive features, so maximizing Social Security is a key part of this strategy.”
For younger workers, it’s likely that the benefits may be reduced by around 20% to 25% of where they are today. But it should still be a part of their retirement planning strategy.
The best way to optimize Social Security’s benefits is to delay receiving them until you turn 70, Vernon says, which means working longer in some way. If you want to retire before then, one option is to work part-time and make just enough to cover living expenses until 70, he suggests.
If working part- or full-time until 70 is out of the question for you, the next best thing to do is to fund what’s called a “Social Security bridge payment,” which acts as a “retirement transition fund,” according to the report.
To create this payment, withdraw the same amount you would have received from Social Security from your other retirement savings, such as a 401(k) or IRA, and keep it in a separate account. If your Social Security payment is $20,000 per year and you’re delaying it for five years, you’d set aside $100,000 to withdraw over those five years.
However, the amount you decide to set aside in this fund is up to you: “Some workers might decide it should be a large enough amount to cover their estimated living expenses for a specified period, say two to five years,” the report says. “Another use for a retirement transition fund is to set aside enough savings to cover the amount of the Social Security benefit they plan to delay for as long as needed.”
No matter the amount you choose to put in it, the purpose of the bridge payment is to delay Social Security payments for as long as possible.
As for where to keep this money, “the retirement transition fund can be set up as a separate account in a worker’s IRA or 401(k) plan,” says Vernon. “Alternatively, retirees can use other investment accounts for this purpose. Since the investment horizon for the retirement transition fund is short, they could invest in stable, liquid investments, such as a short-term bond fund, money market fund or the 401(k) plan’s stable value fund, if it has such a fund.”
2. Create an “automatic retirement paycheck”
To supplement Social Security income, you want to generate consistent “paychecks” from your 401(k) and IRA accounts that will last the rest of your life. You’ll use these paychecks to pay for basic living expenses, such as housing, food and transportation.
To do so, it’s important to withdraw the right amount from your savings each year so that you don’t run out. The IRS requires you to make minimum withdrawals from your retirement savings starting at age 70 ½, known as the required minimum distribution, or RMD. The SSiRS recommends simply withdrawing this amount.
At 70 ½, the minimum is 3.65% of your savings, and the percentage increases every year. Many IRA and 401(k) administrators can calculate your RMD and pay it automatically in the frequency you want, so you will essentially be creating an automatic, and reliable, retirement paycheck.
You don’t have to spend the money that you withdraw, the report adds: You “have the option to pay income taxes on these withdrawals and invest part or all of the after-tax proceeds.” That means if your RMD is more than you need to live on, you can put the extra money back into the market, ideally in a low-cost target date fund, balanced fund or stock index fund.
While “there is no perfect retirement income strategy,” Vernon says, the SSiRS can “help virtually anybody generate a stream of income in retirement.”