Many retirees are spending their retirement savings quite frugally, according to a handful of recent reports and studies. These studies—from the Employee Benefits Research Institute, United Income, and the Boston College Center for Retirement Research—reveal that as a result, retirees might end up passing away with a lot of money in the bank, money they might have been able to enjoy while they were alive.
There are a handful of potential reasons for this phenomenon, including the possibility that retirees are afraid of outliving their money, that they’re saving their money for that proverbial “rainy day,” or that they haven’t yet shifted their mindset from accumulating savings for retirement to spending money in retirement.
Consider a strategy to help you spend more in retirement
While I don’t intend to chastise pre-retirees and retirees for being frugal, I do want them to know there’s a straightforward strategy they can use to safely spend more money in retirement. This strategy is featured in my latest book, Don’t Go Broke in Retirement: A Simple Plan to Build Lifetime Retirement Income.
Appropriately, the strategy is called the Spend Safely in Retirement Strategy, and it’s based on robust research that I led at the Stanford Center on Longevity, in collaboration with the Society of Actuaries. We systematically analyzed and compared 292 retirement income strategies, using sophisticated analytical techniques. Two key metrics we used were the amount of lifetime retirement income you can expect as well as the amount of savings you can access at any point in time. Using these metrics, the Spend Safely Strategy (for short) compared favorably to the other 291 strategies we analyzed, many of which are much more complex.
The Spend Safely Strategy is designed to withstand stock market crashes, and indeed, the recent financial turmoil successfully stress-tested the strategy, due to the high level of risk-protected income.
Adopt a three-step strategy
The basic idea behind the strategy is to develop sources of retirement income that are designed to last the rest of your life, no matter how long you live. Then limit your monthly and annual spending to the amounts of retirement income you expect to receive.
To generate sources of lifetime retirement income, follow these three steps:
- Optimize your Social Security benefits with a careful strategy to delay your benefits as long as possible, but no later than age 70. If you retire before age 70, enable the delay by either working part time or implementing a Social Security bridge payment.
- Invest your retirement savings in a low-cost balanced, target date, or stock index fund—these funds are commonly found in 401(k) plans or IRA platforms. Use the IRS required minimum distribution (RMD) rates to determine the amounts that you can safely withdraw each year to help pay for living expenses. Use the same RMD methodology to calculate your annual withdrawal if you retire before the age the RMD applies to you (age 70 if you were born on or before June 30, 1949, age 72 for all others).
- Set aside some money for an emergency fund, so you don’t need to withdraw from the savings that are generating your retirement income.
Explore refinements and adjustments to customize the strategy
The Spend Safely Strategy isn’t rigid—it includes adjustments and refinements to customize the strategy to your own goals and circumstances. As such, it’s also a decision-making framework. For example, you can use adjustments to safely achieve these goals:
- Generate retirement income before the optimal age to start Social Security benefits.
- Start retirement income before the RMD rules apply to you.
- Develop additional sources of guaranteed retirement income, if that would make you feel safer.
- Spend more money on travel in your early years of retirement, while you are still active and vital.
- Set aside some savings to address potential medical and long-term care expenses late in life.
- Reflect if you’re in poor health.
- Help family members or give to charity.
You can implement the Spend Safely Strategy using virtually any IRA or 401(k) plan, with or without the help of a financial adviser. If you feel more confident working with an adviser, understanding the strategy can help you have an informed discussion with that adviser.
When it comes to their money, some people express a desire to spend all of it while they’re alive and die with nothing in the bank. The trouble is, if you aren’t prescient about your date of death, you might spend too much money and end up with nothing in the bank years before you pass away. The Spend Safely Strategy offers a realistic balance between frugality on the one hand, and spending too much money and outliving your savings on the other.
Don’t Go Broke in Retirement contains the information you need to implement the strategy and the refinements discussed here, as well as helpful examples to assist with your retirement planning. It also identifies useful tools and resources that can help with your planning, and it includes a handy checklist.
It may take some time and effort on your part to build your lifetime retirement income portfolio, but it’s a very good use of your time, considering that you should be planning to enjoy a retirement that lasts for 25 years or more.
