Advice may be cheap – but bad advice, especially bad financial advice, can cost you plenty. So when an organization with the reputation of Stanford University claims to have the best advice for how to spend your money in retirement, it’s worth taking a look. What we found as we analyzed this advice actually sounds like good, solid common sense to us – and what’s more, it’s the kind of simple retirement spending plan that ordinary people should easily be able to implement. However, as is often the case when people talk about retirement finances, they forget that a financial plan and a retirement plan are not the same. More on that in a minute.
The recommendation from the Stanford Center on Longevity appeared in this very recent article from the pages of USAToday. According to the report, a consulting research scholar from Stanford named Steve Vernon decided to collaborate with the Society of Actuaries on a research project designed to help retirees turn their 401(k) plans or IRAs into a sort of pension. The title of the USAToday piece caught our eye: “Stanford analyzed 292 retirement strategies,” said the headline: “here’s what its experts determined is best.”
“What we wanted to do,” Vernon said in an interview, “was identify a strategy that middle-income workers could use that’s fairly straightforward and that they could do on their own.” So they analyzed a wide range of possible retirement strategies and eventually identified what they said was “the best way for most people to withdraw their money in retirement.” The team even came up with a name for it: the “Spend Safely in Retirement” strategy. Vernon said this strategy helps people determine whether they have enough money to retire and gives them a way to evaluate whether they need to work part-time for a while. The goal was also to help retirees, especially those with mid-level resources, to enjoy lifetime income. The Spend Safely in Retirement strategy accomplishes those goals while producing more retirement income than other approaches the team analyzed, says USAToday.
So is this strategy fiendishly complicated? Does it require an army of highly paid financial analysts? Hardly. In fact, there are really only two components, according to USAToday.
The first key, says the Stanford report: Delay Social Security payments until age 70. In spite of some of the program’s detractors, Social Security, says Stanford’s Vernon, is going to be the retirement pillar for most middle-income people, providing between 60 and 80 percent of total income. What’s more, the Stanford study is bullish on Social Security, calling it “nearly a perfect retirement income generator.” That’s because “It lasts the rest of your life, it protects against inflation, it doesn’t go down if the stock market crashes, it’s paid automatically into your checking account, and part of it isn’t subject to income taxes.” According to the Stanford researchers, “No other retirement income generator has all of those positive features,” which is why maximizing Social Security is a key part of the Spend Safely in Retirement strategy. This may involve working longer, either full-time or part-time, in order to cover living expenses so you can put off claiming Social Security benefits until age 70. The Stanford researchers even recommend dipping into savings if you have to so you can afford to delay until then.
The second part of the Spend Safely in Retirement strategy is to use savings to create an “automatic retirement paycheck.” Retirees can supplement their Social Security benefits by investing savings balances in IRAs and 401(k) accounts into low-cost mutual funds. Then, by using the Required Minimum Distribution (RMD) percentages provided by the IRS, you can calculate how much of your retirement savings you’ll receive each year and use that amount plus your Social Security to build your retirement budget. Tax laws require that you start taking distributions from your tax-deferred accounts when you turn 70 ½, and the current RMD at that age is 3.65 percent, rising as you get older. Because most retirement fund administrators will calculate your RMD and pay it to you automatically, “you will essentially be creating an automatic retirement paycheck,” says the USAToday article.
Ironically, according to Stanford’s Vernon, the RMD percentages were originally designed solely so Uncle Sam would be able to capture taxes due from retirement accounts, but as it turns out, if you stick to the RMD table, your funds should last your lifetime. According to Vernon, “several analysts have studied the RMD as a drawdown strategy, and they have concluded it’s a viable way to produce a stream of lifetime retirement income.” Vernon is so enthusiastic about the Spend Safely in Retirement strategy that he says he plans to use it himself when he retires.
If you want to read the Stanford report, there’s a 19-page version here. The full report can be found here – all 144 pages.
So is the Spend Safely in Retirement strategy the right one for you? Perhaps – but as we often say at AgingOptions, a financial plan alone is not the answer to a secure and fruitful retirement. In order to be truly prepared for whatever retirement may throw your way, you need a comprehensive strategy that blends together all the critical pieces of the retirement puzzle: finances, legal, housing, medical and family. The one plan we know of that does all that is a LifePlan from AgingOptions – and if you’re ready to find out more, without obligation, we cordially invite you to join Rajiv Nagaich at an AgingOptions LifePlanning Seminar. Invest just a few short hours and it will change the way you think about – and plan for – your retirement years! For all the details, including online registration, simply click here (and if you wish you can also contact us by phone this coming week). It will be our pleasure to show you the power of a LifePlan from AgingOptions.
(originally reported at www.usatoday.com)