How not to run out of money in retirement

Americans are not good at saving for retirement. Many are even worse when it comes to figuring out how much to spend once there.

An actuary who has studied the matter for three decades recently proposed a relatively simple strategy that may help. In its simplest form, the “Spend Safe in Retirement” plan suggests waiting up to age 70 to claim Social Security and using the minimum payout table required by the IRS to determine how much to withdraw. savings every year.

Even those who quit work earlier can use the strategy, or a version of it, to determine when they can afford to retire and how much they can spend, says Steve Vernon, a researcher at the Stanford Center on Longevity at Stanford. , non-profit. California. Vernon worked with the Society of Actuaries to study nearly 300 different approaches to retirement income. The strategy was the best way for middle-income people with $ 100,000 to $ 1 million in savings to create a source of income, says Vernon.

Most people nearing retirement don’t see a financial advisor, and only about half try to figure out how much money they’ll need to comfortably retire, according to surveys from the Employee Benefit Research Institute. Instead, retirees typically take one of two approaches, explains Vernon:

  • They try to minimize withdrawals, seeing their retirement savings as an emergency fund to be kept, or

  • They like it, using Pension saving like a checking account to pay for their current expenses without thinking too much about the future.

“These approaches are really not ideal,” says Vernon, author of several books on retirement. The stealing mob often burns their money too quickly, while the Conservatives can spend too little.

Traditionally, financial planners have recommended the “4% rule” – withdraw 4% from retirement savings in the first year and increase the amount each year based on the rate of inflation. Recently, some researchers have questioned this approach, saying it may not be safe enough for retirees who might face a lower performing environment than previous generations.

Another way to build retirement income is to purchase an immediate annuity, which offers a flow of payments in exchange for a lump sum, from an insurance company. However, many retirees do not want to hand over a portion of money that they cannot access in an emergency or leave to their heirs.

Social Security, on the other hand, is a kind of annuity that can provide a solid foundation for most people’s retirement, says Vernon. Benefits increase with inflation, do not fluctuate with the market and cannot be exceeded.

If people can delay claiming benefits until they are 70, they will get the highest possible check. (For married couples, only the highest income must wait until age 70, says Vernon. The other spouse can start Social Security checks at full retirement age, which is currently 66. years.)

When maximized, Social Security benefits will likely represent 75% or more of the typical retiree’s income, Vernon says. With most of their income guaranteed, retirees can keep their savings invested in stocks to enjoy above-inflation growth. A balanced index fund or maturing funds can be an easy and inexpensive way for them to invest, he says.

Those who wish to stop working earlier, say at age 65, can use part of their savings as “bridging funds” to replace social security checks.

“There is some judgment involved in the size of the transition fund,” says Vernon, as too much pruning could leave too little to live on later. People may need to cut down on living expenses and consider working part time.

Withdrawals can begin at age 65, using an initial withdrawal rate of 3.5%. At age 70, people can switch to the IRS ‘required minimum allocation table, which dictates how much people must withdraw from most retirement accounts at this age. The withdrawal rate at age 70 is 3.65%, and it increases slightly each year thereafter; at age 90, for example, it is 8.7%.

The safe spending strategy will not make up for insufficient savings, and some people may need to supplement their income by leveraging their home equity, either through a reverse mortgage or by selling their home, says Vernon. .

The amount of withdrawals can vary greatly each year with the rise and fall of the stock market. But the method allows people to squeeze as much income as possible from the savings they have without running out, he says.

“We really didn’t try to find a simple solution,” says Vernon. “But compared to the others, it’s the best.”

This article was written by NerdWallet and was originally published by The Associated Press.


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