The complexity of the retirement income puzzle has many wondering if it will ever be solved. Long-held industry standards like the 4 percent withdrawal rule are in flux, with many arguing it was never the solution many made it out to be.
Luckily, academia is on the case, and the Stanford Center on Longevity has released a white paper authored by one of its research scholars, Steve Vernon, that describes what the university refers to as “a straightforward way for these workers to generate retirement income without buying an annuity or working with a financial [advisor].”
“One of the greatest financial challenges facing middle-income workers is how to generate a steady stream of retirement income,” the paper notes. “This is especially true for older workers who don’t participate in traditional pension plans, and are wondering if they have enough money in their 401(k) plan or IRA to retire comfortably. “
Called the “Spend Safely in Retirement” strategy, Vernon believes it’s a breakthrough idea that workers with a 401k plan or IRA can follow to optimize their retirement security.
The strategy is based on a new study conducted by the Center which “provides a framework for assessing different retirement income generators and navigating the many trade-offs older workers face when making retirement income decisions.”
It compared 292 different retirement income strategies, including various combinations of Social Security claiming ages, systematic withdrawals from invested assets and annuities from insurance companies.
The “Spend Safely in Retirement” strategy delays Social Security for as long as possible but no later than age 70 for the primary wage-earner. It then recommends that retirees invest their savings in a low-cost mutual fund and use the IRS required minimum distribution (RMD) to calculate the lifetime retirement income those savings will generate.
The study suggests using low-cost target-date funds, balanced funds or stock index funds for this purpose.
According to Vernon, the best way for an older worker to implement the “Spend Safely in Retirement” strategy is to work just enough to pay for living expenses until age 70 in order to enable delaying Social Security benefits.
In essence, “age 70 is the new 65.”
However, to make this method work, the paper concludes that “retirees may also need to significantly reduce their living expenses.”