Will you have financial security in retirement? While workers in past generations could often count on a defined benefit pension from an employer to provide lifetime income, workers today are much more likely to be on their own.
While you may have access to a 401(k) at work and your employer may match some of the money you invest, it's still up to you to decide how much to save and what to do with that savings. Figuring all of this out can be really complicated, but the good news is that experts at the Stanford Society of Longevity teamed up with the Society of Actuaries to provide a blueprint most people can use to streamline the process.
These experts analyzed 292 different approaches to retirement savings to come up with the ideal plan, which they've dubbed the Spend Safely in Retirement plan. Here are the core components of that plan.
Here's what Stanford experts think you should do with your retirement money
The retirement strategy devised by the Center for Longevity is one the researchers believe can work for "most middle income retirees," and one they believe can be implemented within any traditional 401(k) or IRA where retirement money is invested.
The plan involves:
- Claiming Social Security at age 70, instead of at age 62 (the earliest age when benefits become available) or instead of at full retirement age (which is 67 if you were born after 1960). Claiming at 70 allows you to earn delayed work credits so your monthly benefit is higher. Working longer is recommended to make it possible to delay claiming Social Security, but using savings to delay claiming is also an option if working isn't possible.
- Withdrawing 3.5% from savings annually from ages 65 to 70, if necessary to support you while you delay claiming Social Security. If you'll be living off of savings, you can create a "retirement transition bucket" by investing the money you'll be living on pre-Social Security in a liquid fund, such as a short-term bond fund or stable value fund that provides minimal volatility.
- Using Required Minimum Distribution (RMD) tables to determine withdrawals from savings at age 70 and beyond. RMD tables are provided by the IRS so retirees with 401(k) or IRA accounts will know how much they must withdraw from tax-deferred retirement accounts each year. The guidelines for withdrawals in the RMD tables are based on your life expectancy.
- Investing in stocks, a target date fund, or balance fund. The Center's analysis found that retirees could do well investing up to 100% of their retirement income fund in stocks -- particularly in low-cost index funds -- as there's reduced risk associated with volatility once you're receiving Social Security. However, if you're not comfortable with risk, retirees could achieve reasonable results -- albeit with slightly lower incomes -- by investing in target date funds allocating 50% of investments to stocks or investing in balanced funds with 60% stock allocations.
The Center also recommended seniors maintain an emergency fund that is not used to generate retirement income, but instead is exclusively for larger one-time purchases.
Alternatives were also provided for seniors who would prefer to spend heavily on travel when they're younger, including setting aside funds specifically for travel that aren't considered part of an income-producing portfolio.
Is this strategy right for you?
Every retiree needs to consider their own unique situation. However, this strategy was found by the Center to best achieve specific goals most retirees have, including producing the highest average income throughout retirement; automatically adjusting withdrawals to account for gains and losses; minimizing volatility, providing lifetime income no matter how long the retiree lives; and keeping pace with inflation.
The plan works by essentially "pensionizing" retirement savings so you'll have steady income coming in, won't have to worry a lot about your money, and can just enjoy your life. If that sounds good to you, it may be worth listening to the experts and giving it a try.