Delay retirement until age 70. Invest in stocks, not bonds. And draw down your retirement account savings in line with IRS rules on required minimum distributions, which start at 3.6 percent a year at age 70 1/2.
That’s the safest recipe for retirement planning, according to a new analysis, “How to Pensionize any IRA or 401(k),” from the Stanford Center on Longevity at Stanford University. Steve Vernon has spent his career as a consulting actuary for big companies’ retirement plans. For this report, he used statistics to actuarially compare 292 retirement strategies.
“There is no perfect income solution for retirement, and people can shoot holes in anything you suggest,” he says, but “this one came out looking pretty good.”
Pushing retirement to age 70 — the first dictate of his strategy, which he calls Spend Safely in Retirement — is probably the biggest stumbling block psychologically for a lot of people. But Vernon’s calculations show that about the worst thing you can do for your long-term planning is take Social Security benefits early at age 62. For every year you delay up to age 70, you get more in monthly benefits for the rest of your life, and that’s a good deal for most people with today’s life expectancies.
“You get a better deal if you can wait,” Vernon says.
The only time he would endorse taking the distribution early is if you have a terminal illness. Even people who are overweight or smokers should keep working as long as they can, he says. However, it’s OK to leave a high-powered job and work just to cover living expenses for most of your 60s. Even delaying until age 68 will capture a lot more of the benefit.
The second big insight is that this plan essentially treats Social Security as the guaranteed-income portion of your retirement portfolio. Classic portfolio planning theory prescribes shifting from all stocks in your early working years to a mixture of stocks and bonds as you get older and finally to nearly all bonds at retirement. Vernon’s calculations show that there is no need for this.
For most people with less than $1 million at retirement, Social Security will represent 66 percent to 80 percent of retirement income, and, again, that is a guaranteed, predictable monthly amount. (This analysis doesn’t take into consideration the chances of Social Security going away any time soon.)
Vernon’s top recommendation for investment allocation — again, based on actuarial projections — is a 100 percent stock index fund at retirement. But he knows that idea will freak a lot of people out, so he’s willing to permit a target-date fund instead.
Finally, the third piece of the puzzle is how much money to take out of your retirement funds every year after retirement. Vernon says too many people have a haphazard approach. They either sip their drink too slowly and die with money in the bank, or take it down in big gulps and have nothing for a rainy day.
People can spend a lot of money on an annuity that promises guaranteed income, but Vernon says that’s one of the worst things you can do because of the high costs. Instead, create a predictable income stream out of your own savings by following the IRS’ RMD standards for 401(k) plans, traditional IRAs and certain other defined-contribution plans.
This rule of thumb will help you calculate your monthly budget in retirement. If needed, you can start looking now for ways to reduce living expenses.
The Spend Safely in Retirement system is so simple that people should be able to enact it on their own.
“This is a way that people who don’t work with a financial adviser can generate income from an IRA or 401(k),” he says, “and it’s also a strategy that any 401(k) operator can put in their plan.”
Anya Kamenetz’ most recent book is “The Test: Why Our Schools Are Obsessed with Standardized Testing, but You Don’t Have to Be.” She welcomes your questions at firstname.lastname@example.org.