The percentage of retirees and near-retirees who list running out of money in retirement as their primary concern is high and increasing according to survey after survey.
Another top concern is determining how to take money out of retirement nest eggs. Many people in or near retirement say they don’t have a plan for taking retirement distributions and don’t know how to convert their savings into income or lifetime cash flow.
These concerns can be resolved with a two-step plan that ensures reliable retirement cash flow.
The first step is to establish your optimum level of guaranteed lifetime income.
Most people now can’t rely on pensions from their employers for steady retirement income. The few employer pensions that are available tend to be fairly modest.
But almost all U.S. retirees will receive Social Security retirement benefits to provide a floor to their retirement income.
Social Security benefits have two big advantages. They are guaranteed for life. No matter how long you live, the monthly benefits continue.
In addition, they are indexed for inflation. Social Security is the only guaranteed lifetime retirement income available to most people that doesn’t lose its purchasing power to inflation.
Don’t take Social Security for granted. Studies indicate Social Security benefits are a major source of retirement cash flow for a high percentage of retirees, and their importance increases as retirees age and their other sources of cash are spent down or lose purchasing power to inflation.
A critical step to avoid running out of money in retirement is to maximize Social Security benefits. Most people should wait as long as they can before claiming their benefits.
Research reveals that lifetime cash flow is higher for those who delay claiming their benefits, even if they draw from other retirement funds to pay expenses so they can claim benefits later.
Married couples should take care to coordinate the timing of their claims for Social Security. They should pay particular attention to the solo years, the period after one spouse passes away.
Many couples do well financially in retirement, until one spouse passes away. Then, the surviving spouse has to live on only one Social Security benefit.
The surviving spouse typically receives the higher of the two benefits that were flowing into the household. You should want that benefit to be as high as possible.
That’s why the best strategy for married couples usually is for the higher-earning spouse to wait to claim benefits, preferably at age 70. That ensures that, no matter which spouse is the survivor, the benefit paid to the surviving will be the highest possible.
Another step in optimizing your amount of guaranteed lifetime income is to convert some of your retirement savings into one or more annuities.
For most people the best strategy is to first estimate the amount of basic monthly expenses. Subtract the amount of Social Security benefits that will be received.
Then, use some retirement savings to buy annuities that will pay enough income to cover the difference. You want annuities that pay immediate income that’s guaranteed to continue for life, such as single premium immediate annuities. You also want to shop around for the highest-available income from financially-secure insurers.
That way, you don’t have to worry about the economy, markets, interest rates, or other factors. You know that income from Social Security and the annuities will cover basic living expenses every month and will continue for life.
The annuity income won’t be indexed for inflation, so the income will lose purchasing power over time. You should have additional retirement savings that can be invested to maintain your purchasing power, cover unexpected expenses, and provide a legacy through bequests to family or charity.
That brings us to the second step to ensure you don’t run out of money.
You need plan for spending plan your assets that aren’t generating guaranteed lifetime income. The spending plan ensures you don’t withdraw so much money in the early years of retirement that you run short of money later in retirement.
Many advisors recommend a spending plan known as the 4% Rule. The retiree withdraws no more than 4% of the nest egg in the first year of retirement. In the second year, the retiree withdraws a maximum of the dollar amount of the first year’s distribution increased by the inflation rate of the first year. Each year after that, the distribution is the previous year’s dollar amount increased by the previous year’s inflation rate.
I’ve made a lot of criticisms of the 4% rule over the years, and many advisors and analysts have joined in the criticisms.
You want a spending plan that adjusts automatically to changes in inflation and your portfolio’s value. But you want the changes to be gradual instead of bouncing up and down with extreme market moves.
You also want a plan that reflects how retirees really spend money over time. Most retirees spend more money in the first years after leaving the work force. Then, the spending gradually decreases.
Instead of the 4% rule, I’ve recommended a variation of the Yale University Endowment distribution plan, which is explained detail in my books. There are other spending plans recommended by different financial advisors and writers that meet the requirements. The important points are to have a plan that adjusts your maximum annual spending based on changes in inflation and the value of your portfolio.
You shouldn’t fear running out of money in retirement when you have this two-step plan: optimize guaranteed lifetime income and have a spending plan for the rest of your retirement savings.
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