How To Use Any IRA Or 401(k) To Generate Lifetime Retirement Income

Report cover: Viability of the Spend Safely in Retirement Study

Stanford Center on Longevity

Worried about making your retirement savings last the rest of your life? Don’t know how much you can spend on living expenses throughout your retirement? Concerned about stock market crashes that could derail your retirement in future years?

If so, you’re not alone. Millions of middle-income, older workers are approaching their retirement years and are very concerned about these challenging decisions. Fortunately, there’s help available from a new study published by the Stanford Center on Longevity (SCL) in collaboration with the Society of Actuaries (SOA).

The SCL/SOA study used sophisticated analytical methods to analyze the Spend Safely in Retirement Strategy (SSiRS), which is a straightforward, baseline approach for making informed decisions regarding the above retirement situations. You don’t need a financial planner to implement the SSiRS, although working with a planner might help you feel more confident.

The SSiRS approach to retirement involves just two steps:

  1. Optimize your Social Security income.
  2. Use your savings to generate a stream of lifetime retirement income to supplement your Social Security benefits.

Let’s elaborate on each of these steps.

Optimize Social Security benefits

For most middle-income, older workers and retirees, Social Security will deliver the largest portion of their total retirement income – at least one-half and often two-thirds or more. Social Security has unique advantages that address common risks that could derail your retirement:

  • Social Security protects against longevity risk by delivering a monthly income for the rest of your life, no matter how long you live.
  • It protects against inflation risk, since your benefits are increased each year with the cost-of-living adjustment.
  • It protects against investment risk, since your Social Security benefits won’t decrease if the stock market crashes.

Because of these advantages, it makes sense to maximize the lifetime income you’ll receive from this valuable benefit. Many people can achieve this goal by delaying the start of their benefits as long as they can, but not beyond age 70. For married couples, however, it might pay to have one spouse start benefits earlier than age 70. It’s possible to increase your lifetime retirement income by $100,000 or more with an effective delay strategy.

To analyze your situation and determine the strategy that optimizes your Social Security benefits, you can use free, online programs, such as Open Social Security and the Financial Engines Social Security calculator. By doing your homework, you’ll be able to establish the best course of action for yourself.  

If you decide to retire before the optimal age at which to start your Social Security benefits, you have two options that will enable you to delay Social Security until your optimal age:

  1. Estimate the monthly income you would have received from Social Security had you started benefits when you retired. Then, earn enough from working to enable delaying your Social Security benefits to your optimal age.
  2. Use a portion of your retirement savings to fund a Social Security “bridge payment,” which substitutes for your estimated Social Security income until you reach your optimal age. A lot of research, including the SCL/SOA report, demonstrates that a bridge strategy is one of the best ways to use your retirement savings to make your money last as long as you live.

To fund your Social Security bridge payment, you can use investments that are commonly offered in IRAs and 401(k) plans and protect against investment volatility. Examples include short-term bond funds, money market funds, CDs, or stable value funds.

Deploy your Retirement Income Generator (RIG)

Generating lifetime retirement income from your savings can be a confusing and intimidating task. To address this task, use a portion of your savings as a lifetime Retirement Income Generator (RIG). The SSiRS uses two straightforward steps to set up your RIG:

  1. Invest your retirement savings in a low-cost target date fund, balanced fund, or stock index fund, which are commonly available in most IRAs or 401(k) plans.
  2. Use the IRS required minimum distribution (RMD) to calculate the amount you should withdraw from retirement savings each year. Many IRA and 401(k) administrators can calculate this amount for you and pay it in the frequency you elect. If you retire before the RMD is required at age 70-1/2, use the same IRS methodology to calculate your annual withdrawal.

The SCL/SOA report contains many details to help you implement all the steps described in this post, including the appropriate RMD withdrawal percentages to use before age 70-1/2, considerations for investing your retirement savings, and examples that illustrate the SSiRS. It also includes straightforward refinements and adjustments that can help you personalize the baseline strategy to meet the common goals and circumstances that many people may have.

The SCL/SOA report also shows how 401(k) plans can implement a retirement income menu that will support the SSiRS. If your 401(k) plan doesn’t offer such a menu, show this post and the SCL/SOA report to your employer and ask them to help you and your coworkers by implementing such a menu.

Still worried about your retirement? Take charge! Learn about your options for generating lifetime retirement income. Investigate whether you can use your 401(k) plan to help you implement the Spend Safely in Retirement Strategy. The best person to help fund your retirement is you!

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