Why It Matters:
Most clients do not have the benefit of a steady pension in retirement.
The jigsaw puzzle of retirement pieces requires clients to draw them down safely so they don’t run out of money.
This strategy can be a good starting point in helping clients make important life decisions.
A decline in traditional pension plans and the subsequent rise of IRAs and 401(k) plans has left many older workers wondering how to deploy their savings in retirement.
The average American worker isn’t adequately trained to make informed decisions about retirement income strategies, according to a recent study from the Stanford Center on Longevity at Stanford University. Read the full report online at: How to “Pensionize Any IRA or 401(k) Plan.
Complex financial questions, such as, do they have enough money to retire? When should they claim Social Security? How should they draw down their savings in retirement? Often causes many Americans to “wing it,” says Stanford researcher Steve Vernon. Retirees run the risk of blowing through their retirement savings too quickly and jeopardizing their long-term financial security.
That’s where input from a financial professional, combined with the straightforward “Spend Safely in Retirement Strategy” from the Stanford Center on Longevity, in collaboration with the Society of Actuaries, can help.
Who can use it
The research provides a framework designed to work for most middle-income retirees and can be implemented in virtually any traditional IRA or 401(k). But the framework is also useful for wealthier individuals who use professional planners, too. The Center’s research compared 292 different retirement income strategies, using analytical techniques that many large pension plans use to devise funding and investment strategies.
The strategy imitates the steady income from a traditional pension, using a worker’s own retirement savings. It encourages individuals to take three steps: Work longer, delay Social Security until age 70 to maximize payments, and set a basic budget using required minimum distributions (RMDs) as a guide. This strategy effectively “pensionizes” your savings.
Working longer allows individuals to help cover their basic living expenses and preserve retirement savings. Even working part-time can keep individuals from tapping into retirement funds early, allowing them more time to hopefully grow.
The first step enables the second step: postponing Social Security benefits until 70 (or as close to it as possible) to maximize payments. Social Security benefits are a near-perfect retirement income generator, protecting clients against several risks of living a long time: inflation, stock market crashes, and the death of a spouse.
The third step uses the IRS formula for required minimum distributions (RMD) as a guideline to calculate a safe withdrawal rate at younger ages. While not designed as a budgeting tool, using Uncle Sam’s RMDs can be useful as an income plan because the withdrawal rate continues to rise gradually over time.
According to the Center, the “Spend Safely in Retirement Strategy” has several advantages, including:
- It produces, on average, more total expected retirement income throughout retirement compared to most solutions the SCL/SOA analyzed.
- It automatically adjusts the RMD withdrawal amounts to recognize investment gains or losses. Withdrawals are increased after years with favorable returns, and vice versa.
- It provides a lifetime of income, no matter how long the person lives, and it automatically adjusts the RMD withdrawal each year for remaining life expectancy.
- It projects total income that increases moderately in real terms, while many other solutions aren’t projected to keep up with inflation. The “Spend Safely in Retirement Strategy” produced projected real increases in income of up to 10% over the retirement period.
- It produces a moderate level of accessible wealth for flexibility and the ability to make future changes. It produces higher accessible wealth compared to strategies that use annuities. It provides less accessible wealth than strategies that maximize flexibility, such as SWPs with low withdrawal rates and/or strategies that don’t use savings to enable the delay of Social Security benefits.
- It provides a moderate level of bequests, for the same reasons listed above.
- It produces low measures of downside volatility, with potential future annual reductions in spending typically well under 3%, which is hopefully a manageable amount.
- It gives older workers the flexibility to transition from full-time work to part-time to full retirement.
Help with important decisions
Financial professionals can use the strategy as a starting point to help clients make important life decisions, such as how long they should continue working, or how much money they’ll have available to spend in retirement. If clients don’t think they’ll be able to live on the estimated amount, financial professionals can introduce the idea of an annuity or other financial products to generate guaranteed income to cover the shortfall.
Financial professionals are in a unique position to help clients make better Wealth + Health decisions. Using the “Spend Safely in Retirement Strategy” can help clients “pensionize” their retirement savings and be a useful first step in helping them prepare for the distinct possibility of living a long time.
Read the full report online at: How to “Pensionize Any IRA or 401(k) Plan.
Transamerica sponsored the Sightlines Project with the Stanford Center on Longevity, which studies the nature and development of the human life span and is dedicated to the well-being of people of all ages.
In addition to working with Stanford University, Transamerica supports the nonprofit Transamerica Center for Retirement Studies® and works closely with the Massachusetts Institute of Technology’s (MIT) AgeLab, which strives to improve the quality of life of an aging population and caregivers.
Things to Consider:
Discuss a client’s ability to continue working longer to delay drawing upon retirement funds.
Talk to clients about the possibility of delaying Social Security until age 70 to maximize payments.
Use the IRS RMD formula as a guideline to calculate a safe withdrawal rate at younger ages.