A team of financial experts analyzed hundreds of retirement strategies to find the best one for middle-class Americans, and the winner hinges on 2 crucial decisions
- A team of financial experts at Stanford devised a two-part strategy to help middle-class Americans make the most of moderate retirement savings.
- First, the experts suggest delaying Social Security benefits beyond full retirement age in order to increase benefits.
- Second, they suggest setting up a "retirement paycheck," or steady distributions from a workplace retirement plan, such as a 401(k), or a traditional IRA to cover basic living expenses.
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Most Americans won't retire with $1 million.
In a new report from the Society of Actuaries and the Stanford Center on Longevity, a team of financial experts presents a solution for those with moderate retirement savings: the Spend Safely in Retirement Strategy (SSiRS).
Intended for middle-income Americans - defined as those with less than $1 million across employer-sponsored retirement accounts, such as 401(k)s; IRAs; and regular savings accounts - the strategy can help older workers and retirees make the most of their savings.
While the strategy is designed to be implemented without ongoing aid from a financial adviser, the report's authors encourage retirees to seek professional help for specific guidance. Despite the SSiRS beating out 292 other retirement income strategies in an analysis, the experts recognize it cannot work for everyone. "The SSiRS is intended to be a baseline strategy, from which refinements can be made to customize the application to meet individual goals and circumstances," the report reads.
But through their research, the experts found that the best way to make moderate savings last generally hinges on two crucial decisions: delaying Social Security benefits and setting up automatic "retirement paychecks."
Delaying Social Security will increase your benefit
When taken at the optimal time, Social Security benefits can make up between 66% and 80% of the typical retiree's income, the report says.
The full retirement age for today's workers is between 66 (if born prior to 1960) and 67 (if born in 1960 or later). That's the age a person who worked at least 10 years can begin claiming 100% of their Social Security benefit, which is equal to an average of monthly wages for their 35 highest-earning years, adjusted for inflation.
But, with each 12-month period that benefits are delayed beyond a person's full retirement age (up to age 70), the benefit increases by up to 8% for a maximum of either 24% for those born in 1960 or later or 32% for those born before 1960.
The experts recommend single people or primary wage earners who are married delay their benefits as long as possible. The non-primary earning spouse and unmarried couples may want to consult a professional to identify the best time to take Social Security, the report says.
To replace income in the absence of Social Security, the report's authors suggest retirees either work part-time or set up a "retirement transition fund" to pull from in the meantime.
"Some workers might decide it should be a large enough amount to cover their estimated living expenses for a specified period, say two to five years," the report says. "Another use for a retirement transition fund is to set aside enough savings to cover the amount of the Social Security benefit they plan to delay for as long as needed."
Setting up 'retirement paychecks' guarantees steady income
As for savings, older workers and retirees who want to implement the SSiRS should set up a stream of "retirement paychecks," or distributions from their retirement accounts that will cover basic living expenses such as housing, medical premiums, and food, the report says.
These amounts should follow the required minimum distribution (RMD) table outlined by the IRS, which states the minimum amount a retiree must withdraw from their traditional IRAs and defined contribution retirement plans beginning at age 70 and a half.
Workers who want their "paycheck" to begin at age 65, for example, should withdraw 3.215% of the balance in their accounts, according to the report. You can decide whether you want to take the payments monthly, quarterly, or annually.
However, retirees don't have to spend the money they withdraw if they don't need it to cover expenses. "They have the option to pay income taxes on these withdrawals and invest part or all of the after-tax proceeds," the report reads.
To ensure the money in the retirement accounts continues to grow, the authors suggest choosing a low-cost index fund, target date fund, or balanced fund.
For more on the advantages, disadvantages, and refinements of this retirement income strategy, check out the full report.
- Read more:
- How much Social Security will I get? Find out with a free tool that only takes seconds to find
- The government can tax up to 85% of your Social Security. Here's how to find out exactly how much
- A financial planner does the same 2-part calculation to figure out how much every client needs to retire
- Here's exactly how much more money you get each year you delay taking Social Security
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