Here’s a simple, inexpensive way to set up a retirement plan like the pros

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Saving for retirement can be difficult. It is more difficult to plan how to spend this nesting egg – while ensuring that the money does not run out.But there is good news: Americans can build a simple, inexpensive retirement plan using only social security and savings, experts say.

From an academic perspective, the “optimal” retirement strategy combines two concepts, said Wade Pfau, professor of retirement income at the American College of Financial Services.

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On the one hand, retirees put in place a “floor” of income by using guaranteed payments like social security to cover all the recurrent fixed costs of retirement (insurance premiums and mortgage payments, for example).

The second component uses an investment portfolio for discretionary expenses (travel and leisure, for example). Retirees would increase or decrease these expenses based on life expectancy, thereby ensuring that their money would not run out.

“This is an easy and simple way for people to have a retirement strategy that [ideal] university strategy, “said Pfau.

Social Security

Maximizing social security benefits is perhaps the most important aspect of the strategy.Social security is the “foundation” of retirement for most middle-income retirees, providing between about half and three-quarters of their total retirement income, Pfau and other researchers wrote in an article published in 2017 by the Stanford Center on Longevity.

Researchers define “average earnings” as those with between $ 100,000 and $ 1 million in retirement savings.

Retirees should, at a minimum, determine what their fixed costs will be during their retirement years. This is the “bottom line” income, which includes all essential monthly and annual payments such as housing, food, utilities and transportation.

Aim to “get as much of this as possible from social security,” according to David Blanchett, chief of retirement research at Morningstar Investment Management.

Exceeding the bottom income would be even better, he said.

Social security is a unique and powerful advantage for retirees for several reasons.

Payments are guaranteed for life, which means they can’t survive. They are indexed to inflation, so the purchasing power of a retiree does not decrease as much over time. They are partially protected from federal income tax and are not exposed to the volatility of the stock market. In many states, this income is also exempt from state taxes.

And because the payments are made regularly and monthly like a paycheck, they help overcome a common behavioral hurdle for retirees – the fear of spending the money, said Blanchett.

“It’s just the best thing,” said Blanchett.

It’s like the take-out pension plan you can start with.

Mike Piper

CPA and author of the blog Oblivious Investor finance

Americans can start social security from the age of 62. But waiting until age 70 is one of the most impactful financial decisions a retiree can make.

This is because social security checks increase by 8% each year, a retiree waits to claim benefits.

Take the example of a person who turns 62 this year and who will receive about $ 1,000 a month from Social Security at age 67. This person would get $ 716 a month at age 62, but a much higher monthly sum – $ 1,266 – while waiting until age 70, according to the social security administration.

A guaranteed return of 8% is particularly lucrative in today’s environment of extremely low interest rates, which means that retirees get much less from traditionally safe investments like cash and bonds.

Investments

The second part of the retirement strategy includes the investment portfolio. The goal is to use these liquid savings to finance all the fun activities in retirement.

This money can be invested aggressively – for example, in a mutual fund that tracks the stock market, such as an S&P 500 index fund, according to the Stanford newspaper.

In fact, the risk of a retiree’s overall investment would be diluted by the fact that such a large part of his overall retirement income comes from a reliable source (social security and / or traditional pension).

However, risk-averse retirees can still achieve “reasonable results” by investing in a more conservative mutual fund, such as a balanced fund “which invests about half in stocks and half in bonds,” says the newspaper.

How much to withdraw?

Retirees can toggle withdrawals from their investment portfolio each year based on their life expectancy, which ensures they won’t run out of money.

Retirees can follow the instructions in a “Minimum Distribution Worksheet Required” published by the IRS as a guide.

The simple exercise is to divide the account balance by a “distribution period” indicated for the corresponding age. The result is the amount that a retiree can safely withdraw from their investment portfolio that year.

Photo de Supoj Buranaprapapong

For example, a 70-year-old retiree with a $ 1 million retirement account would divide $ 1 million by 27.4, which is the distribution period shown for a 70-year-old man. This person can withdraw approximately $ 36,500.

Retirees would repeat the exercise each year based on the balance of their new account.

Withdrawals from accounts in this way slightly distort the conservative side, said Pfau.

“It’s pretty easy to implement,” said Mike Piper, CPA and creator of the Oblivious Investor’s personal finance blog, Global Strategy. “It’s like the take-out pension plan you can start with. “

Transition fund

There are variants to the strategy that retirees could implement depending on their particular situation. This would of course complicate the two-pronged strategy listed above.

The ideal retirement scenario involves working up to age 70 and covering living expenses with a paycheck before applying for social security.

Of course, not everyone can wait 70 years to retire.

Those who retire earlier should carve out part of their investment portfolio as a transition fund to cover expenses in the years before applying for social security.

Now is not a good time to guess retirement. Unless you are certain and unless you have to, I would consider working a little more.

David Blanchett

retired research manager at Morningstar Investment Management

It would be prudently invested in a money market mutual fund, a short-term bond fund or, for 401 (k) investors, a stable value fund.

Having a transition fund to wear until the age of 70 is ideal, but claiming social security at ages 67, 68 and 69 “still offers significant benefits,” according to the Stanford newspaper.

“Now is a bad time to guess at retirement [age] Blanchett said, referring to the country’s high unemployment rate. Unless you are certain and unless you have to, I would consider working a little more. ”

Other alternatives

Some retirees, especially those with higher incomes, may not be able to get all of their “floor” income from Social Security.

If they have money, retirees can purchase a simple immediate or deferred income annuity to help bridge this gap. Retirees should generally avoid more complex versions of annuities such as variable or fixed indexing for this exercise.

Income from a traditional pension scheme can also supplement social security.

This plan strategy is not without risks, however.

On the one hand, it can be difficult for this plan to cope with large unforeseen expenses, such as health care costs or long-term care.

Retirees can potentially exploit their net worth – via a reverse mortgage or a home equity line of credit, for example – to supplement retirement income and face some unforeseen costs, said Pfau.

A reverse mortgage, however, has some caveats that could hinder this strategy.

For example, although it may cover long-term care costs related to home care, it probably would not cover care outside the home (for example, in a nursing home) because the home must remain the principal residence of the borrower.

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