How not to run out of money in retirement
Americans aren't terrific at saving for retirement. Many are even worse when it comes to figuring out how much to spend once they get there.
An actuary who's studied the issue for three decades recently proposed a relatively straightforward strategy that can help. In its simplest form, the "Spend Safely in Retirement " plan suggests waiting until age 70 to claim
Even those who stop work earlier can use the strategy, or a version of it, to figure out when they can afford to retire and how much they can spend, says
Most people nearing retirement don't consult a financial adviser, and only about half try to calculate how much money they'll need to retire comfortably, according to surveys by the
— They try to minimize withdrawals, viewing their retirement savings as an emergency fund that must be conserved, or
— They wing it, using retirement savings as a checking account to pay their current living expenses without much thought for the future.
"These approaches really aren't ideal," says Vernon, author of several books on retirement. The winging-it crowd often burns through their money too fast, while the conservers may spend too little.
Traditionally, financial planners have recommend the "4 percent rule" — withdrawing 4 percent of retirement savings in the first year and increasing the amount each year by the rate of inflation. Recently some researchers have questioned that approach, saying it may not be safe enough for retirees who could be facing a lower-return environment than previous generations.
Another way to set up a retirement income is to buy an immediate annuity, which offers a stream of payments in exchange for lump sum, from an insurance company. Many retirees, however, don't want to give up a chunk of money that they won't be able to access in an emergency or leave to heirs.
If people can delay claiming benefits until they are 70, they'll get the largest possible check. (For married couples, only the higher earner needs to wait until 70, Vernon says. The other spouse can begin
Once maximized,
Those who want to quit work earlier, say at age 65, can use some of their savings as a "transition fund" to replace
"There's some judgment involved in the size of the transition fund," Vernon says, since carving out too much could leave too little to live on later. People may need to reduce their living expenses and consider working part-time.
Withdrawals can start at age 65, using an initial 3.5 percent withdrawal rate. At age 70, people can switch to the
The spend safely strategy won't make up for inadequate savings, and some people may need to supplement their income by tapping their home equity, either through a reverse mortgage or by selling their house, Vernon says.
How much people withdraw can vary considerably every year with the rising and falling of the stock market. But the method allows people to squeeze as much income as possible from the savings they have without running out, he says.
"We really didn't set out to find a simple solution," Vernon says. "But compared to the others, this is the best."
This column was provided to The Associated Press by the personal finance website
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