Researchers Revisit ‘Spend Safely in Retirement’ Strategy

Last year, a study by the Stanford Center on Longevity, conducted in conjunction with the Society of Actuaries, presented a framework of analyses and methods that plan sponsors, financial advisers and retirees can use to compare and assess strategies for developing lifetime retirement income.

The target group for the strategy, called the Spend Safely in Retirement Strategy, is individuals with less than $1 million in retirement savings. It entails delaying Social Security until age 70 and using the IRS required minimum distribution (RMD) rules to calculate income from savings. The best way for an older worker to implement the strategy is to work enough to pay for their living expenses until age 70; if possible, they shouldn’t start Social Security benefits or begin withdrawing from savings to pay for living expenses. The next best way to implement the strategy is to use a portion of savings to enable the delay of Social Security benefits as long as possible, but no later than age 70.

In a new report, “Viability of the Spend Safely in Retirement Strategy,” the researchers offer examples of the strategy implemented. They first look at a single female currently age 65, with a current annual salary of $50,000 and $250,000 in retirement savings, and an annual Social Security benefit starting at age 65 of $19,476 and starting at age 70 of $27,646. The researchers find that if she retires at 65 and starts both her Social Security benefit and drawdown of savings using the RMD calculation, 71% of total income is covered by Social Security and protected from longevity, market, volatility and inflation risks, and 29% is covered by the RMD, subject to market, volatility, and inflation risks.

They then look at when that same retiree wishes to use a portion of her savings to establish a retirement transition fund that will enable her to delay Social Security benefits until age 70, even though she still retires at age 65. She decides to pay herself from her savings $27,646 per year from age 65 to age 70, the Social Security benefit she expects to receive at age 70. In this case, she sets aside $138,230 (5 years times $27,646) and invests this amount in a money market, short-term bond or stable value fund. She withdraws $27,646 in the first year. Interest earnings can increase her withdrawals in subsequent years. With the remaining savings ($111,770 = $250,000 – $138,230) she invests in a low-cost balanced or target-date fund (TDF) and uses the RMD to calculate the annual withdrawal. In this case, 89% of total income is covered by Social Security and protected from longevity, market, volatility and inflation risks, and 11% is covered by the RMD, subject to market, volatility and inflation risks. Using the retirement transition fund, she achieves an increase of 14% in her total retirement income without changing her retirement date. She also increases the percentage of her total income that is protected from longevity, market, volatility and inflation risks.

If she works just enough to enable delaying her Social Security benefit from age 65 to age 70, 72% of total income is covered by Social Security and protected from longevity, market, volatility and inflation risks, and 28% is covered by the RMD.

The analysis features other scenarios as well, including examples for a married couple, both age 65.

In addition, the report discusses possible refinements to the baseline strategy to address specific goals and circumstances, such as uneven expense and income flows, or alternative patterns of retirement income.