The Spend Safely in Retirement Strategy

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In 2017, the Stanford Center on Longevity analyzed 292 retirement withdrawal strategies. The study used eight metrics to measure how each strategy would satisfy various retirement income goals. From this analysis, the study identified what it described as the Spend Safely in Retirement Strategy (SSiRS).

As described in a paper titled How to “Pensionize” Any IRA or 401(k) Plan, the SSiRS is a simple retirement spending strategy based on Social Security and taking RMDs from retirement accounts. The author, Steve Vernon, describes the strategy as follows::

Our analyses identified a straightforward strategy that produces a reasonable tradeoff among various goals for middle-income retirees. This strategy delays Social Security until age 70 for the primary wage-earner and uses the IRS required minimum distribution (RMD) to calculate income from savings.

The same author, along with Wade D Pfau and Joe Tomlinson, published a lengthy supplement to the paper in 2019: Viability of the Spend Safely in Retirement Strategy. The supplement provides additional analysis of the strategy and practical tips on how to implement it.

In this article I'll walk through how the SSiRS works, some modifications you may consider based on your specific circumstances, and what I think are the pros and cons of this strategy.

Spend Safely in Retirement Spending Stategy

SSiRS is an easy to use spending strategy that middle-income retirees can use without the need for complex calculations.

– Rob Berger

Ease of Use
Responds to Market Conditions
Responds to Inflation
Guaranteed Income for Life

Summary

The Spend Safely in Retirement Strategy combines Social Security beginning at age 70 and required minimum distributions of retirement savings. It's very easy to use, respond to market conditions, and guarantees a retiree never runs out of money.

4.5

How the Spend Safely in Retirement Strategy Works

Social Security

The first step is to wait until age 70 to claim Social Security if you are single or the primary wage earning for married couples. Delaying Social Security results in significantly higher payouts. Each year one delays claiming Social Security past their Full Retirement Age (66-67 depending on your year of birth) results in an 8% increase.

As for the spouse who is not the primary wage earning, the study notes that the optimal claiming strategy will depend on the couple's specific circumstances:

For married couples, the optimal strategy for claiming Social Security for the spouse who isn’t the primary wage earner typically depends on individual circumstances. Often the optimal strategy for this spouse calls for starting benefits somewhere between the full retirement age (currently age 66) and age 70. For our analyses, we assumed the spouse who isn’t the primary wage earner would start Social Security at age 66.

Social Security Software

The 2019 supplement recommended “that older workers and retirees develop an optimal claiming strategy by working with a qualified retirement adviser or using commonly available software.”

For software, the authors recommended Open Social Security or Financial Engines. Open Social Security is a free and excellent SS calculator, which I reviewed in this video. Financial Engines, unfortunately, has since been purchased by a wealth management firm and is no longer available.

One alternative that I use is New Retirement. This retirement planning software covers all aspects of retirement, from your investments to Medicare to Social Security. It includes a tool that will help you determine your optimal Social Security claiming strategy.

How to Delay Social Security Until Age 70

For many, delaying Social Security until age 70 may be difficult. The authors make a few suggestions.

First, one can choose to work until age 70. They describe 70 as the “new 65.”

Second, one can create what they call a Retirement Transition Bucket. From the 2017 paper:

In the years leading up to retirement, an older worker might want to use a portion of their retirement savings to build a “retirement transition bucket” that enables them to delay Social Security benefits. While there’s some judgment involved with the necessary size of this bucket, a starting point would be an estimate of the amount of Social Security benefits the retiree would forgo during the delay period. The retirement transition bucket can also provide a buffer if the older worker is uncertain about the timing of retirement, and it could protect the worker against stock market crashes in the period leading up to retirement.

Finally, the authors note that claiming Social Security a bit early, say at age 67, 68, or 69, is a viable option with acceptable results.

RMDs

The second piece of the puzzle is the Required Minimum Distribution (RMD). The retiree simply takes their RMD from their retirement accounts each year. Major brokers will calculate this number for you and transfer the money to a linked checking account. As such, the combination of receiving SS checks and RMD payments make this strategy extremely easy to implement.

Here, we need to address several potential RMD issues.

RMDs for Early Retirees

First, what about those who retire before RMDs begin? Here, it's very easy to use the RMD tables to determine what your RMD would be at younger ages.

To do this, we need to understand how the RMD table works. For most retirees, RMDs are calculated using Table lll (Uniform Lifetime) from IRS Publication 590-B (2022), Distributions from Individual Retirement Arrangements (IRAs). This table shows the joint life expectancy of the IRA owner and a spouse who is 10 years younger. For example, an IRA owner aged 72 with a spouse who is 62 has a joint life expectancy of 27.4, according to the table.

For such an individual, their RMD would be the balance of their traditional retirement accounts as of December 31 of the previous year divided by 27.4. As you'll note from the table, however, there are no RMD factors for those younger than 72.

We can create such a table by using Table ll from the same IRS publication. Table II applies to those retirement account owners who have a spouse who is a 100% beneficiary of the retirement account and who are more than 10 years younger than the account owner.

To use this table, we simply look up the age of the account owner and a hypothetical spouse who is exactly 10 years younger. To help, here are the results for those aged 60 to 71 (I've added a column for withdrawal rate, which is 100/Distribution Period):

AgeDistribution PeriodWithdrawal Rate
6038.72.58%
6137.72.65%
6236.82.72%
6335.82.79%
6434.92.87%
6533.92.95%
6633.03.03%
6732.03.13%
6831.13.22%
6930.13.32%
7029.23.43%
7128.33.53%

You'll note that for account owners younger than 66, the RMD factor results in a withdrawal percentage below 3%. I suspect that setting a floor of 3% is not an unreasonable approach if an early retiree were to follow the SSiRS.

Perhaps the more difficult challenge for early retirees is living off investments for a decade or more before claiming Social Security. As such, the Spend Safely in Retirement Strategy may not be ideal for those contemplating extreme early retirement.

RMDs on Roth and Taxable Accounts

The second potential issue is that many retirees have retirement savings in accounts not subject to the RMD requirements. Roth retirement accounts and taxable brokerage accounts are two that come to mind. Here, one can still use the RMD formula to calculate annual spending.

Stock/Bond Allocation for Retirement Accounts

The third issue is how one should invest their retirement savings using the SSiRS. The authors of the study conclude that a 100% stock portfolio produces the best results. While such a volatile portfolio is rarely recommended for retirees, the authors felt that the stability offered by Social Security justified the risky portfolio:

Our analyses support investing the RMD portion significantly in stocks – up
to 100% – if the retiree can tolerate the volatility. The resulting volatility in
the total retirement income portfolio is dampened considerably by the high proportion of income produced by Social Security, which doesn’t drop if the stock market drops.

Here it's worth noting that 70% of retirees describe Social Security as a “major” source of income, according to a 2022 study by EBRI. That being said, the authors also found that a 50% to 60% stock allocation performed well:

However, our analyses project reasonable results with a typical target date fund for retirees (often a 50% stock allocation) or balanced fund (often a 60% stock allocation), and these funds are commonly available in IRA and 401(k) platforms. These lower stock allocations would reduce expected income but would also produce lower downside volatility, compared to a 100% stock allocation.

Even with the stability of Social Security, I suspect many retirees would find the volatility of a 100% stock portfolio hard to stomach.

Refining the SSiRS

The authors noted several potential modifications a retiree could make to the SSiRS based on their specific circumstances.

  1. Emergency Fund: It's recommended that retirees maintain an emergency fund that would not be used to generate retirement income. This fund could be used for unforeseen expenses, such as house or car repairs.
  2. Spend More: Some retirees might want to spend more money in their early years of retirement while they're active and healthy. In this case, they could dedicate a portion of their retirement savings to a special bucket for these purposes; this bucket would also not be used to generate retirement income.
  3. More Guaranteed Income: If retirees desire more guaranteed income than produced by the SSiRS, they could use a portion of their savings to purchase a low-cost Single Premium Immediate Annuity (SPIA). The authors also suggest the use of a Guaranteed Lifetime Withdrawal Benefit (GLWB) or Fixed Index Annuity (FIA). I'm not a fan of either due to their cost and complexity.
  4. Tap Home Equity: If a worker is unable or unwilling to work longer to postpone drawing Social Security benefits, one possible financial strategy would be to use a reverse mortgage line of credit as a pool of funds to help cover living expenses while delaying Social Security benefits. Here the retiree should thoroughly investigate the pros and cons of a reverse mortgage before going down this route.

Pros and Cons of the SSiRS

Pros

The SSiRS offers several advantages:

  • According to the authors, “It produces more average total retirement income expected throughout retirement compared to most solutions we analyzed.” Note that it performed better than constant dollar strategies such as the 4% Rule.
  • It automatically adjusts the RMD based on the performance of the stock and bond markets. While this introduces volatility in the withdrawals, I think it reflects how retirees actually spend their money. In years when the markets are down, retirees tend to spend less.
  • It provides a lifetime income, no matter how long the participant lives, and it automatically adjusts the RMD withdrawal each year for the remaining life expectancy. In contrast, the 4% Rule assumes a 30-year retirement. While this may be a reasonable assumption for some, any such constant dollar withdrawal strategy requires an assumption on the length of life. The SSiRS does not.
  • “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.”
  • Finally, the Spend Safely in Retirement Strategy is easy to implement. As the authors note, it “can be readily implemented from virtually any IRA or 401(k) plan without purchasing an annuity. Many administrators can calculate the RMD and automatically pay it according to the frequency elected by the retiree.”

Cons

There are a few potential downsides:

  • It may not be ideal for early retirees. While we can calculate the RMD for any age, retiring long before the start of Social Security may be impractical for many. In addition, RMDs at ages younger than 60 result in very low withdrawal rates that would put early retirement out of reach for most.
  • In bad markets with high inflation, a retiree's after-inflation income could go down. Of course, the inflation-adjusted Social Security payments help to stabilize spending. But the RMD withdrawals, which are not subject to inflation adjustment, do expose a retiree to some level of inflation risk.
  • Finally, the SSiRS could result in a retiree underspending, particularly in early retirement. This issue is not unique to SSiRS. The 4% Rule more often than not results in retirees who have more money after 30 years than they started with. As noted above, one response to this issue is to designate an amount of money to be spent in say the first decade of retirement and set it apart from the funds to which the RMD calculation will be applied.

Resources

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Rob Berger is a former securities lawyer and founding editor of Forbes Money Advisor. He is the author of Retire Before Mom and Dad and the personality behind the Financial Freedom Show.

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