32 BARRON’S August 5, 2019
A group of researchers think they
have a way to turn retirement savings
into lasting income. BySarahMax
Solving
AnOld-Age
Problem
says Vernon. “It’s indexed for inflation, it protects
against longevity risk, and if the stock market
crashes,itdoesn’tgodown.”Italsoprotectsagainst
cognitiverisk,hesays,sincerecipientsdon’tneedto
worry about making complicated investment deci-
sions or turning their assets over to a scam artist.
Andtherearetaxadvantagestoboot:Aportionof
the benefit is exempt from federal tax, and most
states don’t tax Social Security income.
TheeasiestwaytodelayclaimingSocialSecu-
rity is to keep working, he says, even if it means
working just enough to cover living expenses.
“ThisiswhatI’mdoing,”says66-year-oldVernon,
who “downshifted” from an intense job as a con-
sulting actuary to his current role with the Stan-
ford Center on Longevity.
Thealternativeistoretirebefore70butdelay
claiming benefits by carving out a portion of re-
tirementsavingstocoverexpensesuntilSocialSe-
curitykicksin.A65-year-oldsinglewomanwitha
current salary of $50,000 and savings of $250,000
who claims Social Security at age 70 would in-
creaseherannualbenefitto$27,646versusclaim-
ingat65for$19,476.Doingsowouldrequirethat
she use a significant chunk of her savings to
bridge the gap—but in the long run it could in-
creasehertotalretirementincome14%andreduce
thepercentageofhertotalincomethatissubject
to market, inflation, and longevity risk.
Invest Like Your Younger Self
ThesecondcomponentoftheSpendSafelyinRetire-
mentStrategyistoinvestretirementassetsmoreag-
gressivelythanhadtraditionallybeenprescribedby
experts,whilewithdrawingaslittleaspossible.
The thinking here is that retirees who adopt
thefirstpartofthestrategytorelymoreheavily
on Social Security for income needs can afford to
takemoremarketrisk.Theresearchersconcluded
thata100%allocationtostocksmightevenbeac-
ceptable. “But I’ll be the first to admit that not
manypeopleinretirementaregoingtowanttoin-
vest 100% in stocks,” says Vernon, who recom-
mends as a compromise a balanced fund with
stocksandbondsoratarget-datefundwithanin-
vestment mix geared toward someone younger.
Thisphaseofthestrategycallsforretireesto
withdrawnomorethantheInternalRevenueSer-
vice’srequiredminimumdistribution.(Forpeople
youngerthan70½—theageatwhichretireesmust
beginwithdrawingapercentageoftheirsavingsin
tax-deferredaccounts—theresearchersusedIRS
methodologytomapoutequivalentpercentages.)
Totaketheguessworkoutofwithdrawals,retirees
can set up automatic withdrawals in monthly or
quarterly increments.
“It’shardtoarguewiththisstrategy,”saysMe-
liaoftheInstitutionalRetirementIncomeCouncil,
thoughhesaysitmaybehardertopulloffifem-
ployeeshaveretirementfundsinmultipleaccounts.
Vernon acknowledges this strategy isn’t for ev-
eryone, namely retirees who have amassed larger
savings. For retirees with at least $1 million in as-
sets,hesays,investmentreturnscarrymoreweight
and annuities can start to look more appealing.
Still,forAmericanswhocounttheirretirement
savingsintensandhundredsofthousands,asimple
approachmaybethebest.“OnceyouoptimizeSo-
cialSecurityforamiddle-incomeretiree,thatmight
be all the annuity income you need,” says Vernon.
WhatabouttheriskthatSocialSecuritybene-
fitscouldbecut?Vernonhasrunthenumberswith
various scenarios, including a 20% reduction in
benefitsin2035—whentheprogramisexpectedto
deplete its reserves. “The answer is delaying is
still the right strategy,” he says.
INCOME IDEA
Here’s how the Spend
Safely in Retirement
Strategy would look for a
65-year-old single female
$50,000
Current salary
$250,000
Retirement savings
$19,476
Annual SS benefit
(at age 65)
$27,646
Annual SS benefit
(at age 70)
If she retires at 65
and immediately claims
Social Security and
starts drawing required
minimum distributions,
her income would be:
$19,476
Social Security
$7,813
RMD
(3.125% of $250,000)
$27,289
Total
(55% replacement ratio)
But, if she waited to
claim SS until age 70
and supplemented
income from retirement
savings, her income
starting at 70 would be
higher, even after cut-
ting her retirement sav-
ings by more than half:
$27,646
Social Security
$3,493
RMD
(3.125% of $111,770)
$31,139
Total
(62% replacement ratio)
A
N ACADEMIC CENTER STUDYING LONGEVITY
andaprofessionalbodydedicatedtomanag-
ingtherisksofagingthinktheyhaveasolu-
tiontowhateconomistandNobellaureateWilliam
Sharpehascalledthe“nastiest,hardestproblemin
finance”:turningretirementsavingsintoapredict-
ablestreamofincomeoveraperiodthatcouldspan
years or decades.
Theissueofcreatinglastingretirementincome
is particularly onerous for Americans who have
lessthan$1millioninsavings—thatis,most—and
don’tpayforprofessionalfinancialadvice.Leftto
theirowndevices,thesesaversoftengotooneof
two extremes, says Steve Vernon, a research
scholarattheStanfordCenteronLongevity.They
either live too frugally for fear of running out of
money, or they choose to be oblivious, spending
freely until they reach a point of no return.
Itishardtostrikeabalance,hesays,because
there are so many variables such as years in re-
tirement, inflation, and market performance, and
so little room for error.
Meanwhile,theprimaryresourceforretirement
savingtoday—employer-sponsoredretirementplans
like401(k)s—haveonlyrecentlystartedtolookat
how to help employees safely spend down their
savings. “For the first time, the vast majority of
plan sponsors see their objective to generate re-
tirementincome,”saysBobMelia,executivedirec-
toroftheInstitutionalRetirementIncomeCouncil.
So what’s a retiree to do?
TheStanfordCenteronLongevityandSociety
ofActuariesrecentlyoutlinedastrategythatcould
betheanswerformiddle-incomeAmericansseek-
ingastraightforwardplantheycanexecutewith-
outanadvisororannuity.TheSpendSafelyinRe-
tirement Strategy, as they call it, involves two
basic components.
Wait to Claim
ThefirstistomaximizeSocialSecurityincomeby
claiming benefits as late as possible, ideally until
age70,whenrecipientsreceive132%oftheirfull
monthly benefits for delaying 48 months.
“SocialSecurityisprobablythebestretirement
income source for most middle-income people be-
Ben Mounsey-Woodcause it addresses every common financial risk,”