How To Safely Spend Your Retirement Savings

Many retirees plan to spend their retirement savings quite frugally, according to a few recent reports and studies. For example, a recent survey report, To Spend or Not to Spend from Blackrock, shares that retirees prefer to keep their assets untouched and that just one in four survey respondents feel they need to spend the principal of their savings in retirement. According to the report, “For most, retirement is not a time to live it up, it is more important to feel financially secure.”

Similarly, the 2024 Retirement Confidence Survey from the Employee Benefit Research Institute reported that more than one-third of retirees (38%) have a savings mindset, meaning they want to spend less and save for the future. If this mindset continues throughout life, some retirees might end up passing away with a lot of money in the bank, money they might have been able to spend and enjoy while they were alive.

The Blackrock study identifies a few potential reasons for this phenomenon, including the possibility that retirees haven’t yet shifted their mindset from accumulating savings for retirement to spending money in retirement, that they’re afraid of outliving their money, or that they have a deep-seated fear they’ll experience a serious financial or health shock.

Here’s A Strategy To Safely Spend Your Retirement Savings

While I don’t intend to chastise pre-retirees and retirees for being frugal, I do want them to know there’s a straightforward strategy they can use to safely spend their retirement savings. Appropriately, the strategy is called the Spend Safely in Retirement Strategy, and it’s based on robust research that I led at the Stanford Center on Longevity, in collaboration with the Society of Actuaries.

We systematically analyzed and compared 292 retirement income strategies, using sophisticated analytical techniques. Two key metrics we used were the amount of lifetime retirement income you can expect as well as the amount of savings you can access at any point in time. Using these metrics, the Spend Safely Strategy (for short) compared favorably to the other 291 strategies we analyzed, many of which are much more complex.

The Spend Safely Strategy is designed to withstand stock market crashes, and indeed, the financial turmoil caused by pandemic successfully stress-tested the strategy.

Adopt A Three-Step Strategy

The Spend Safely Strategy suggests developing sources of retirement income that will last the rest of your life, no matter how long you live. Then, it recommends you limit your monthly and annual spending to the amount of retirement income you expect to receive.

To generate sources of lifetime retirement income, follow these three steps:

1. Maximize your Social Security benefits with a careful strategy to delay your benefits as long as possible but no later than age 70. If you retire before age 70, enable the delay by either working part time or using a portion of your savings to implement a Social Security bridge payment.
2. Invest your retirement savings in a low-cost balanced, target date, or stock index fund, any of which are commonly found in 401(k) plans. Use the IRS required minimum distribution (RMD) withdrawal rates to determine the amounts you withdraw each year to supplement your Social Security benefits. Use the same RMD methodology to calculate your annual withdrawal if you retire before the age the RMD applies to you (currently age 73). You can find these rates here.
3. Set aside some money for an emergency fund, so you don’t need to withdraw from the savings that are generating your retirement income.

If you want to preserve your retirement savings, the conservative RMD withdrawal rates might appeal to you. The rates are currently under 3% until age 66, under 4% until age 75, and under 5% until age 81.

Customize The Strategy To Fit Your Needs and Goals

The Spend Safely Strategy is really a decision-making framework. You can customize it meet your own goals and circumstances. For example, you can make adjustments to achieve these goals:

• Generate retirement income before the optimal age to start Social Security benefits.
• Start retirement income before the RMD rules apply to you.
• Develop additional sources of guaranteed retirement income, such as an income annuity, if that would make you feel safer.
• Responsibly increase withdrawals at rates higher than the RMD rates.
• Spend more money on travel in the early years of your retirement, while you’re still active and vital. This goal was expressed by one in six retirees in the Blackrock study.
• Help family members or give to charity.

You can implement the Spend Safely Strategy in most IRAs or 401(k) plans, with or without the help of a financial advisor. If you work with an advisor, understanding the strategy can help you have an informed discussion with your advisor.

The Spend Safely Strategy offers a realistic balance between frugality on the one hand and spending too much money and outliving your savings on the other. It may take some time and effort on your part to build your lifetime retirement income portfolio, but it’s a very good use of your time, considering that you should be planning to enjoy a retirement that lasts for 25 years or more.