Pre-retirees need to make five critical decisions about their retirement long before they start drawing upon their savings.

Feeling uncertain about long-term decisions and the economy, pre-retirees often approach retirement without significant savings to allow room for mistakes. According to a study by the Standford Center on Longevity (SCL), the median balance for those with retirement savings is about $200,000.

The SCL developed a Spend Safely Strategy as a framework for decision-making before retirement. It identifies the first important decision as when and how to retire, including how you plan to work. Tied into it is the second decision: When to take Social Security benefits. The study found little difference in the impact to savings after age 62 between working part-time or full-time, but doing one or the other to delay claiming benefits made a significant difference in total retirement income.

The biggest advantage of continuing to work is the delay of Social Security benefits and savings withdrawals. Because Social Security benefits are risk-protected, retirees should maximize this income and find the optimal age to start.

How to deploy retirement savings to generate retirement income is the third decision. As a base, the strategy uses the U.S. IRS required minimum distribution (RMD) payout rates to estimate retirement income. This makes the strategy flexible as individual circumstances change. How you invest your money depends on your need for income and your risk tolerance.

Since most retirees haven’t saved enough to maintain their pre-retirement standard of living, decision four is how to reduce living expenses.

Housing needs may help or hinder your other retirement goals. Whether to deploy home equity and how is decision five. Downsizing could reduce living expenses and generate capital gains—the most straightforward approach. Retirees also have options for reverse mortgages.

Source: “Critical Decisions: Planning for Retirement Income,” by Steve Vernon; Benefits Magazine, January 2021.

Related

Financial Planning

The Relationship Between Wealth and Delaying Social Security Benefits

Retired Investor

You May Need a Different Kind of Financial Professional for Retirement

Portfolio Strategies

Revisiting the Risks of Retirement Spending Rules