(Sam Swenson, CFA, CPA)
In a time of high inflation, rapidly rising interest rates, and a dwindling Social Security reserve, retirees are right to feel concerned about making their savings last. Combine that backdrop with the reality that few companies still offer defined pension plans, and even more pressure is placed on the average retiremente to save enough over the course of their respective career.
Let’s look at three realistic ways for a retiree to protect their nest egg.
1. Delay filing for Social Security
This doesn’t necessarily mean waiting until age 70 to file, when your benefit will be the highest. But it does mean waiting until full retirement age (“FRA”), which is currently 67 for those born in 1960 or later. Claiming before age 67 costs you 6.67% per year for the first three years and another 5% per year for the next two, resulting in a reduction of up to 30%.
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Making sure you get everything you can out of Social Security is even more imperative in times of high inflation. Knowing you’ll receive a certain amount of guaranteed income for the rest of your life can substantially reduce the need to withdraw from personal savings. In a falling stock market, selling stocks can harm future growth prospects.
Delaying your claim for benefits is easy for some, but may not be easy for others — especially those in poor health or who desperately need the income in their early 60s. Whatever you decide, you’ll still receive a fair amount more for the rest of your life if you wait to claim.
2. Consider single premium immediate annuities
Single-premium immediate annuities (“SPIAs”) are sometimes appropriate for retirementes with a low guaranteed percentage of income relative to their total asset size. If you’re someone without a pension or with limited Social Security benefits, you’re more sensitive to market swings than those with a more stable income scenario. Additionally, those dependent on stock-related savings face additional longevity risk, or the possibility that they’ll outlive their money.
SPIAs are simple products that allow you to annuitize a portion of your assets, largely to generate income and reduce the likelihood that you’ll need to draw on your portfolio after the market takes a dive. Unlike some of the more complicated annuity products, fees are usually more reasonable. But you should expect to pay something in the range of 1% to 3% annually for the certainty that comes with annuitization.
3. Pick up part-time work
Retirement is supposed to mean the end of work. But with part-time (and often remote) opportunities the new norm, working in retirement can be an effective way to reduce the pressure on your investment portfolio.
As an example, assume that you’ve determined your annual spending need in retirement is $50,000. According to the 4% rule, this implies an overall savings need of $1,250,000 for a 30-year retirement.
By working a part-time job that nets $20,000 per year (or just under $400 a week), you can effectively reduce portfolio withdrawals by the same amount. Instead of withdrawing $50,000 from your portfolio in the first year, you only need to withdraw $30,000.
Even minimal income amounts can go a long way in protecting your savings. Adjusting your spending up or down to account for unexpected market movements can also help, but by earning additional income, you put control back into your own hands.
Keep your hard-earned savings
Saving for retirement is difficult, and saving enough to retire comfortably is an even more challenging task. But it’s possible to make it through retirement comfortably if you use every tool at your disposal.
Delaying your Social Security claim, looking at single-premium annuities, and considering part-time work are all options for making your nest egg last for several decades. If you take Social Security later, you’ll be set up with higher guaranteed income for the rest of your life. Working in retirement may not always prove to be a viable option, so you’ll need to be judicious about how and when you choose to make certain decisions.
Retirement is much more than a financial equation. It encompasses many factors both financial and non-financial, so it’s worthwhile to take your time and carve out a reasonable action plan.
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