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When you’re closing in on retirement, the big financial question shifts from “How much should I be saving?” to “How can I make my money last?” Steve Vernon,
a research scholar at the Stanford Center on Longevity and author of Retirement Game-Changers, offers a few smart answers in the new Friends Talk Money podcast episode, available on streaming services.
“As people approach their retirement years, the decisions become more complex and they have higher stakes. It’s going to take some time to work through the decisions,” Vernon tells my Friends Talk Money co-host Terry Savage, the syndicated personal finance columnist and author. (Our third “friend” is Pam Krueger, creator of the Wealthramp site that vets fiduciary financial advisers.)
For Retirement Income, Change Your Mindset
Vernon suggests changing your mindset in two ways.
One is to tell yourself it’s okay to start spending your money in retirement. “That’s what you’ve been saving it for,” he notes.
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The other: Shift from building an investment portfolio of retirement savings to a diversified portfolio of retirement income. Savage’s view: “Spending some of your principal and generating income at the same time is a very delicate balancing act.” It may require working in retirement, she notes.
Vernon also recommends thinking through when to start claiming Social Security. Postponing the benefits is the best way to maximize your lifetime income, he says.
Postponing When You Start Claiming Social Security
“For every year you delay starting Social Security, you can significantly increase your retirement income,” Vernon notes. That’s because your Social Security benefit increases 8% a year for every year you put off claiming between what’s considered your Full Retirement Age — between age 66 and 67 — and age 70. That’s a pretty great guaranteed rate of return these days.
“Where else can you earn eight percent a year?” asks Savage.
But, as I note in the podcast, many people can’t afford to delay claiming Social Security. They need the money to pay their bills.
Social Security benefits also rise with the inflation rate, something you can’t say about most other sources of retirement income. “A three percent rate of inflation — this historical average — can cut the spending power of your dollars in half in 25 years, and that can really impact your retirement lifestyle,” says Savage.
You don’t need to start claiming Social Security at the same time you retire. In fact, Vernon says, you might want to begin retirement by paying yourself out a “Social Security bridge payment” out of your savings. It would be an amount equal to how much you would’ve received from Social Security had you started collecting benefits at retirement.
Investing and Spending in Retirement
Vernon, an actuary, also offers this caution about the stock market and your retirement income: “If you will be retired for twenty to thirty years, you will probably need to survive two or three or four stock market crashes.”
To prepare for that possibility, he advises, have enough guaranteed income — like Social Security and annuities — to cover your basic living expenses. Then, if the market does crash, you can trim your discretionary living expenses accordingly; those are things like travel, hobbies and, Vernon says, “spoiling your grandkids.”
Krueger’s recommendation to increase retirement income: work part-time in retirement. “A little extra income from side work helps put off spending your other money,” she notes.