You could fill a library with all the books, articles and studies devoted to saving for retirement and maximizing Social Security benefits, but you might not be able to fill a single shelf with those devoted to retirement spending. Spending is an important consideration in retirement — not just in terms of budgeting, but also in terms of building new income streams to pad your savings.
Americans with access to a retirement plan are “frequently encouraged to save,” according to a new joint study from BlackRock and the Bipartisan Policy Center, but guidance on how much to spend once they reach retirement “is lacking.”
The study, called “Paving the Way to Optimized Retirement Income,” was released on June 21. It analyzes the challenges seniors face when planning to spend their retirement savings, along with how the public and private sectors can work together to find solutions.
“Retirement spending is one of the hardest problems retirees face, so the industry needs to give people affordable, innovative solutions and tools to help them navigate this challenge,” Matt Soifer, head of distribution for BlackRock’s Retirement Business, said in a press release. “We did this research because we think more people could use these levers if they knew about the benefits they can provide.”
If there is anything approaching conventional wisdom about retirement spending, it’s the so-called 4% rule. The rule states that retirees can make their money last for 30 years if they take 4% of their initial portfolio value in the first year of retirement and then make adjustments to account for inflation.
The key is building up enough savings and income to pull it off. According to the BlackRock/Bipartisan Policy Center, savers and retirees must treat retirement as “a phase of life rather than a destination,” and develop a retirement income toolkit that includes multiple potential income sources and strategies to diversify and increase retirement income.
The study outlines key findings and examples based on a typical U.S. worker’s financial situation when they are ready to retire. Among its recommendations is to delay claiming Social Security benefits as long as possible to “generate even more annual spending and further reduce downside risk.”
The study also recommends that U.S. savers develop a three-step framework to help chart their path to retirement spending. Here’s a breakdown of the three steps researchers outlined:
1. Determine Retirement Objectives
Individual retirement objectives vary from one person to the next, but everyone can benefit from understanding and articulating what financial success in retirement might look like. This means weighing factors such as wealth, personal preferences, risk tolerance and estate planning.
Unfortunately. many savers and retirees “cannot articulate” what financial success in retirement looks like for them, the study found. “Without clarity around retirement objectives, understanding the challenges one must surmount and creating a plan to overcome them is virtually impossible,” the researchers wrote. “Each saver’s goal will depend on their circumstances and preferences.”
2. Consider Key Risk Factors
As the study noted, you’ll face a wide variety of risk factors throughout your life, including longevity, declining health, market volatility, behavioral biases and “disparate access” to financial guidance. These risks “combine and manifest differently” over time but usually align with three broad phases of the retirement planning journey: early career, near retirement and retirement.
During the early-career years, low earnings often pose the greatest challenge because it hampers your ability to save and invest. As you near retirement age, market volatility “comes to the fore.” Once you are retired, the challenge is to “spend sustainably” from your retirement savings.
3. Formulate a Holistic Strategy
One of your goals heading into retirement should be to figure out ways to optimize your income when you leave the workforce. This requires considering career earnings as well as income from Social Security, part-time work in retirement and other sources while “also accounting for key risk factors and their evolving significance.” A holistic strategy requires maximizing your spending ability, maximizing your spending certainty (such as recurring bills) and addressing your longevity risk.
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