There are many ways to retire, but some are more financially savvy than others.
To determine which plan reigns supreme, the Stanford Center on Longevity compared 292 retirement income strategies. It determined that the best way to withdraw savings in retirement is through the “spend safely in retirement strategy” (SSiRS).
This strategy involves two components: delaying Social Security benefits and creating an automatic retirement paycheck.
In a 2019 report, researchers took a deeper dive into how to best implement these strategies. The SSiRS is optimal for middle-income workers (defined as having less than $1 million in savings) who will depend on Social Security.
“Social Security will deliver the majority of retirement income for middle-income workers, even for workers currently in their 20s and 30s,” said Steve Vernon, co-author of the report, to CNBC Make It.
The best way to optimize Social Security is to delay taking benefits until age 70. That way, you are maximizing the amount you will receive and not missing out on the roughly 8% more per year you can receive by delaying withdrawal.
If working full-time until you are 70 years old isn’t in the cards, Vernon suggests working part-time to make enough to cover living expenses.
And if neither of those options sounds appealing, he recommends creating a “Social Security bridge account” where you take what you would receive from Social Security from another retirement savings account and set it aside to use until you turn 70 years old.
Once you are drawing on Social Security, it’s likely still not enough to live on. So to supplement, the SSiRS strategy uses an automatic payment from a retirement savings account such as a 401(k) or an IRA.
Essentially, you create a consistent payment that will cover your expenses for the rest of your life without running out of money. The IRS requires you to take a minimum amount out of your retirement savings account at age 70 ½, which is the amount the SSiRS strategy recommends.
This required minimum distribution (RMD) is 3.65% of your savings at age 70 ½, but it increases as you age. The goal is to create a steady paycheck for yourself that you can rely on, just like your paycheck was when you were working.
“There is no perfect retirement income strategy,” Vernon says, but the SSiRS can “help virtually anybody generate a stream of income in retirement.”