Researchers at the Society of Actuaries and Stanford Center on Longevity published a study that offers guidance for consumers who are worried about outliving their retirement assets. The study also advises retirees who may have limited resources to consider using a reverse mortgage to pay for long-term care and other needs.
The study’s authors – which include Dr. Wade Pfau of the America College of Financial Planning, Steve Vernon of Stanford and actuary and financial planner Joe Tomlinson – recommend that pre-retirees and retirees 1) delay claiming Social Security benefits for as long as possible; and 2) that they generate retirement income from savings using the IRS-required minimum distribution rules, coupled with a low-cost index fund, target date fund or balanced fund.
The IRS requires that IRA and 401(k) account owners start taking mandatory distributions from their accounts starting at age 70½. The RMD rules require consumers to start withdrawing a certain amount of money from their retirement accounts each year based on their life expectancy and the amount of money in their accounts.
These two steps, which the researchers refer to as the “Spend Safely In Retirement Strategy” (SSiRS), provide a “baseline” approach for middle-income workers who won’t have much, if any, traditional pension/defined benefit plan income; have accumulated $1 million or less in their 401(k), IRA or other accounts earmarked for retirement; and don’t work with a financial adviser.
There are a few important caveats to this strategy, the authors noted. “It is very difficult to predict out-of-pocket expenses for long-term care, which could easily exceed amounts set aside for this purpose,” they said. “Retirees may want to adopt other strategies to address the risk of long-term care expenses, such as buying long-term care insurance, holding home equity in reserve, arranging for a reverse mortgage line of credit, or buying a qualified longevity annuity contract (QLAC).”
The report also advises retirees who don’t have adequate retirement savings to “explore deploying other assets to generate income, such as reverse mortgages or annuities funded with cash values of whole life insurance policies. In both cases, these solutions would deliver ‘retirement paychecks’ that aren’t impacted by investment performance and would be paid for life (although reverse mortgages are paid for life only if the retiree stays in the home and meets maintenance and tax requirements).”