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A retirement income strategy for do-it-yourselfers

For my money, here are two of the most critical retirement planning tasks: determining if you’ve saved enough money to retire and figuring out how to deploy your savings to generate a regular retirement paycheck that will last the rest of your life. 

Given that these tasks aren’t exactly easy, it’s no surprise many people might want help. So you, too, may want to find a qualified professional adviser who has your best interests at heart to help make sure you’re on track.

However, if you’re game to tackle this on your own, here’s a simple, straightforward three-step strategy designed for do-it-yourselfers:

Step 1: Maintain an emergency fund

Start by setting aside enough money to cover unexpected, large emergencies, such as major repairs on your home or car, or out-of-pocket medical expenses. The amount depends on your personal circumstances, but could range from $10,000 to $20,000 or much higher. You could park these savings in a money market fund or savings account with a bank or credit union.

Step 2: Guarantee the basics

Next, develop sources of retirement income that won’t drop if the stock market crashes and are guaranteed to last for the rest of your life, no matter how long you (and your spouse or partner, if you’re married or in a committed relationship) live. Cover most or all of your basic living expenses with these sources of income. This way, if you or your significant other live into your 90s or even 100s, or if the stock market crashes, you won’t have to move in with your kids or friends.

Sources of guaranteed income that can be straightforward to implement include:

  • Social Security
  • A monthly pension from a traditional pension plan or hybrid cash balance plan from your employer, if you participate in such a plan 
  • An annuity purchased from an insurance company

This order indicates the most cost-effective sources of guaranteed income. Start by maxing out your Social Security benefits. The best way to do this is to delay the start of these benefits as long as possible, but no later than age 70, if you’re single or the primary wage-earner of a couple.

For married couples, the optimal strategy becomes more complicated, and it’s worth spending time investigating the optimal strategy with free, online calculators. If you stop working before the optimal age to start Social Security benefits, it would be wise to draw down your retirement savings to cover living expenses while you’re delaying your Social Security benefits.

If your Social Security benefits aren’t enough to cover your basic living expenses, and if you participate in your employer’s defined-benefit pension plan, estimate your monthly income from that source. Most pension plans have online calculators you can use to estimate your monthly check, or you can request an estimate from your plan’s administrator. 

But resist the temptation to take your benefits in one lump sum, if your employer offers that choice. Usually the lump-sum equivalent of a pension is below its fair market value.

Finally, if you still need an additional source of guaranteed lifetime retirement income, you can buy an immediate monthly annuity from an insurance company. To minimize your transaction costs and obtain a competitive bid, consider using an online annuity bidding service such as Income Solutions or

The above annuities typically don’t let you change your mind and withdraw your savings once you’ve purchased the annuity, and they don’t return unused funds to your heirs after you die (and after your spouse dies if you buy a joint and survivor annuity). 

If this bothers you, you can buy a guaranteed lifetime withdrawal benefit or fixed index annuity that has these features, although your monthly income will be lower than the immediate annuities described above. Fidelity Investments and Vanguard are two low-cost sources of these types of annuities. 

If you’re concerned about inflation, consider that Social Security income increases with the CPI. Most pensions are fixed in dollar amount, but that’s not a reason to dismiss their value. They’re still an important part of your retirement income portfolio. You can also buy annuities that increase with inflation or increase by a specified percentage.

Step 3: Invest and draw down the rest of your savings

To cover your discretionary living expenses, such as travel, gifts, hobbies and spoiling your grandchildren, invest the remainder of your savings and use a systematic withdrawal plan (SWP) to calculate your regular paycheck. 

A recent study by the Stanford Center on Longevity (SCL) and the Society of Actuaries (SOA) shows that the best SWP strategies readjust your annual withdrawal each year to reflect investment gains or losses that have occurred. These methods apply a percentage to your remaining savings at the beginning of each year to calculate the withdrawal for the coming year.

One such method that’s easy to use is the IRS required minimum distribution (RMD) that applies to IRAs and 401(k) accounts after age 70-1/2. Most IRA and 401(k) administrators or financial institutions can calculate the RMD for you, or you can use an online calculator. If you’re younger than age 70-1/2, use 3-1/2 percent as your annual withdrawal percentage.

If you want to develop a more refined SWP strategy than the RMD and aren’t afraid to do your own number-crunching, check out this free online calculator and website developed by Ken Steiner, a retired pension actuary.

The SCL/SOA study supports investing most or all of these savings in stocks for growth potential, if you can tolerate the resulting volatility in this part of your retirement paycheck. In essence, the guaranteed sources of retirement income described in Step 2 become the “bond” part of your retirement income portfolio, and the income described in this Step 3 is the “stocks” part of your income portfolio.

One thing you’ll want to avoid is panicking and selling your stocks in a market crash. Of course, it can be hard for retirees to maintain this discipline since they may not be able to go back to work to make up their losses. But by guaranteeing your basic living expenses in Step 2, you should have the confidence to ride out the inevitable market downturns that will occur during the rest of your life.

If you participate in your employer’s 401(k) plan and it offers low-cost mutual funds, this can be a good place to invest savings devoted to Step 3. You can also implement this strategy through a low-cost mutual fund family.

You can answer the first question -- do you have enough savings to retire -- by completing all three steps and determining if the results are sufficient to support the life you want in retirement.

So there you have it: a retirement income strategy you can design and implement on your own, if you’re willing to spend the time to understand and implement it. And even if you still want professional help, by understanding this strategy, you might have a more informed and collaborative conversation with that adviser.

It’s a good use of your time to develop these strategies. After all, you’re setting up your paycheck for the rest of your life. 

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.