Most likely, your 401(k) plan isn’t a true retirement plan. It may be a valuable savings plan that helps you accumulate retirement assets. But most 401(k) plans don’t have the robust features needed to turn your hard-earned savings into streams of reliable retirement income. If 401(k) plans adopted the features described in this post, they’d deserve to be called a true “retirement plan.”
If your 401(k) plan (or 403(b) or 457 plan) doesn’t offer the features described here, you’ll need to piece together your own retirement income portfolio. Let’s dig in and see how you can do that.
A Straightforward Retirement Income Strategy
Research conducted by the Stanford Center on Longevity (SCL), in collaboration with the Society of Actuaries (SOA), identified a straightforward retirement income strategy that could be implemented with most IRAs or 401(k) plans. It’s called the Spend Safely in Retirement Strategy (SSiRS), and it has two steps:
- Maximize Social Security benefits with a careful strategy to delay the start of these benefits. Social Security benefits have several valuable features – it’s paid for life no matter how long you live, it’s adjusted for inflation and it won’t go down if the stock market crashes. It makes sense to make your Social Security benefit as large as possible by delaying the start of benefits (but not beyond age 70). The best way to delay the start of your Social Security benefits is to work just enough to replace the Social Security benefit that you’re delaying. The next best way is to use a portion of your retirement savings to fund a “Social Security bridge payment” until you start your actual Social Security benefit.
- With most of your remaining savings, invest in a low-cost target date, balanced, or stock index fund. To calculate the annual withdrawal from your savings, use the IRS required minimum distribution (RMD) amount. If you retire before age 70-1/2, when the RMD is required, use the same methodology to calculate your annual withdrawals.
The SCL/SOA project compared the SSiRS to 292 different retirement income strategies using sophisticated analytical methods. The simple-to-use SSiRS compared favorably to even more complex strategies.
How Can 401(k) Plans Be Modified to Generate Retirement Income?
To implement the SSiRS or many other reasonable retirement income strategies, a 401(k) plan could offer a retirement income menu that complements the familiar investment menu in your plan. An effective retirement income menu would offer at least three payment options:
- It could offer an installment payment that pays you a specified dollar amount or percentage of remaining assets in the frequency you elect – monthly, quarterly, or annually. With this option, you’d invest your savings in one of the plan’s investment options.
- To fund a Social Security bridge payment, it would pay you a specified monthly dollar amount that roughly equals the Social Security benefit that you’re delaying. The 401(k) plan would pay you this amount until you decided to start Social Security benefits.
- For workers and retirees who want more guaranteed lifetime income than Social Security benefits, the plan could facilitate a rollover to an annuity bidding platform that helps you buy a low-cost lifetime annuity.
Of course, a 401(k) plan could offer more options than these three – the above options provide just the basic features to help you build a diversified portfolio of retirement income.
Carefully read your 401(k) plan’s summary plan description (SPD) to see if it has the features described here. If it doesn’t, politely ask your human resources department to install these features. If enough of your coworkers make the same request, some enlightened employers will try to accommodate you. Most 401(k) providers have the administrative capabilities and investment funds to implement the SSiRS and many other reasonable retirement income strategies.
If your 401(k) plan doesn’t offer these features, you’ll need to shop for an IRA platform that will support your retirement income portfolio. Understand your IRA’s options for generating retirement income, and roll over your 401(k) account to this IRA when you retire. There are several viable IRA platforms that can accommodate your retirement income portfolio – it’s your “retirement job” to shop for them before you retire.
The views of the author of this article do not necessarily represent the views of Gradifi. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Readers should consult their own attorneys or other tax or financial advisors to understand the tax, financial and legal consequences of any strategies mentioned in this article.