Figuring out how to manage household income once you are no longer working isn’t easy.
The core problem is you don’t want to run out of money and you don’t want to be so cautious that you don’t enjoy life. The uncertainty compounds during volatile times like now when forecasters are calling for very different economic outcomes for the year.
For everyone but wealthy households, Social Security is the foundation of retirement income. You can’t outlive your Social Security payments.
Social Security income is protected against the ravages of inflation through an annual cost-of-living adjustment. Some people get a pension in retirement. (Private-sector pensions typically don’t hedge against inflation; a majority of state and local government pension plans provide a cost-of-living adjustment.)
The difficult issues involve 401(k), 403(b), IRAs and other defined contribution retirement savings plans.
Here are three of the more popular retirement money strategies with an emphasis on a safe and secure income.
The ‘4 percent’ rule: The basic formula is your first withdrawal equals 4 percent of your portfolio’s overall value. The portfolio is comprised of 60 percent stocks and 40 percent bonds. The following year you take out another 4 percent plus the rate of consumer price inflation, and so on. A variation, “dynamic withdrawal strategies,” requires more active engagement, offsetting higher rates of withdrawal in good years with smaller withdrawals in bad markets.
The ‘bucket’ strategy: The idea is to set aside enough money in safe assets to meet necessary expenses for one to three years. The money for paying expenses is invested in FDIC insured savings accounts, U.S. Treasury bills and the like. This allows the retiree to take greater risk with the remainder of the portfolio (usually with equities).
The ‘safety-first’ approach: The third tactic is best associated with Zvi Bodie, emeritus finance professor at Boston University. You secure an income to meet needed expenses for the rest of life by investing in Treasury Inflation Protected Securities (TIPS), I-bonds (the savings bond with a built-in inflation hedge), and lifetime annuities with a rider that allows for cost-of-living adjustments.
Each of these strategies are at their core financially conservative. Each technique has fierce advocates.
Personally, I’m agnostic. I like the bucket strategy, not because I believe it’s the best approach. The tactic fits my temperament and lifestyle.
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.