After years of working, many people face the challenge of converting their savings into a sustainable flow of income in retirement. Some researchers think they have a practical solution: Workers should take steps to “pensionize” their nest eggs.

The transition from saving to spending was once relatively simple, at least for retirees with traditional pensions offering predictable payments. But such plans are dwindling — in 2017, only 16 percent of Fortune 500 companies offered a defined benefit plan.

While employers have taken steps to automate employee contributions to workplace plans, retirement experts say, few offer options for automatic payment plans in retirement. That means many retirees face a jigsaw puzzle of payments, requiring them to piece together an income from their workplace stashes and individual accounts to supplement Social Security.

One option is to use some of their savings to buy an annuity — an insurance contract that pays out income over time. But many of them are larded with fees.

The complexity often pushes people to “wing it,” said Steve Vernon, a research scholar in the financial security division at Stanford University’s Center on Longevity. Retirees may then spend too much, jeopardizing their long-term financial security.

Vernon and two colleagues said they think they have a workable solution, developed in collaboration with the Society of Actuaries and outlined in a report in November: The “spend safely in retirement” strategy.

It focuses mainly on middle-income people — those who have saved perhaps $100,000 to as much as $1 million as they approach retirement.

The strategy helps older workers mimic a steady pension with their own retirement savings with three steps: Work longer; delay taking Social Security to maximize payments, and set a budget using an amount that you are required to withdraw from your retirement accounts anyway, effectively “pensionizing” your savings.

Working longer — at least part time — can help cover basic living expenses and preserve savings. That in turn helps enable the second step, the postponement of Social Security benefits, ideally until age 70, to maximize those payments.

Taking benefits sooner, in contrast — say, at 62, the earliest age for taking benefits — significantly reduces your check.

If 70 isn’t possible, working even an extra year or two can help.

The third step of the strategy is to draw down a percentage of your retirement accounts each year as income, using the IRS’ “required minimum distribution” amount as a guideline. That’s the money that retirees typically must withdraw from most types of retirement accounts each year, after age 70½.

Called an “RMD,” the amount is calculated each year as a percentage of your retirement savings, based on an IRS formula that factors in your life expectancy. So if you have $400,000 in a retirement account at age 70, you must withdraw about $14,600, or about $1,217 a month.

The RMD wasn’t designed as a budgeting tool; rather it was created to make sure Uncle Sam collected taxes, after letting retirement savings grow tax deferred for years. But it can work as an income plan too, Vernon said.

The withdrawal rate progresses from about 3.65 to 4.2 percent of assets for people in their early 70s, according to the IRS chart, and continues to rise gradually over time. Although you don’t have to take a distribution before age 70½, the approach can be used to calculate a safe withdrawal rate at younger ages — Vernon suggested 3.5 percent, to keep things simple.

If someone can’t work until age 70, Vernon said, it’s preferable to cut back on spending and dip into savings to meet basic needs for food, clothing and housing for a few years, in order to delay taking Social Security. That may mean less savings overall, but the trade off is higher “guaranteed” Social Security income.

Vernon and his co-authors, Wade Pfau and Joseph Tomlinson, analyzed about 300 retirement income strategies, and found that the “safe spending” approach generally wrings the most out of available benefits for middle-income retirees, while avoiding excess complexity.

Vernon urged potential retirees to think of Social Security as their steady “paycheck” to cover the basics, while the money from annual RMDs, which may fluctuate based on investment returns, represents a “bonus.”

The approach isn’t perfect. For one, it assumes that Social Security will continue as it exists today, although the program is subject to political risk as the population ages. (Vernon also cautioned that it’s important for married couples to plan carefully when claiming Social Security, so the surviving spouse gets the highest amount possible should one of them die.)

Some financial planners say they doubt that basing a budget on Social Security plus an RMD will support the lifestyle many people hope for in retirement, unless they have saved larger amounts of cash. Jennipher Lommen, a financial planner in Santa Cruz, Calif., said: “If the RMD isn’t enough, you still have to cut expenses.”


Ann Carrns writes for the New York Times.