Here’s an easy, low-cost way to build a retirement plan like the pros

Saving for retirement can be difficult. Planning how to spend that savings, while making sure the money doesn’t run out, is more difficult.

But there is good news: According to experts, Americans can build a simple, low-cost retirement plan using only Social Security and savings.

From an academic standpoint, the “optimal” retirement strategy combines two concepts, said Wade Pfau, professor of retirement income at the American College of Financial Services.

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On the one hand, retirees establish an income “floor” using guaranteed payments like Social Security to cover all recurring fixed costs at retirement (insurance premiums and mortgage payments, for example).

The second tip uses an investment portfolio for discretionary expenses (travel and leisure activities, for example). Retirees would increase or decrease this expense based on life expectancy, ensuring that their money would not run out.

“This is an easy and simple way for people to have a retirement strategy that approaches [ideal] academic strategy, “said Pfau.

Maximizing the Social Security benefit is perhaps the most important aspect of the strategy.

Social Security is the “base” of retirement for most middle-income retirees, providing about half to three-quarters of their total retirement income, Pfau and other researchers wrote in an article in 2017 published by the Stanford Center on Longevity.

The researchers define “median income” as those with between $ 100,000 and $ 1 million in retirement savings.

Retirees should, at a minimum, determine what their fixed costs will be in their retirement years. That is the “minimum” income, which encompasses all essential monthly and annual payments, such as housing, food, utilities, and transportation.

Aim to “get all you can from Social Security,” according to David Blanchett, head of retirement research at Morningstar Investment Management.

Exceeding the minimum income would be even better, he said.

Social Security is a unique and powerful benefit for retirees for several reasons.

Payments are guaranteed for life, which means they cannot survive. They are indexed to inflation, so a retiree’s purchasing power doesn’t erode as much over time. They are partially protected from federal income tax and are not exposed to volatility in the stock market. In many states, that income is also exempt from state taxes.

And because the payments come in regular monthly installments like a paycheck, they help overcome a common behavioral hurdle for retirees: the fear of spending money, Blanchett said.

“It is for the best,” Blanchett said.

Americans can start Social Security starting at age 62. But waiting until you’re 70 is one of the most shocking financial decisions a retiree can make.

This is because Social Security checks grow 8% each year a retiree waits to claim benefits.

Consider someone who turns 62 this year and who will receive approximately $ 1,000 per month from Social Security at age 67. This person would receive $ 716 a month at age 62, but a much higher monthly amount ($ 1,266) when waiting until age 70, according to The Social Security Administration.

A guaranteed return of 8% is especially lucrative in today’s low interest rate environment, which means retirees get much less return on traditionally safe investments like cash and bonds.

The second tip of the retirement strategy covers the investment portfolio. The goal is to use these liquid savings to finance all the fun things in retirement.

This money can be aggressively invested, for example, in a mutual fund that tracks the stock market, such as an S&P 500 index fund, according to the Stanford document.

This is because a retiree’s overall investment risk would be diluted by the fact that such a large part of his total retirement income comes from a secure source (Social Security and / or a traditional pension).

However, more risk-averse retirees can still achieve “reasonable results” by investing in a more conservative mutual fund, such as a balanced fund “that invests about half in stocks and half in bonds,” the newspaper said.

Retirees can alternate withdrawals from their investment portfolio each year based on their life expectancy, ensuring that they will not run out of money.

Retirees can follow the instructions on a “Minimum Required Distribution Worksheet” published by the IRS as a guide.

The simple exercise is to divide the account balance by a “distribution period” listed for the corresponding age. The result is the amount a retiree can safely withdraw from their investment portfolio that year.

For example, a 70-year-old retiree with a $ 1 million retirement account would divide $ 1 million by 27.4, which is the indicated distribution period for a 70-year-old. This person can withdraw about $ 36,500.

Retirees would repeat the year each year based on the balance of their new account.

Withdrawing from accounts in this way leans slightly toward the conservative side, Pfau said.

“This is pretty easy to implement,” said Mike Piper, CPA and creator of Oblivious Investor’s personal finance blog, on the overall strategy. “It’s like the cookie cutter retirement plan you can start with.”

There are variations in the strategy that retirees could implement based on their specific situations. This, of course, would complicate the double strategy mentioned above.

The ideal retirement scenario envisages working until age 70 and covering living expenses with a working salary before claiming Social Security.

Of course, not everyone can wait until age 70 to retire.

Those who retire early must divide part of their investment portfolio as a transition fund to cover expenses in the years prior to claiming Social Security.

This would be conservatively invested in a money market mutual fund, a short-term bond fund or, for 401 (k) investors, a stable value fund.

Having a bridging fund to carry through to age 70 is ideal, but claiming Social Security at age 67, 68 and 69 “still offers significant advantages,” the Stanford newspaper said.

“Now is the wrong time to guess about retirement [age]”Blanchett said, referring to the country’s high unemployment levels.” Unless I’m sure and unless I have to, I would consider working a little harder. “

Some retirees, especially those with higher incomes, may not be able to get all of their “minimum” income from Social Security.

If they have the money, retirees can buy a simple or immediate deferred income annuity to help close that gap. Retirees generally should avoid more complex versions of annuities, such as fixed or variable rate annuities for this exercise.

The income from a traditional pension plan can also complement Social Security.

However, this plan strategy is not without risks.

For one thing, it can be difficult for this plan to accommodate large unexpected expenses, such as healthcare costs or long-term care.

Retirees can take advantage of the accumulated value of their home, for example, through a reverse mortgage or home equity line of credit, to supplement retirement income and address certain unexpected costs, Pfau said.

A reverse mortgage, however, comes with some caveats that could impede that strategy.

For example, while it could cover long-term care expenses related to home care, it probably would not cover care outside the home (for example, in a nursing home) since the home must remain the primary residence of the borrower.