How Can I (Better) Protect My Retirement Income?

How do I not outlive my retirement income? This concern is very common in people as they approach retirement and when they retire. The solution at first glance seems to be to spend less than what you receive in retirement so that the money you have lasts longer.

This solution can be very useful to prepare and not have to worry. William Gale, director of the Retirement Security Project at the Brookings Institution, recently told a Brookings webinar that many of us will be in retirement for a quarter to a third of our lives.

There is a very interesting podcast for those over 50 called “Friends Talk Money” in which you can see suggestions on the matter, with the help of Steve Vernon, an academic researcher at the Stanford Center on Longevity and author of the excellent new book, “No be ruined in retirement. ”

Is there a formula to protect retirement income?

Vernon’s “magic formula” for retirement income security is to make sure your retirement income (I) exceeds your expenses (E).

Pam Krueger (MoneyTrack co-host), proposes that to find out if this formula works, you should initially do a cash flow analysis to see what your retirement cash flow actually looks, or could see, month after month.

Experts recommend two possible ways to spend less when you’re retired: the “buy less latte” analogy and what Savage calls “The Big Cut.”

Do you know the Latte Factor?

A very common and well-known saying is that buying less latte at Starbucks will save you money to invest much more in your retirement savings.

David Bach, the author of “Smart Women Finish Rich” and co-author of “The Latte Factor: Why You Don’t Have to Be Rich to Live Rich,” popularized this saying. In 1999 he stated that if instead of spending $ 5 a day at Starbucks for 40 years you save it, you will have more than $ 2 million in your account when you turn 65.

Helaine Olen, a personal finance writer, debunked this notion of the latte factor by doing her own calculations, saying that Bach took an 11% per year profit on savings excluding taxes on the savings fund. And Vernon also doesn’t support spending less in retirement through small regular spending cuts.

You could decide to eat less out and actually skip your coffee at Starbucks. But if you still have a large gap between your retirement income and your expenses, that adjustment simply would not close the gap.

The cuts you can make might not add up to millions of newfound savings, but Savage (a nationally syndicated personal finance columnist and author of “The Savage Truth on Money”) says he believes it can still be useful.

“I call that the five-cent approach. And it makes you feel better. And it’s a reasonable thing to do,” Savage said. “But I agree with Steve that it won’t get you where you want to go.”

On the other hand, Krueger joined in urging early retirees and retirees to look for ways to reduce small and recurring expenses, such as utility bills.

Krueger says he did an energy audit on his home and saw that a year he managed to save a few hundred dollars here and there, “I think those things add up,” he said.

The big cut

The Big Cut proposal, on the contrary, focuses on analyzing the large expenses that one has and evaluating which ones it can eliminate or reduce. Large expenses are typically those for housing, cars, health care, insurance, and income taxes.

Savage says it would be like thinking “How long should we stay in this house? With property taxes going up, feeling like there will have to be a new oven because we replaced it ten years ago and it will probably have a useful life of fifteen years. All those kinds of things. ”

Relocating would not only mean reducing what you spend monthly on housing. It could also mean reducing or possibly ending your property tax bills and lowering your home maintenance costs.

Savage claimed that the biggest big cut would be with income taxes. “By moving to a state that doesn’t have an income tax,” he said, like Florida or Tennessee, instead of living in a state with high-income taxes like New York or California.

Krueger recommends seriously considering giving up your second car in retirement, or even all of your cars.

With good public transportation or access to car services like Uber and Lyft, you could eliminate the expenses of owning a car: loans, taxes, parking, tolls, gas, maintenance and repairs, and car insurance.

Social Security Bridge Payment

On the other hand, Vernon also proposes a good strategy to reduce expenses: “establish a Social Security Bridge Payment”.

The first step is to delay claiming Social Security beyond your full retirement age, which is now 66 to 67, until age 70, since Social Security increases benefits by approximately 8% annually. This way, you wouldn’t have to cut your expenses so much if you receive more retirement income.

The second step is the bridge payment part. “You must pay with your savings what Social Security would have paid you when you retired. This will delay your Social Security benefit, “Vernon said.

He also said he has done analyzes that have shown that a Social Security bridge payment may be the best way to use your savings to generate additional retirement income.

“I think it’s a spectacular idea,” Savage said. “Especially since Social Security benefits will be adjusted up every year due to inflation.”

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