In personal finance, I often think in terms of “levers” to push or pull. Here are five different levers to increase your portfolio safe withdrawal rate in retirement. Here are three levers used increase your final savings balance at retirement:
- Asset allocation: How are you investing your money?
- Savings rate: What percentage of your income do you save?
- Time horizon: How long are you saving for?
Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life by Laurence Kotlikoff has another good example of pulling certain levers involving a couple that comes to him with their proposed retirement plan. By tweaking these five different levers, he is able to increase their allowable monthly spending (above housing) by over $6,000 a month for the rest of their lives (a net present value of over $1.5 million):
- Delay taking Social Security. “First, they should wait to begin taking their Social Security benefits till age seventy, rather than immediately at sixty-two.”
- Use your 401(k) to fund your retirement early years instead. “Next, they should start to withdraw from their 401(k) accounts now, rather than wait till seventy.”
- Buy joint survivor single premium immediate annuities. “They also should take their 401(k) withdrawals in the form of joint survivor annuities.”
- Downsize your house/condo. “Next, they should downsize their four-bedroom house by half.”
- Move to a lower-tax state. “And finally, they should move to New Hampshire, which has no state income tax.”
This retirement makeover will make an amazing difference. In fact, it will more than double the Smith’s sustainable retirement spending! Under their original plan, the Smiths could afford to spend $5,337 per month in addition to covering their housing costs and taxes. Under the new plan, they can spend $11,819 per month in addition. That’s a ginormous increase and adds up to a $1,578,374 increase in lifetime spending measured in present value. In other words, the new plan amounts to handing the Smiths a bag filled with around $1.5 million in cash. This is money magic, pure and simple.
Now, I’m not sure I would use the term “magic”, but these are readily-available choices and the numbers come from the author’s MaxiFi retirement planning software. Living in a two-bedroom condo instead of a four-bedroom house is not the same experience, but at least you should explore it and weigh the costs and benefits. Using single premium immediate annuities to supplement Social Security is a way to guarantee income, and they are the simplest and most transparent form of annuities that are easy to comparison shop directly. I bet that significant percentage of retirees don’t even run a free, no-obligation quote.
I enjoying finding and thinking about the levers in my life. Even if not financially-optimal, it feels good to make a conscious choice and know that your actions matter. I know that I could have made more money by moving to a different state with better job opportunities, lower taxes, and/or lower cost of living. I know that I could have bought a bigger house, but also a much smaller house.