The SSiRs includes two key steps:
For individuals retiring before the optimal age to begin Social Security, the SSiRS suggest the following approach:1. Optimize expected Social Security benefits through a careful delay strategy; in this case, many middle income retirees may have all the guaranteed lifetime income they need.
2. Generate retirement income from savings using the IRS required minimum distribution (RMD) rules, coupled with a low-cost index fund, target date fund, or balanced fund.
A common topic of debate on the forum is the concept of the Liability Matching Portfolio (LMP) popularized by William Bernstein. Most seem to either love or hate the concept with little middle ground. The opponents often argue, among other things, that it is impossible for an individual to forecast his/her liabilities from retirement date through death. This is a true and valid argument, but proponents of the LMP would argue that current expenses are the best estimate of future expenses (after including some level of inflationary increases) and that the plan can always be modified if needed or desired.In this case, the retiree would set aside a “retirement transition fund” that equals the total amount of the Social Security bridge payments that are expected to be withdrawn until actual Social Security benefits start.
In an effort to set the above disagreement aside, I propose a middle ground inspired by the SSiRS. One approach to implement the LMP concept in conjunction with the SSiRS is to
- (a) delay Social Security,
- (b) build an LMP that contains an amount equal to Social Security at the optimal age multiplied by the number of years from retirement age to Social Security commencement, and
- (c) use the remainder of the portfolio to support a desired variable withdrawal strategy (e.g., VPW or RMD) using a desired asset allocation
- An individual wishes to retire at age 60
- His Social Security at age 70 will be $75,000
- His LMP would be $750,000 ($75,000 x 10 years)
- The LMP would be invested in bonds and the remainder of the portfolio can be invested however desired
Note: I personally suspect that much of the debate about the LMP rests on when people desire to retire. Those who plan to retire prior to say age 55 will likely find the cost of an LMP prohibitively expensive. So, in the interest of discussing the merits of this approach, let's assume that the above concepts are focused entirely on individuals planning to retire on or after age 55.