Best retirement option: work till 70 and 'pensionize' 401(k), IRA

It’s not what a lot of people want to hear, considering that the typical age for Americans to retire is at 63, but a new Stanford study proposes that the best retirement plan is for workers to stay on the job till age 70 and “pensionize” their defined contribution plan funds.

The Daily Progress reports that research from The New School indicates that not only do Americans usually retire even before full retirement age, but for the “vast majority of workers,” sticking it out till age 70 isn’t even an option, according to Theresa Ghilarducci, professor of economics at The New School.

Instead, many are forced out because of age, or find that they have to retire due to ill health, caregiving demands or layoffs.

And it can be considerably tougher to find a job even from the age of 45 on up, according to AARP financial security expert Jean Setzfand.

Enter the Stanford study. Lots of would-be retirees might not like this plan either, although Steve Vernon, a research scholar at the Stanford Center on Longevity in its financial security division and lead author of the study, and his colleagues went to great pains to analyze close to 300 retirement methods before coming up with the one proposed in the study.

Challenged by insufficient savings, plan leakage and the dilemma of how to generate retirement income, the study says, workers “don’t plan like actuaries and investment managers,” and only about a third of them actually turn to a financial advisor for guidance on how to get through retirement without going broke.

As a result, it adds, “retirees tend to exhibit two distinct strategies for deploying their retirement savings,” either hoarding their savings against future need and minimizing withdrawals or “winging it” and using savings “like a checking account … for current living expenses” and ending up running through the money at an unsustainable rate.

What the study says turned out to be the best option after crunching all the numbers is postponing collecting Social Security till age 70, so that workers can collect the maximum benefit possible, and taking only the required minimum distribution from their retirement savings once they hit age 70½.

Researchers call this the “Spend Safely in Retirement Strategy,” pointing out that “In essence, ‘Age 70 is the new 65,’” but retirees may have to cut back on their standard of living to adhere to the strategy—yet it’s the best way to “annuitize” retirement accounts that otherwise may be far from providing an adequate and regular source of income during retirement.

And even if workers can’t stick it out all the way to age 70, even working for additional months can make a noticeable difference.

The study says, “Our analyses show that for many middle-income retirees, Social Security benefits will represent one-half to two-thirds of total retirement income if workers start Social Security at age 65, and from three-fourths to more than 85 percent of total retirement income if they optimize Social Security by delaying until age 70.” That means that DC plans won’t have to provide anywhere near as much income to supplement Social Security than they would if workers retired substantially earlier.