Nothing exists in a vacuum, meaning that even if you’ve determined the best time and method of taking your Social Security benefits based on your age, objectives, and lifelong earnings, it won’t matter unless you properly coordinate your benefits with your overall retirement income plan. Most people agree that Social Security is not enough to live on in retirement; it needs to be supplemented with other sources of income. Therefore, it is essential to help ensure your other savings and investment vehicles are as reliable as Social Security and capable of meeting the same financial objective: providing income that you can’t outlive.
Retirement income for any purpose, including living expenses, major purchases, or satisfying RMDs, should ideally come from interest and dividends on your savings and investment vehicles, not from principal — just like your parents probably told you. Spending down on principal in retirement has never been a good strategy, but today it’s a more slippery slope than ever, especially in the early years of retirement. That’s because average life-expectancy rates are higher today than they’ve ever been, and most people need to plan for 30 years of retirement. To see the potential danger there, consider a 30-year retirement like a 30-year mortgage in reverse: When you first start making mortgage payments, you’re not paying back much principal at all.
Instead, you’re paying primary interest and just a small amount of principal. But as the years go on and the balance gets paid down, you pay a little less interest and a little more principal. The process continues until, after 30 years, your mortgage is thankfully paid off. Now, imagine the process in reverse. Take a pool of savings worth $1M, generating 5% interest, or $50,000 a year. If you take even a little bit more than that $50,000 each year, just a small amount of the principal, that sum will be depleted within 30 years in much the same way that a mortgage is paid off — or potentially a lot sooner than 30 years depending on market conditions.
