Clients facing retirement often worry about making investment decisions that will determine their financial security for decades. But recent research from the Stanford Center on Longevity (at Stanford University in California) in collaboration with the Society of Actuaries in Illinois identifies a carefree retirement strategy that can work for many middle-income retirees.

The joint report, Optimizing Retirement Income by Integrating Retirement Plans, IRAs, and Home Equity: A Framework for Evaluating Retirement Income Decisions, provides a framework for assessing various retirement-income generators and navigating the many trade-offs older clients face when making retirement-income decisions. The study compared a wide array of income strategies for three hypothetical retirees with retirement savings of $250,000, $400,000 and $1 million, including various combinations of public-pension claiming ages and systematic withdrawals from invested assets, annuities from insurance companies and, if necessary, tapping home equity.

The report identifies a “spend safely in retirement” strategy, which recommends retirees invest their savings in either a low-cost target-date fund (often with a 50% stock allocation) or a balanced fund (often with a 60% stock allocation), as well as basing annual spending on the U.S. Internal Revenue Service’s (IRS) required minimum distribution (RMD) rules, which force investors to begin taking a minimum amount of money out of tax-deferred savings plans at age 70.5.

This approach works best when a retiree postpones government pensions until age 70. However, claiming benefits from such a pension at earlier ages, such as 67 or 68, still provides significant advantages. The research assumes a withdrawal rate of 3.5% from ages 65 to 70, with the RMD schedule kicking in at 3.65% for the first year and then gradually escalating.

The success of such an RMD strategy lies in its simplicity, according to the report. The IRS stipulates withdrawal percentages based on life expectancy tables and automatically adjusts the withdrawal each subsequent year based on continuing life expectancy. This allows the percentage of remaining wealth consumed each year to increase gradually with age as the retiree’s remaining life expectancy decreases.

Employing this strategy results in more expected total average retirement income throughout retirement compared with most other solutions the report analyzes.

However, the winning framework does not address future discontinuities in income or living expenses. Previous research found that although there’s often an initial spike in consumption when people retire, it generally tapers off. In many instances, spending drops with age (in a pattern known as the “retirement spending smile”) – something an RMD strategy fails to address.

The report acknowledges that wealthier retirees may want to adopt more refined actuarial methods for systematic withdrawals, such as determining retirement cash flow income by balancing the present value of future income and future living expenses.

Alternatively, clients may wish to smooth yearly fluctuations by applying minimum or maximum annual withdrawal amounts. The idea is to create “guardrails” that will keep a portfolio on track if withdrawal rates get too high or if markets dip too low.