Here's Exactly How I Plan to Spend My Social Security Checks in Retirement

Life may be less hectic in retirement than it is during your working years. But it's not necessarily any cheaper. In fact, the 20% reduction in expenses that most financial planners suggest you'll enjoy in your golden years is often matched by a similar reduction in income.

In other words, unless you're wealthy enough now to never have to worry about money again, you'll probably need to continue managing your money wisely in retirement. This includes being smart about whatever Social Security payments you end up getting from the beleaguered benefits program even though it's probably not going to account for the bulk of your retirement income. You still want to make the most of it.

There's an important nuance to Social Security payments that future retirees might want to consider while making their longer-term financial plans, however. To this end, here's exactly what I plan to do with this recurring cash flow once I begin collecting it.

Two whole different kinds of retirement income

Yes, I know Social Security is on the ropes. If nothing changes between now and then, the program's board of trustees believes an across-the-board 26% reduction in benefits payments will be required sometime in 2034. In more approachable terms, it means retirees' current average monthly payment of $2,071 is likely to be pared back to something in the ballpark of $1,500 in today's dollars.

Even if the issue is addressed in the interim, however, it seems the underlying problem is never really going to go away. It's just apt to resurface in a different way at a different time. So, at some point in my lifetime I still suspect I'm going to suffer the same percentage reduction in my Social Security payment that everyone else will. It stinks to be sure. Nevertheless, my number crunching still suggests that about two-thirds of my retirement income will come from my own retirement savings accounts.

And this underscores an obvious but often overlooked difference between Social Security income and income generated by personal retirement savings. That is, even if the size of my future payments is relatively reduced, Social Security's ongoing cash payments are still essentially guaranteed by the federal government. It may not be much, but at least it's reliable as well predictable.

Investment income generated by dividend stocks and interest-bearing bonds, on the other hand, isn't. Their payments can ebb and flow. Heck, their principal values can ebb and flow. It's a worry simply because if you need to sell an asset to free up cash to live on in retirement, you could be forced to sell something at a loss, doing long-term damage to a portfolio that may not become evident until years later.

Make a retirement bucket list (but not the kind you're probably thinking of)

Fortunately, there's a solution. Most retirees unconsciously do it anyway. However, most of them would be better served by making a conscious decision to split their retirement savings into distinct "buckets" each with a different investment purpose. For instance, one bucket could be meant to meet short-term cash needs, while another could be intermediate term in nature, holding resilient dividend stocks that fare well even during periods of economic weakness.

There may even be room and money for a long-term bucket that continues to hold a few volatile growth stocks. In almost all cases, the goal is simply to move gains and income from longer-term buckets to shorter-term ones. For most retirees, the middle bucket will usually be the biggest. And for too many retirees, the near-term bucket often holds more cash than it needs to, crimping net returns. There's even a fairly uncreative name for this plan, called the retirement bucket strategy.

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There's no magic being done here, of course. The point of this structuring is just to force you into making a plan that ensures you're always able to refill your near-term cash and cash-equivalent bucket to cover your cost of living, This will require you to figure out exactly how much is needed in each bucket at any given time, recognizing that the more growth a particular investment offers, the riskier and more volatile it's going to be, and the longer you may need to plan on holding it.

Great, but what's this got to do with Social Security payments?

It may not be a massive amount of monthly income or even enough to cover all my regular monthly bills. But I'm pretty confident in saying I'll be getting something from the Social Security Administration in retirement, and that monthly payment will be a reliable, known amount. This means I won't need to keep a ton of idle cash in my near-term bucket just to cover short-term expenses and can instead leave more in my intermediate-term bucket doing something at least a little constructive like generating (probably) dividend income. This may even ultimately allow me to keep a little more money in my long-term growth bucket.

Worth the trouble

This plan has its arguable downsides. Chief among them is the fact that it offers very little wiggle room and requires regular activity.

While there will be something of a modest cash-stash in my near-term bucket, I doubt it will be enough to purchase a new automobile -- maybe only enough to comfortably pay for an expensive car repair or to unexpectedly replace my home's HVAC system. Again, I want to minimize my idle cash by planning on paying most of my monthly bills first with my Social Security income as I receive it even though I know this plan minimizes my immediate fiscal flexibility.

I'm OK with that though. If the need arises, I'm pretty confident I'll be able to handle a few weeks' worth of float while I shop around for the right exits from the right assets at the right time. I won't have to make a major snap decision. I'm not the only investor with the wherewithal to do so either. With just a bit of thoughtful planning, most anyone reading this could likely do the same for themselves.

The bigger takeaway, of course, is that one of the more overlooked risks in retirement is remaining underinvested when you don't really need to be. Social Security payments may be modest, but they're still a very reliable source of retirement cash flow that allows you squeeze more value out of your existing retirement investments. It just takes a bit of ongoing management that's worth it in the end.

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