You've reached the retirement summit - now what?
We put a lot of time into saving and investing money for retirement, but we don’t spend nearly as much effort developing a strategy for withdrawing those assets once we retire.
However, developing a retirement strategy is similar to planning a mountain trek — how we get down from the peak is just as important as how we scale up it.
Today we'll share four questions to help shape your strategy for spending the retirement income you’ve worked a lifetime to build.
Once you stop earning a paycheck, asset growth may slow as you begin taking income. This is fine; it’s what you’ve been working for your whole life. But it is important that you develop a plan to prudently draw down from that mountain of assets. Without a plan, you could withdraw too much, too soon, and run out of
money during retirement.
This is a big part of retirement income planning: Choosing a reliable, methodical and flexible descent route.
1. How long should I expect to live?
On average, a man who reaches age 65 todaycan expect to live to age 84, while a woman can expect to live to 86 ½. Bear in mind that those are statistical averages. In reality, one out of three 65-year-olds today will live past age 90; one out of seven will live past age 95. 1
For a woman, the odds of outliving her husband are strong. Not only can she expect to spend more years in retirement, but she must prepare for the fact that medical and long-term care bills
for her or her husband could impact her future income.
An avalanche of expenses can devastate the financial security of a surviving spouse. This is one of many reasons why it’s important to
consider all types of financial vehicles, including insurance options, to help ensure that a nest egg isn’t drained due to long-term care expenses or the death of one spouse.
2. How much will the cost of living increase during my retirement?
Inflation can have a stronger impact on retirees compared with
the rest of the population. That’s because retirees tend to spend
a higher percentage of their household budget in categories that
experience higher inflation, such as medical and long-term care.
To help quantify the difference in cost-of-living expenses, the
U.S. Bureau of Labor Statistics (BLS) periodically calculates an
inflation index specifically for older adults, called the CPI-E. While
the BLS has not updated the index since 2011, research indicates that the relative weights for housing and medical expenses are higher for older adults. 2 This indicates that retirees spend a larger percentage of retirement income in these areas over the average consumer.
To help determine long-term cost-of-living increases in retirement,
consider areas in which you are likely to spend more as you age.
3. When should I retire?
Obviously, the age at which you retire depends on several variables, including if you enjoy your job and want to work past traditional retirement age and whether your health or your employer gives you a choice in the matter. However, another
factor that not everyone considers is what could be going on in the investment markets when you’re nearing retirement. This is important because you typically want to avoid retiring just after or during a market decline.
When deciding when to retire, a key factor is the ability to be flexible. If market performance is in a period of decline, it may be prudent to delay retirement until the market recovers so that your portfolio does not suffer from an initial negative sequence of returns.
Bear in mind, too, that by continuing to work a few more years, you also may have increased your level of income from Social
Security benefits.
4. Where should I place my assets?
The next question to consider for your downhill strategy is where to allocate your assets during retirement. As a general rule, retirees should transition some portion of their portfolio to more conservative accounts to help protect assets from market loss.
Because there are a variety of circumstances that should be considered, it’s best to consult with an experienced
financial professional to develop a tailored distribution plan. With that said, following are some general recommendations to help you develop a financial strategy designed to last throughout retirement.
- Determine how much income your portfolio needs to provide each year to supplement Social Security benefits and any other income sources.
- Allocate a portion of assets to a liquid account to help pay for periodic expenses (such as homeowner’s insurance and property taxes) as well as an emergency fund.
👉 Learn more about How much your should keep in savings
- Consider whether it might be appropriate to continue investing a portion of your retirement portfolio for long-term growth opportunity to help offset the impact of inflation and the chances that you live a long time.
- Diversify equity investments to help minimize risk of loss.
- Be flexible with regard to your annual withdrawal rate; you may want to save excess money withdrawn in years when the market produces higher returns and reduce your withdrawal rate in down years — using those prior savings to supplement your income.
- Consider the value of repositioning a portion of your assets to an annuity to secure a guaranteed income stream for both you and your spouse’s lifetime; this would protect your income needs should the investment market experience a prolonged decline.
- Consolidate assets as much as possible for ease of management, and automate required minimum distributions.
How will you descend?
For most people, it can take 30 years or more to accumulate a mountain of savings. Bear in mind that with today’s longer life expectancy, that savings may need to last 30 years or more on the other side of the peak.
Your strategy for the descent should be slow and steady — the same way you accumulated those assets.
Climbers use a rope and pulley system to control how quickly they
rappel down a mountain. Likewise, at retirement you need the right
tools and a predetermined route to help protect assets and draw them down in a controlled yet flexible manner, with the ability to make course changes as necessary.
Accumulating enough money for retirement is just half the journey; the other half is making that money last as long as you do. Consult with a financial professional to map out a detailed plan to help you confidently descend the mountain.
1 Social Security Administration. “Benefits Planner: Life Expectancy.” https://www.ssa.gov/planners/
lifeexpectancy.html. Accessed July 5, 2019.
2 Bureau of Labor Statistics. March 2, 2012. “Consumer Price Index for the elderly.” https://www.bls.
gov/opub/ted/2012/ted_20120302_data.htm. Accessed July 5, 2019.
3 1Stock1.com. 2019. “S&P 500 Index Yearly Returns.” http://www.1stock1.com/1stock1_141.htm.
Accessed July 5, 2019.
