We spend so much time making plans and saving for retirement to get to the point where we can retire. At some point we make the transition from saving for retirement to living off our retirement savings. The question is how can we make sure our savings last as long as we do.
To do that, it’s important to plan and be willing to adjust the plan. Think beyond selling assets and consider all your streams of income. That would certainly include income from investments like dividends and interest, but it would also include Social Security and pensions. Sometimes markets shift and factors change in ways that call for additional adjustment. Here are some common challenges people face when they first start living off their retirement savings.
Spending needs
Planning for retirement is based on several different assumptions. How much will you need to live on each year? How much will your investments produce each year? How long do you expect to live? These are not questions you can answer with certainty. The answers are not fixed. Ultimately, you have to make an educated guess.
For a variety of reasons, you may find you need more income than expected. This could be a result of health issues or market factors beyond your control. What impact will that have on the longevity of your savings?
Or maybe your portfolio is growing faster than you anticipated. Do you spend more? It can be difficult to determine if it is a good idea to increase your spending beyond what you had planned. This is where talking with an expert can help in developing a comprehensive plan and then reviewing it and making necessary adjustments every so often.
Market fluctuation
No one wants to see their portfolio fall, especially in retirement or when you are approaching retirement. It can be scary. And yet, volatility in the market tests our ability to stay on course. You can reduce that risk by limiting your exposure to stocks, but that can also limit your ability to see future growth. It is possible to insulate your nest egg from major declines in the stock market and still leave room for growth. That is the value of planning a well-structured portfolio that takes into consideration your goals, your risk tolerance, and your short-, medium- and long-term needs.
That can mean opening an account for immediate spending and keeping about a year’s worth of cash available there. Then you can keep money you expect to need two or three years out in more stable investments that hold value in the event of a market downturn. And the rest of your portfolio can be invested for higher income and upside potential. This approach protects you against potentially having to sell long term investments at a loss in a down market.
Taxes
Another challenge is minimizing taxes in retirement. This can be tricky because withdrawing money from your investment portfolio can bring tax liabilities. The best strategy will depend on the type of income and assets you have. You will need to talk with your tax advisor about those and your spending needs. Many investors have both taxable and tax-advantaged accounts. Generally, it is recommended to use taxable accounts first and let tax-deferred accounts like 401(k) and traditional IRAs grow. There are instances when drawing down tax-deferred accounts may be better before reaching the age of required minimum distributions (RMDs), especially if you risk being pushed into a higher tax bracket. Many retirees can be surprised by the size of their RMD, especially since they increase as you age.
Just to illustrate, suppose your IRA has $1,000,000. According to the SEC’s Required Minimum Distribution Calculator, at 72 the RMD is $39,062.50, but at 85, the RMD is $67,567. Your tax advisor can help identify the best approach for your specific situation. Making your retirement income last does require planning and organization, but the good news is you are not alone. Whether you need to make adjustments, or work out your larger retirement plan, Brixton Capital Wealth Advisors can help you identify the best strategy for your goals.