Reaching Retirement

You have worked hard your whole life anticipating the day you could finally retire. You saved for and sent your children to college. You have diligently funded your retirement accounts. Now that your retirement is close at hand, you will need to carefully manage your assets so that your retirement savings will last.

Review Your Portfolio Regularly

Traditional wisdom holds that retirees should value the safety of their principal above all else. For this reason, some people shift their investment portfolio to fixed-income investments, such as bonds and money market accounts, as they approach retirement. The problem with this approach is that you will effectively lose purchasing power if the return on your investments does not keep up with inflation. While generally it makes sense for your portfolio to become progressively more conservative as you grow older, it may be wise to consider maintaining at least a portion of your portfolio in growth investments.

Spend Wisely

Do not assume that you will be able to live on the earnings generated by your investment portfolio and retirement accounts for the rest of your life. At some point, you will probably have to start drawing on the principal. But you will want to be careful not to spend too much too soon. This can be a great temptation, particularly early in retirement. A good guideline is to make sure your annual withdrawal rate is not greater that 4% to 6% of your portfolio. The appropriate percentage for you will depend on a number of factors, including the length of your payout period and your portfolio’s asset allocation. Remember that if you whittle away your principal too quickly, you may not be able to earn enough on the remaining principal to carry you through the later years.

Understand Your Retirement Plan Distribution Options

Most pension plans pay benefits in the form of an annuity. If you are married, you generally must choose between a higher retirement benefit paid over your lifetime or a smaller benefit that continues to be sent to your spouse after your death. You should consult a financial professional to help you with this difficult, but important, decision. Other employer retirement plans like 401(k) plans typically do not pay benefits as annuities; the distribution and investment options available to you may be limited. This may be important because if you are trying to stretch your savings, you will want to withdraw money from your retirement accounts as slowly as possible. Doing so will conserve the principal balance, and will also give those assets the chance to continue to grow tax-deferred during your retirement years. You should consider whether it makes sense to roll your employer retirement account into a traditional IRA. In an IRA, you will have greater investment options and more flexibility for making withdrawals. A rollover to an IRA also allows you to consolidate your retirement assets.

Plan for Required Distributions

Keep in mind that you must begin taking minimum distributions from prior employer plans and traditional IRAs when you reach age 70 ½, whether you need them or not. Plan to spend these dollars first in retirement. If you own a Roth IRA, you are not required to take any distributions during your lifetime. Your assets can continue to grow tax-deferred, and qualified distributions will be tax-free. Because of these unique tax benefits, it generally makes sense to withdraw funds from a Roth IRA last.

Know Your Social Security Options

You will need to decide when to start receiving your Social Security retirement benefits. At normal retirement age (which varies from 65 to 67, depending on the year you were born), you can receive your full Social Security retirement benefit. You can elect to receive your Social Security retirement benefit as early as age 62, but if you begin receiving your benefit before your normal retirement age, your benefit will be reduced. Conversely, if you delay retirement, you can increase your Social Security retirement benefit.

Consider Phasing

For many workers, the sudden change from employee to retiree can be a difficult one. Some employers, especially those in the public sector, have begun offering “phased retirement” plans to address this problem. Phased retirement generally allows you to continue working on a part-time basis. You benefit by having a smoother transition from full-time employment to retirement, and your employer benefits by retaining the services of a talented employee. Some phased retirement plans even allow you to access a portion of your pension benefit while you work part-time. One advantage is that since you are continuing to receive income, you will not need to dip into your retirement savings as much. Another advantage of delaying full retirement is that you can continue to build tax-deferred funds in your IRA or employer-sponsored retirement plan. If you do continue to work, make sure you understand the consequences. Some pension plans base your retirement benefit on your final average pay. If you work part-time, your pension benefit may be reduced because your pay has gone down. Also, remember that income from a job may affect the amount of Social Security retirement benefit you receive if you are under normal retirement age. However, once you reach normal retirement age, you can earn as much as you want without affecting your Social Security retirement benefit.

Facing a Shortfall

What if you are nearing retirement and you determine that your retirement income may not be adequate to meet your retirement expenses? If retirement is just around the corner, you may need to drastically change your spending and saving habits. Saving even a little money can really add up if you do it consistently and earn a reasonable rate of return. In addition, by making permanent changes to your spending habits, you will find that your savings will last even longer. The first step to narrow the shortfall between your retirement income and retirement expenses is to prepare a budget to see where your money is going. Then, you need to reduce discretionary expenses such as lunches and dinners out. Finally, you will need to look at other ways to stretch your retirement dollars like refinancing your home mortgage and transferring any high-interest credit card balances to low-interest cards. By planning carefully, investing wisely, and spending thoughtfully, you can increase the likelihood that your retirement will be a financially secure one.