Having spent decades saving for retirement, it can feel like a major shift for retirees to spend down their hard-earned assets. Research by the Employee Benefit Research Institute found people with $500,000 or more in savings at retirement spent down less than 12 percent of their assets over 20 years.(1) Many of these retirees are reluctant to dip into their principal for fear of running out of money due to the anticipation of increased healthcare expenses and other factors. If you share these concerns about the longevity of your savings, here are steps you can take to help you feel more confident:
Understand the arc of retirement spending. Annual expenses generally are highest within the first few years of retirement. This is because retirees are often taking advantage of their newfound leisure time to pursue hobbies, travel, dine out and shop. Spending tends to slow down with advancing age. You may find it reassuring to realize there’s a good chance your lifestyle expenses in retirement could level out or decrease over time.
Plan for healthcare costs. Healthcare is consuming an increasing proportion of many retirees’ income. You can start preparing for these expenses today by researching your insurance and savings options and developing a strategy to cover your needs. Your options could include a combination of the following: Medicare, Medigap supplemental insurance, health savings accounts (HSAs), long–term care policies, continuing health insurance through your current or former employer, and other dedicated healthcare savings. Having funds and protection in place can help you feel more prepared to handle a medical emergency or more routine care.
Understand the level of risk in your portfolio. As you turn your savings into income, it’s important to review your portfolio and assess your level of risk. This means ensuring that you have a diversified portfolio that suits your anticipated spending and balances your needs for liquidity and growth. For example, consider having a year to several years of easily accessible investments to provide income in case of a market downturn or an unexcepted financial event in your life. At the same time, it’s important to also have investments that are positioned for growth, or at the minimum, keep up with inflation. Many retirees spend decades in retirement, so plan your investment strategy with longevity in mind.
Devise a sustainable withdrawal strategy. A well-crafted retirement income plan can help you avoid running out of money and feel more confident about spending your hard-earned assets. Tally up your various sources of retirement income, which may include Social Security, annuities, retirement assets and other investment earnings. Then, decide which assets you will tap into first, and when you will claim Social Security benefits. Remember that at 72 years of age you are required to take required minimum distributions from your traditional IRA and employer-sponsored retirement plans, so work this income into your plan.
Consider the tax consequences. Reducing taxes on retirement income is a priority for a great number of retirees, yet many feel understanding the tax impacts of drawing down assets is complex. Starting the planning process early and seeking guidance from a tax and financial advisor can help you feel more secure in your strategy.
MICHAEL W. K. YEE, CFP,® CFS,® CLTC, CRPC®
1585 Kapiolani Blvd., Ste. 1100, Honolulu, HI 96814
808-952-1222, ext. 1240 | firstname.lastname@example.org
Michael W. K. Yee, CFP®, CFS®, CLTC, CRPC®, is a Private Wealth Advisor, Certified Financial Planner™ practitioner with Ameriprise Financial Services, LLC in Honolulu, HI. He specializes in fee-based financial planning and asset management strategies and has been in practice for 37 years.
Investment advisory products and services are made available through Ameriprise Financial Services, LLC, a registered investment adviser. Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
1 “The Employee Benefit Research Institute’s Spending in Retirement Survey”. EBRI, 2021. Ameriprise Financial Services, LLC. Member FINRA and SIPC. ©2021 Ameriprise Financial, Inc. All rights reserved.