The Sunday Mail
The lack of retirement readiness among American workers receives a lot of attention in the press and rightly so. Depending upon which study you read, this is an issue of varying severity. Accumulating a retirement nest egg is tough in today’s world, where defined contribution plans are the primary retirement savings vehicle for many of us.
Once you reach retirement, and even if you have saved enough, it IS not smooth sailing just yet. As important as saving enough for retirement is, managing the process of drawing down your retirement saving is equally important. For many, they may be retired nearly as long as their working careers.
Retirement Income Sources
A major part of the process is to look at all of the various resources the client has available to them to fund their retirement expenses. These might include many of the following: Social Security, Pension, Taxable investments, Employment or self-employment income, Annuity, health savings account (HSA)
There could certainly be other resources, but these are among the most common out there. A financial advisor should be able to take sources from this list along with other information and determine what type of income and cash flow the client will likely be able to generate during retirement.
Retirement Income Needs
Hopefully, the client has done a retirement budget of some sort and has an idea of what their income needs will be during retirement. Things like living expenses, travel, medical costs and the like should be included. So should lifestyle changes, such as downsizing their residence.
Social Security and Pensions
Social Security and possibly pension decisions should be made or at least the ramifications of making one choice or another should be considered here. In the case of Social Security when will the client take their benefit? Can they wait until their full retirement age or even age 70? If they are married, does one of the claiming strategies available to married couples fit their situation?
How Much to Withdraw?
Once the client and the financial advisor have gone through the steps outlined above, it is time to start planning a withdrawal strategy. This assumes that the client’s various financial resources are sufficient to support their lifestyle or, if not, that adjustments in their planned spending have been made. Many retirement planning programs and online calculators will look at withdrawals as somewhat fixed either in nominal or inflation-adjusted terms.
Which Accounts and in What Order?
Depending upon the client’s situation, they may have several retirement accounts from which to draw funds. Some may be tax-deferred and withdrawals are taxed at the client’s highest marginal tax rate. A Roth account, assuming the rules are followed, provides tax-free withdrawals as does an HSA account when used to cover qualified medical expenses. Appreciated taxable investments are taxed at preferential capital gains rates as long as they are held for at least a year and a day.
A Bucket Approach
A bucket approach to retirement entails setting up three buckets or portions of your retirement nest egg. Bucket number one would contain enough cash or very low risk, short-term fixed income investments to fund several years of your anticipated needs in retirement. This allows for peace of mind and eliminates the need, for the client, to dip into stock investments to fund their retirement during a declining market. — https://www.investopedia.com
