One of the biggest fears for people in retirement is the fear of running out of money. We focus so much on planning for retirement that we often neglect how important proper planning is when actually in retirement.
Based upon your fixed income (Social Security, employer pensions, fixed annuities) and variable assets (personal savings vehicles), your financial advisor can recommend an appropriate distribution strategy to make sure you to do not outlive your assets.
Your Distribution Strategy
If you refer to our Retirement Planning article, we discuss the concept of using a “4 box” system to identify your retirement income needs and assets. Within these boxes, you will have both fixed and variable assets to draw down from in retirement. Here are some general guidelines, recommendations, and ideas that you can consider as you plan your life in retirement. Please remember, your financial advisor is the expert and the one who will know your specific financial situation to make the proper recommendations.
1. Make a budget: Based upon your guaranteed fixed income streams, plus a conservative draw down of your personal investments, you should have a good estimate of the amount of income that you can rely on monthly. Based upon that income, you should then be able to manage your expenses and prepare a proper budget.
2. Take Advantage of Tax Deferred Vehicles: Investment vehicles such as IRAs and 401k’s can grow tax deferred. Accordingly, you want to let those assets grow for as long as possible with those tax benefits. The government does not require that you start withdrawing from these assets until age 70 ½, so if you are able to leave those investments untouched until that time, you can enjoy the benefits of tax deferred growth.
3. Using Annuities For Guaranteed Income: There are pros and cons to annuities in general, and in addition, each company offers different flavors of annuities with varying benefits and insurance protection. Without getting too in depth about annuities, annuities have the benefit of guaranteeing an income stream for the rest of your life while also protecting against market variance and interest rate fluctuation. This is where you and your advisor can evaluate whether an annuity makes sense with your income distribution strategy. Again, you can refer back to your 4-Boxes to see how much income you need to generate from your personal assets to reach your retirement income goals, and if an annuity can provide that income, that may be your best option given the predictable payments and market protection.
4. Charitable Giving: Charitable gifts to organizations of your choice is always a noble gesture. In addition, properly setting up charitable trusts can help reduce your tax obligation while in retirement while also doing good for your community.
5. Manage Your Expenses: In conjunction with #1 above, and the general fear of most people in retirement, the last thing you want to do is deplete your assets too quickly. Accordingly, when you are not on a typical salary anymore and you have more time to do other activities, money can be spent a bit more quickly. So, managing your expenses in coordination with your distribution strategy will be vitally important.
Work Closely With Your Financial Advisor
As we have said many times on this site, not all financial plans are created equal. Everyone has their own personal needs, goals, and financial situation. Your trusted financial advisor should have an intimate knowledge of your financial plan (hopefully he/she has been developing it with you over the years) and be able to layout a very specific distribution plan for you to make sure you live out your years comfortably in retirement.