So far, we’ve discussed taking off (preparing for retirement), flying (safe investing practices), and preparing for landing (what to do in the years leading up to retirement). Today we want to talk about life after you land in retirement. We’ll focus on three key areas: your finances, longevity, and staying busy.
Financial security and planning
After you arrive in retirement, there are a few financial items you’ll want to keep in mind:
Reasonable withdrawal rates
Reasonable withdrawal rates are intended to give you enough money to live on this year without making it impossible to live ten years down the road. There’s no universal rate that works for everyone and at all ages, but studies show that a 4 percent withdrawal rate has a high likelihood of success, assuming the portfolio has a reasonably diversified allocation.
Whatever rate you go with, make sure it’s adjusted for inflation. Most people forget about the impact inflation can have and end up with an unpleasant surprise down the road.
Required Minimum Distributions
The big question here is, should you spend or re-invest?
Here’s what you need to remember. The whole point of RMDs is so the IRS can get their share of your savings. Once you hit 70½, you have to start taking required minimum distributions (RMDs) or the IRS will penalize you.
Some people withdraw the RMD and then put it in a bank account, where it doesn’t earn nearly as much as it might in their portfolio. We often encourage people to withdraw the required amount, pay taxes on it, and then re-invest any money they don’t need according to their plan.
Your RMD amount increases every year, so you’ll eventually be required to withdraw more money than you need. So, for example, if you need $20k from your portfolio and ten years into retirement, your RMD reaches $30k, keep the $20k and re-invest the extra $10k (give or take after taxes).
Emergency funds are a popular topic in the world of financial planning. While they are important, we also like using income buffers as a way to plan for the unexpected.
We’ve talked to people before who keep many times their annual income in cash in retirement because they’re worried about the markets. Yes, a bad market can be very bad for retirees, but there are other ways to buffer your income besides stuffing your mattress full of hundred-dollar bills.
Consider the following: If you had $1 million in a fairly conservative portfolio and a crisis as bad as 2008 hit again, our best estimates say it would take your portfolio just a few years to recover. However, many conservative bond components actually grew during that time. Many people refer to the fact that the S&P 500 took four years to cover, according to Yahoo Finance. Your portfolio would likely react a lot differently, unless it looks just like the S&P 500. To protect themselves if such a situation arises, we encourage clients to build an income buffer they can turn to if the markets go south so they can leave their investments alone and give them time to recover.
Rather than keeping $1 million in cash, make it two years’ worth of expenses (which is probably anywhere from $75k to $200k, depending on how you’re living). Then, if the market dumps, we switch off investments and go to the buffer fund. That way the majority of your money is still working for you, and you won’t be forced to sell at an inopportune time.
Want to learn more about how you can set up an income buffer that works for you? Drop us a line.
Determine your retired budget
One of the great things about retirement is that you’ll finally have time for all those projects you’ve been wanting to do for years. Sometimes, newly retired clients often come in and want to pull hundreds of thousands out of their IRA in order to do a big project, like a major home improvement.
Such a big move can kill your retirement plan. The early years of retirement really make a difference on your security, and if you overspend or eliminate too much money in retirement, you won’t be able to get it back by working.
Now, when we say “budget,” we’re not talking about getting overly detailed. We’re talking about a higher level: what are your living expenses, health expenses, etc.
Our recommended retirement budgeting method is split into four accounts – two checking and two savings.
Split your two checking accounts into fixed and variable. Fixed expenses are bills (mortgage, health, utilities, etc.) where you have little control over the amount. Variable is everything else (groceries, gifts, spending money). When you run out of money in the variable expense category, it’s important that you stop spending on variable expenses. That means, if you’re thinking about buying that new jacket that’s $400 and you’re low on variable expenses, don’t buy it! (Think about this trick Steve Martin learned on SNL.)
Your savings accounts are also split: One for saving up for bigger expenses (such as buying new household appliances or a car), and the other is the emergency fund. When it comes to an emergency fund, keep in mind that the purpose of it is easy accessibility, not investing.
If you have a hard time not spending your emergency fund, you aren’t alone. Some people invest their emergency fund with us in a way that’s easily accessible, but that extra step of having to contact us helps them keep from spending it unless they really need it.
Longevity Planning: Don’t Get the Date Wrong
A lot of people say, “I’m going to really enjoy my money in retirement! I’m going to spend it all!” My response to those people is always the same: Don’t get the date wrong.
If we knew your exact longevity, we could build a plan that uses all your resources between now and then, but we can’t.
You might say, “My parents both died by age 83, so I want to use all my money by then.” That seems like sound logic, but what if we do that and get the date wrong? Every generation seems to be living longer than the last nowadays.
Nobody wants to run out of money before they run out of health. That’s why it’s important to be reasonable and have a plan during your first years of retirement – spending too much too soon can leave you in a less than ideal situation if it turns out you planned wrong.
Stay Busy in Retirement
Not going to work every morning feels good, but after the novelty wears off, you’re going to need something to do. These two questions can help you determine how you want to spend your days:
- What’s going to get you up in the morning?
- What do you love doing so much that you would do it for free?
Some people say, “I’ll have all day to do whatever I want when I retire! I’ll figure out how to fill my time.” But if you don’t have something in mind, you could struggle with boredom and strained relationships.
A lot of people aren’t used to seeing their spouse 24 hours a day, but that’s what will happen in retirement if you don’t have something else to do. It may sound bad, but it’s healthy to find things to do and friends to hang out with so you don’t have to be around each other constantly.
Here are some ideas to help get you out and about:
Some people want to golf their way through retirement. That’s great, but keep in mind that you can only golf so much. Either the weather will give out or you’ll get bored with it. Find new ways to stay active.
Join a gym, get together with friends for a walk around the park, or start an in-home exercise program. Staying active keeps your mind and body sharp and can help you age in place instead of going to an assisted living center when you’re older.
Retirement is different now than it was thirty years ago. A lot of retirees continue to work well into their seventies or even longer. Some jobs to consider include:
- Part-time at your previous career
- If your paycheck doesn’t matter, get a job you’ve always wanted. For instance, for some reason, I’ve always thought it’d be fun to be a greeter at Wal-mart or work at the zoo. I might just get a job there after I retire. They can pay me minimum wage and it won’t make a bit of difference.
- For more ideas, check out Barry LaValley’s book, So You Think You Are Ready to Retire?
If you’re retired or nearing retirement, use these ideas to form your financial and retirement life strategy. Ideally, you shouldn’t wait until you retire to think about these things. They can all be built into your financial plan.
Want to talk about life after retirement? We’d love to hear from you!