(StateCollege.com) - It turns out many pre-retirees are so focused on accumulating assets that they never really think about actually withdrawing and using the money. Saving funds and using funds are a big difference, a different mindset and a different investing style.
Studies show that many retirees aren’t drawing down their retirement portfolios, opting instead to live on Social Security and a minimum of distributions so their portfolios can continue to grow. This may lead to unnecessary sacrifices in a retiree’s standard of living.
The Problem with Uncertainty
So why aren’t these retirees spending their nest eggs? Some may be spending as little as possible to leave behind a larger sum for their loved ones or philanthropic pursuits. This situation is a topic unto itself. But in many other cases, they worry about the “what ifs” retirement may throw their way and want to be prepared.
You may be able to relate.
This latter group understands that throughout a long-term retirement, inflation can erode savings. Portfolio returns can vary, and healthcare costs can quickly escalate. And they may be concerned about outliving their savings – only 25% of baby boomers believe their savings will last throughout retirement, according to the Insured Retirement Institute. By spending less and allowing their savings to potentially grow in the early years of retirement, they hope to offset some of the uncertainty.
Just like in your working years, you can establish a just-in-case cash cushion or line of credit that helps put you at ease. And having a sound distribution plan and strategy in place – one that considers your income sources, lifestyle, asset locations and tax situation – can help you enjoy the retirement lifestyle you envisioned.
When it comes to withdrawing your retirement savings, here are a few things to consider:
Organize your expenses
Three typical categories include essential expenses (think food, housing and insurance), lifestyle expenses (vacations, hobbies) and unexpected expenses (the what if’s you’d like not to be caught off guard). Consider paying for each category with different and clearly identified sources – assets or income.
Be flexible
There’s little doubt your income needs will fluctuate during retirement. The early years may be filled with adventures, hobbies and other big-ticket items that require more substantial withdrawals. You’ll likely travel less as time passes, but your healthcare expenses may increase. Studies show that spending tends to decline in the later retirement years, most likely due to less travel and similar pursuits. Building in flexibility allows you to go with the flow.
Review your plan
Developing and regularly reviewing a plan for your retirement income and distributions is essential. You can run hypothetical simulations based on your current situation and goals. This allows you to understand better how much you can comfortably and confidently spend in retirement.
Everyone’s retirement situation is different. You may have encountered some unexpected circumstances, such as a layoff or forced retirement that occurred earlier than you planned, and you couldn’t save as much as you hoped. On the other hand, leaving a legacy may be your primary goal. Whatever the case, establishing and consistently revisiting a spending strategy that’s right for you is good for your financial and psychological comfort.
By Tom King
April 30, 2023
Tom King CFP®, CLU®, AEP® is Registered Principal of King Financial Partners (goKFP.com) at 222 Blue Course Drive, State College, Pa. King Financial is a team of credentialed professionals specializing in retirement, investment management, wealth transfer, and estate planning. Tom can be reached at Tom@goKFP.com or (814) 234-3300.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.© 2021 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. King Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Sources: kitces.com; forbes.com; cnbc.com; ournextlife.com; smartaboutmoney.org; thestreet.com; kiplinger.com; myirionline.org, Raymond James Commentary & Insights. The professionals with King Financial Partners do not offer tax advice. You should discuss any tax matters with the appropriate professional.
