Most people work 35 to 45 years or more. It’s a long haul,
and when it’s finally over, they deserve to enjoy their retirement. If they’ve
been diligent about their saving and overall retirement planning, the fruits of
their decades of labor can be quite rewarding.
Knowing how to navigate the distribution phase of retirement
is crucial. And the first thing to know is that retirement planning doesn’t end
on your last day of work – when the distribution phase begins. This is when you
start using the savings and investments
built up during the accumulation phase to supplement regular income from
Social Security, pensions and other income streams while supporting your
retirement lifestyle. And though this new stage of life you’ve worked so hard
toward can be fun and liberating, the idea of spending money with no income
from work can cause stress and worry. Did you save enough, and will it last
long enough?
Once you’re ready to retire and are living off your assets,
you can ease your concerns by having a strong grasp of your distribution plan.
Here are some steps you can take to come up with a plan before retirement that
will allow you to determine your income needs, take distributions smartly and
retire comfortably.
Start with your priorities
If you plan to travel extensively, you’ll want to build that
priority into your budget. If you're a homebody, your priorities will be geared
more toward maintaining your home and spending on your hobbies. Someone who
wants to leave a legacy would have a different way of investing, because
they’re looking at long-term objectives with their money.
It helps to have an honest conversation with your spouse to
see what’s important to you both. Write down the top five things that matter to
you and discuss them together.
Focus on principal-guaranteed accounts
Unless they are significantly downscaling their lifestyles,
most people in retirement can expect to spend 20% more than they did during
their working years because they will be full-time consumers. Thus, it’s
important to know where the money will come from.
One dependable stream is from a bucket containing
principal-guaranteed accounts – certificates of deposit, fixed annuities,
market-linked CDs and fixed-index annuities. The other bucket contains growth
accounts, which are where investments can fluctuate in value, such as stocks.
The idea is to draw distributions from cash but not from the
stock bucket. The stock bucket can be partially liquidated occasionally as is
necessary to replenish cash, but only when the market is up.
Overall, it’s important during the distribution phase to
control the withdrawal rate so that retirement savings are not exhausted during
your lifetime.
Convert to a Roth IRA
Converting portions of your traditional IRA to a Roth IRA
over a series of years well before retirement makes sense for three primary
reasons:
All the growth in your Roth will be tax free.
Any income you take from the account will be tax free and
penalty free, assuming you are 59½ or older and can wait at least five years
after the conversion.
Money you bequeath from a Roth IRA will go to beneficiaries
tax free.
Yes, you pay taxes on the amount you convert to a Roth, but
we currently have historically low tax rates, and being able to pay the taxes
now rather than later can result in important savings in retirement. It’s best
to convert over a series of years instead of everything at once; that way, you
can minimize your tax bill and determine how much to convert each year based on
which tax bracket you’re in.
Prepare for and protect against the worst, just in case
What would happen to your money if a situation like the 2008
financial crisis occurred again? If all your money is invested in stocks,
that’s going to destroy your plan. You can protect yourself from a downturn by
taking income from your principal-guaranteed accounts. At the same time, you
don’t want to be selling shares to cover expenses; doing so when their values
are lower leaves you with fewer shares to benefit from when stocks rebound. And
bonds, contrary to popular belief, are not safe right now, because we’re in a
rising interest rate environment. When rates go up, bond prices tend to drop.
Creating a sound distribution strategy can help you plan
better for volatility scenarios. Knowing how your account balances might be
affected in years where your investments lose money, you can go more
conservative or set aside a few years of cash distributions. One way to
stress-test your portfolio, and ideally well before retirement, is to conduct a
Monte Carlo Simulation, which helps people see how a portfolio might perform in
a wide range of possible circumstances.
One of your biggest fears about retirement may be running
out of money. Saving more is an obvious way to try to prevent that, but it may
not be enough of a strategy for you to avoid this stressful outcome. Having a
plan that includes knowing how you will spend your money is essential if you
want your nest egg to last throughout your entire retirement.
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