Five Steps to a More Financially Secure Retirement
A balanced portfolio and reduced spending may provide the edge you need
Thursday, October 18, 2012
Lots of baby boomers are nervous about retirement. The Great Recession took a heavy toll on many investments and former financial goals don't seem as attainable in some cases.
Eleanor Blayney, consumer advocate for the Certified Financial Planner (CFP) Board of Standards, says retirees and prospective retirees need a plan to spend their savings wisely while maintaining assets that grow and generate income.
"Today, many Americans are on their own when it comes to saving -- and then spending -- their retirement income," Blayney said. "The majority of Americans will have to learn how to generate income using assets and investments they themselves have set aside in their retirement plans."
That means retirees need to create a financial plan that continues to produce income throughout their retirement. It's what Blayney calls "creating your own paycheck."
There are other steps she recommends to help establish a retirement that will be financially secure.
Timing is everything
The point when you start taking income from your retirement account can make a huge difference. Withdrawals from a portfolio during a bad investment market may diminish the sustainability of those savings by several years. In cases of bear markets, those able to delay retirement, and continue earning income rather than consuming assets, are in a much better position to avoid running out of money during their lifetimes.
Conservative can be costly
Being overly safe, investing only in bonds or annuities, can end up hurting you in the long run. For most retirees, a healthy allocation to investments that will grow over time, rather than those that promise regular income, will pay off. Dividend stocks are good, but must be closely monitored and portfolios adjusted. Bonds are more predictable but not without risk. As a balance, investing in equities or other assets that are likely to increase in value can provide added security. According to Blayney, it's simplistic to think that investments that pay interest or dividends are safe, whereas growth stocks are not.
Finding the right withdrawal rate
Generally speaking, there is a consensus that a four percent annual withdrawal rate -- defined as the highest yearly payout from an investment portfolio that will not deplete the portfolio over a given period -- is a reasonable payout over the life expectancy of most retirees. However, retirees should adjust this rate in certain situations. When an investment portfolio is doing well, or when there are large expenses, perhaps for medical costs, a higher rate may be warranted or necessary.
Don't be afraid to spend capital from a retirement portfolio. Traditional IRAs, 401(k)s, 403(b)s, and self-employed plans are structured, under the tax laws, to be depleted over our lifetimes. Retirees are penalized if they fail to take principal from these accounts at a certain age. Many retirees find the prospect of spending down these accounts very upsetting, when, in fact, doing so under the guidance of a CFP professional can result in a far more comfortable and secure retirement.
Understand your tax obligations
Most retirement funds are tax deferred, so that you don't start paying taxes until you withdraw money. Tax rates help determine acceptable savings withdrawals, and utilizing both taxable and tax-deferred accounts appropriately can help control the amount of taxes owed in any given year. Withdrawing from these two types of accounts can be critical to sustaining a retirement portfolio.
This may be one of the more overlooked aspects of a successful retirement. If you can downsize so that you don't require as much money each month, you don't need as much retirement income. The best place to save is probably with housing. If you are still making a mortgage payment, for example, consider taking your equity and moving to a smaller home -- preferably one you can purchase for cash. If you are considering the purchase of a condo, don't forget that most condos have pretty steep monthly homeowners association dues.
According to Blayney, spending matters more than investments. She notes the amount of fixed income in a portfolio could vary from approximately 35 to 65 percent without significantly changing sustainable withdrawal rates. This suggests retirees should focus primarily on expense management in retirement as the most effective way to ensure that their resources will last.
"Taxes, timing and spending are what matters most in creating income in retirement," says Blayney.
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