Managing Finances During Retirement

When our clients retire, they often spend the first few weeks or months feeling like they are on vacation. However, as Americans are living longer, retirement, while the end of your working career, is also the beginning of a new phase of your life.
The retirement years may last a third of your life and require you to depend on your savings to supplement your other sources of retirement income. It is, therefore, imperative that you take as much, or even more care in planning your finances in retirement as you did in planning for retirement.
One important financial question facing retirees is “Will I run out of money?” Hopefully, you will have done your homework before retiring and put together a detailed, conservative plan that shows that you have enough money to retire. The first step is to determine your income sources, such as Social Security, pensions, retirement savings and any income you might have from a part-time job in retirement.
In the last few years before retirement, you will want to carefully review your Social Security benefits, which you can do by setting up an account on ssa.gov. You will also review any pension benefits you are entitled to. If your pension offers a lump-sum option, you will need to determine if it makes more sense to take the one-time lump sum or a monthly income.
Next, you will review your retirement savings, like 401(k)s, IRAs, Roth IRAs and 403(b)s. You’ll also include any non-retirement investment or savings accounts you have. If you are planning to downsize your home, you can include the excess from the sale of your home in your savings amount.
Once you have determined your income sources, you will plan your expenses. A general rule is that you will need around 80% of your pre-retirement income during the retirement years. We have found that many of our clients actually need close to 100% of their pre-retirement income, especially in the early, most active years of retirement. You will likely spend less on discretionary activities as you get older, but you may spend more on health care. You can plan to spend around 15% to 20% of your after-tax income on health care.
You will, of course, still have the normal everyday expenses like taxes, mortgage or rent, insurance, utilities, cars, food, clothing, gifts, entertainment, travel and charity.
Compare your “fixed” sources of retirement income, like Social Security and pension income, to your expenses and see if you will need to supplement the income with your retirement savings. If you do, you will want to determine how much you can safely withdraw from your investment each year. This is your withdrawal rate.
In the ‘90s, many people thought you could safely withdraw 7% each year. Today a general rule of thumb is 4%, but there is much research suggesting that even 4% may be too high in today’s interest rate environment.
In addition to determining your withdrawal rate, you will need to determine a strategy for your withdrawals. Make a list of different accounts and whether they are taxable, tax-deferred or tax-free. You can then determine the order of priority. Usually, retirees will draw on their taxable assets first and allow the tax-advantaged ones to continue to grow. At age 73, you will be required to take distributions from your traditional retirement accounts, so you can factor that into your withdrawal plan.
Finally, you will want to structure your portfolio for retirement. You can do this by creating an emergency fund that contains three to six months of your living expenses. Next, you may want to put another three to five years of your living expenses in maturing investments like bonds and certificates of deposit. Then you can round out your portfolio with investments with the goal of preserving the purchasing power of your nest egg by keeping up with, and outpacing, inflation.
Take time to enjoy the fruits of your retirement preparation, but don’t forget to pay attention to managing your finances during retirement. We imagine that the last thing retirees want is to have to go back to work.
Important Disclosure:
Mike Bergen is a Partner, Managing Director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.