We spend much of our lives financially preparing for retirement by saving in 401(k)s and individual retirement accounts, but little thought is given on how to withdraw that money to ensure those funds last a lifetime.
Unfortunately, near-retirees get little guidance on this major life step.
A Transamerica Center for Retirement Studies’ report released in April 2016 showed few companies offer them any sort of guidance. Additionally, the survey showed of the 41 percent of retirees who currently use a professional financial adviser to help manage their savings or investments, relatively few use their advisers to calculate retirement income needs, develop strategies for spending down savings or other general financial planning.
The general spend-down rule many retirement professionals suggest is for retirees to withdraw no more than 4 percent from savings annually, but often early-retirees exceed this amount, which puts them in jeopardy for a secure financial future.
[See: 7 Stocks to Buy for the Baby Boomer Retirement Wave.]
For people who have five to 10 years before they retire, there are critical steps they can take to put them on solid financial footing in their golden years.
Know what you’re spending now. Mark Doman, chief executive officer of The Doman Group, says he works with clients on both their monthly and annual spending before moving to retirement budgeting.
“Typically, clients initially do not accurately realize their monthly or annual spending,” Dorman says.
He has them prioritize their spending in both non-discretionary items, like housing and utilities, and discretionary items, like entertainment.
“Once we prioritize spending, we can then identify where there may be resources to allocate to new activities in retirement,” he says.
Judith Ward, senior financial planner with T. Rowe Price Investment Services in Baltimore, agrees.
“It’s really important that they do that budgeting exercise prior to retirement — what are they actually going to spend their money on, what do they want to spend their money on and how do those income sources help that,” she says.”I think it’s really important to match what you want to spend money on to your income sources.”
David Terrell, regional manager and vice president for coastal southern California in the private client group for US Bank, says people should also know their debt-to-income ratio.
“Try any way to pay off big debts, like high-interest credit cards. Really start to organize that and think through what can be done there. Also, look at refinancing a mortgage to pay it off early, or decrease the monthly output to increase saving,” he says.
Figure out retirement income sources. Ward says five years ahead of retirement it’s critical people understand where their money will come from when they are no longer working fulltime. Review what regular income sources may be coming in, like pensions or Social Security, and then gauge how much savings will be needed.
Ward said people should look at some retirement planning tools to get a sense how they’re tracking for retirement.
“Five years before retirement, you have some flexibility should there be a bear market when you’re planning to retire. That may include working a few more years,” she says. “Retirement is not an age, it’s a number. That number is the size of your portfolio, your savings, your other income sources.”
This is a good time to increase contributions to 401(k) plans or other traditional retirement accounts, if feasible, Terrell says. After age 50, people can put an extra $6,000 in 401(k), 403(b) or 457 plan. People who use a SIMPLE 401(k) can add another $3,000, and pre-retirees can stash an additional $1,000 to their IRA.
Plan for health care. Ward says people who retire after 65 are eligible for Medicare, but for those who want to quit full-time work before 65, they’ll need to decide what to do for health care.
[See: 7 Pharma Stocks and the Prognosis for Profits.]
“You’ll want to look to see if your company has retiree benefits, or COBRA. That might be more expensive, but it’s worth it to find out how much it will cost you. Or get on health exchanges to see the cost,” she says.
Consider looking at long-term health care at this point, Terrell says. “Insurance is an important piece in this stage,” he says.
Younger, healthier people can get better plans and rates than when they are older, he says, so long-term care can protect income later in life when even part-time jobs are unlikely to happen.
Define retirement. For some people it simply means no longer working in their current occupation or spending time with friends or family without having to work beyond what they want to do. This may not be the right approach, Dorman says.
“While waking up to do what one wants is a powerful incentive for retirement, (we) always recommend having some ‘obligatory’ activities — whether it is a charitable endeavor, (or) part-time employment in a new job related to some passion. Retirement should be seen as a means to do what you want to, not what you have to, and definitely avoid doing nothing,” he says.
Writing down the plan is also important, says Catherine Collinson, president of Transamerica Center for Retirement Studies, and that’s something many retirees don’t do.
“The most important thing is to sit down with their financial adviser or on their own and spreadsheet it out. Everyone’s circumstances are different,” she says.
Talk about a drawdown plan. Most people use financial advisers for help with investing, but few use them to create a plan on how to draw down assets, Collinson says. The retirement survey Transamerica did earlier this year shows there’s a disconnect going on between financial advisers and their clients on this issue.
“Financial advisers have certain specialties. Some may be more on the investment side and less on the financial planning piece. Advisers are serving the clients, but the clients also need to ask for that. If the adviser can’t offer this advice, they look for someone else,” Collinson said.
Terrell agrees. “Ask the adviser what is his or her process. Ask, ‘what will my experience be in working with you on my retirement plan,'” he says.
While the traditional view toward savings withdrawal has always been 4 percent annually, that’s at best a starting point.
[Read: Will Rising Interest Rates Hurt Stocks?]
“The 4 percent rule is a rule of thumb that looks at one’s overall savings and spending down 4 percent per year, could last their lifetime. Rules of thumb are one thing; real life is another thing. A spitball estimate may not be right now,” Collinson says.
More from U.S. News
The 10 Best Ways to Buy Tech Stocks
The 9 Best Investors of All Time
11 Great Investing Tips for Women
5 Steps to Prepare for Retirement originally appeared on usnews.com
