When it comes to retirement, most people think it's just about saving up a considerable chunk of money during their working days. But spending that money safely and appropriately in retirement is just as much of a concern.
To put this in perspective, reports from the Transamerica Center for Retirement Studies and Aegon Center for Longevity found that Americans worry more about running out of retirement funds than declining health. In a survey of CPA financial planners, 30% of financial planners say their clients' top fear in retirement is running out of money.
The general advice for retirement is to save, save, save, and invest, invest, and invest. But times have changed. People need to understand that saving successfully for retirement isn't the end of the job. Experts now recommend spending time on withdrawal strategies. You need to learn how to spend safely and know your actions if the financial market eats into your assets. Here are some ways to preserve your retirement savings.
The popular 4% rule suggests that you should withdraw 4% of your retirement holdings annually while keeping pace with inflation. To get your retirement holdings, you'll have to add up all your assets in various accounts, including your 401(k), brokerage, and individual retirement accounts. This 4% includes all the dividends from your stocks.
By withdrawing 4% every year, you'll have a balance large enough to last you for 25 years in retirement. This 4% also includes all the dividends from your stocks. The rule is, however, not entirely rigid. The 4% withdrawal is just the starting point. When the financial market experiences a downturn, you may have to reduce your retirement to 3% or even 2%.
Spikes and Valleys
Research over the years has shown that people's budgets aren't identical all through retirement. Retirees tend to spend more on leisure and travel during the early years. This, however, seems to trend down as they approach mid-retirement. At that point, the spending goes up for healthcare costs.
This is why rigid withdrawal strategies can be ineffective. Instead of following a rigid formula, see your retirement withdrawals as distinct financial decisions and work out the best strategy for you. Take less when the market is down, and if the financial market goes up, you can take more. For instance, 4% of $2 million would be $80,000. You can take all of that in a good year, and take less in a market downturn to safeguard yourself.
Consider using a minimum distribution approach. The RMD tables tell you how much you can withdraw, depending on your age. As you grow older, the withdrawal amount goes up because your life expectancy is dropping.
Mix it Up
Diversification is key to safeguard your investment. Your asset allocation should include bonds and cash. This way, if the equity market hits a brick, these assets can hold your portfolio pretty well, and there'll be no need to invade your stocks.
Also, your withdrawal strategy should be sensitive to happenings in the financial market. There's the risk that the market can dip in your first few years in retirement. If you make withdrawals at that time, you're selling at a loss, which may affect the value of your portfolio.
For instance, let say you have $1,000,000, then the market stumbles, and you're left with $800,000. Selling at this point will affect your portfolio. Hence, it's essential to withdraw less in a market downturn.
A Safety Net
Life expenses aren't the same every month, so you need guardrails in your spending. One year you might spend so much on travel and the next, health or a vacation.
So if you earn $3,000 every month, there's no guarantee that you'll only need $3,000 in future months. That amount should be the upper limit. Consider saving any difference between your monthly spending plan and upper limit for months of higher spending.
Another critical decision you'll make in retirement is when to claim Social Security. There's a need to give it a lot of thought because it can be very impactful. It's advisable to delay Social Security so that you can claim maximum benefits. But you also need to consider how much you have and whether you're at risk of running out of money.