The day is finally here. After decades of saving, diversifying your portfolio, and managing your investments, you’ve entered retirement.
You’re ready to transition from saving for retirement to withdrawing from your accounts, but how can you make sure that your money will last as long as you need it?
“The best advice,” says Lee Baker, CFP of Apex Financial Services, “is a healthy dose of realism.” You’re looking at a possible 30-year timeframe when it comes to your retirement, so you’ll want to understand your situation and then make a plan on which you believe you can act.
Ideally, you’ll already have something in place, such as a withdrawal policy statement (WPS) or investment policy statement (IPS). A WPS outlines how you’ll withdraw from your retirement accounts and what changes should be made to that strategy based on market conditions. An IPS outlines your goals and how you or your account manager should handle your investments. You can work with your investment advisor to create both of these documents.
Policies like these can be helpful as guides to which you have already committed and can eliminate the need to come up with a last-minute plan.
Starting to withdraw
Ask yourself about how you have been saving for retirement . Have you utilized several accounts? Do you have a spouse or partner, and if so, has he or she been contributing as well? Answers to these questions can help determine the best ways for you to withdraw your funds.
“In an ideal world, you should have multiple sources to withdraw from,” says Baker. Not only does this help to keep your portfolio more secure—with multiple accounts to draw on, you won’t have all of your eggs in one basket—but also it allows you to take advantage of accounts that are more tax efficient, such as Roth IRAs. These accounts will continue to accrue interest even while you withdraw from other accounts.
“One of the things I suggest no matter what is you’ve got to be careful not to take out too much money up front,” says Baker. A difficult part of retirement planning is that you will not know how long your money needs to last, so it’s important to stick to a budget. Rather than take out a large amount right away and possibly run out of funds later in life, let your money continue to grow by only withdrawing as much as you need when you need it.
Once you start down this path, keep in mind the future toward which you have been working. In order to benefit from your hard work, you’ll want to stick to your withdrawal plan.
Taking Social Security benefits with a spouse
“Saving for retirement with a spouse can be huge,” says Baker. If one spouse takes a spousal benefit, where a husband or wife can receive funds equal to 50 percent of the already retired spouse’s benefits, that spouse can delay taking his or her own Social Security payments for a few years. “For each year you delay [Social Security benefits],” says Baker, “you pick up about 8 percent in interest.”
Same-sex couples, both married and in non-marital relationships, are encouraged to apply for Social Security spousal benefits, though their eligibility depends on the state in which they live.
If you or your spouse has already retired and you can both live comfortably for a few years without the other’s full benefits, then this is a great way to make sure that you get the maximum worth out of your retirement funds and that you don’t run out of savings too soon.
During your retirement years, problems may still arise. The economy can hurt your portfolio, family emergencies can happen, and you may be tempted to use your savings as a solution.
Remember that smart withdrawing also means protecting your funds from yourself.
If something comes up and you aren’t prepared with an emergency savings fund, something such as a 401(k) loan from your retirement account might look like an attractive option. Before taking it, Baker advises that you should exhaust all other options.
If it’s the difference between you keeping your home or not then take it, Baker says. Otherwise, avoid this option like the plague. The problem with these loans, he explains, is that they carry many consequences if you cannot pay the money back, all of which are compounded by the fact that you have entered retirement.
Taking out money now is always easier than putting it back later, especially if “later” is during retirement, when you’ll likely have a reduced income. Remember that your retirement savings should be just for your retirement, and it would be unwise to use those funds for anything else.
Continue to keep the future in mind
Once you begin to withdraw, everything you do will affect your future. If you haven’t already, consider what you’d want to happen to your money once you no longer need it. Do you want to leave it to a child or heir? Would you like to donate it?
By planning these details out, you can be sure that none of your money goes to waste.
You’ve spent decades working toward this time. That’s why it’s important to stay financially smart and take advantage of every opportunity you can.
“If you pay attention and stay engaged,” says Baker, “you can make a huge difference in the longevity of your savings.”