You spent a lot of time and energy planning and saving for retirement. But did you know you also need a strategy for how to spend your money once you reach retirement? By planning ahead, you can avoid making these four common mistakes that can have a negative impact on your financial security in retirement.
1. MAINTAINING THE SAME LEVEL OF INVESTMENT RISK
As you transition into retirement, you’ll want to re-evaluate your investment strategy.1 For decades, you’ve saved and invested with the goal of growing your assets. Now, as you enter retirement, you have to focus on making sure your assets will last. While you still need some investments to keep up with inflation, you may not want to take on as much investment risk as you did during your working years. So you’ll want to reassess your tolerance for risk and adjust your investments accordingly.
2. TAPPING INTO YOUR ACCOUNTS AT AN INOPPORTUNE TIME
As you start to make withdrawals from your retirement accounts, the last thing you want to do is pull money from your investments if the market happens to be in a downturn. You can minimize that risk by having multiple sources of income to draw from. In addition to your investments, aim to have assets that are not subject to daily market fluctuations, such as a cash reserve, an income annuity or permanent life insurance cash value.
You also want to have flexibility when it comes to paying taxes. The best way to give yourself such flexibility is to have a mix of accounts that will be taxed, such as a traditional 401(k), and accounts that aren’t taxed as you withdraw money in retirement, such as a Roth 401(k) or Roth IRA.2
The more options you have, the better you’ll be positioned to help minimize taxes and the impact of market losses and therefore maximize your income in retirement.
3. OVERSPENDING OR UNDERSPENDING
When you stop working, it can be easy to get carried away with vacations, spoiling the grandkids and any other number of ways you’ll fill your time. In fact, some retirees find they spend more in the first couple years of retirement than they had in the years leading up to retirement.
At the other end of the spectrum, some people find it hard to give themselves permission to spend in retirement because they’re worried they’ll run out of money or that there won’t be anything left for their kids or grandkids. So they choose not to take that trip to Alaska or cross off other items on their retirement bucket list.
Ultimately, your goal should be to right size you’re spending so that you’re doing the things you want with the confidence that you’ll have the funds to get you through retirement. To right-size spending:
- Have a spending plan that includes estimated costs for both must-haves and a prioritized list of nice-to-haves.
- Be realistic about costs: People often underestimate the cost of health care in retirement or the impact of taking Social Security early. Downsizing also can cost more than you expect.
- Once you’ve calculated the cost of your essential expenses, make sure they can be covered by guaranteed income from Social Security, a pension and/or an annuity. When you know those costs are covered, you’ll sleep better at night and mentally free yourself to spend money on the nice-to-haves
- If you have a desire to leave a legacy, build that into your financial plan, too. With a legacy plan in place, you’ll have the freedom to spend money on yourself.
4. LENDING MONEY TO KIDS OR FAMILY
In retirement, you may have a finite amount of financial resources available to you. So if you want to lend money to your kids or other family members, make sure it’s money you won’t miss and can afford to live without (in case you don’t get paid back). And if you choose to go ahead with making a loan to your kids or other family members, take these steps:
- Be very intentional about the fact that it’s a loan — not a gift.
- Set terms for when you’ll be paid back and the consequences of making late payments or defaulting.
- If trust is an issue, establish parameters for how the money can be used. If you’re lending, you set the rules!
- Get on the same page with your significant other before deciding to make the loan.
- Get it in writing.
1 No investment strategy can guarantee a profit or protect against loss.
2 Distributions may be subject to ordinary income tax and may be subject to a 10% IRS early withdrawal penalty if taken before age 59 ½.
This publication is not intended as legal or tax advice. Financial Representatives do not give legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.