For our parents, retirement may have been less of a challenge than it is today. People didn't live as long as they do now, and tended to work longer. Consequently, they didn't have to fund so many years of retirement. In addition, many companies in those days had defined benefit pension plans for their employees. You didn't even have to contribute to the plan as an employee, and the plan guaranteed income for life! For some people, retirement planning was simple -- they put all their retirement savings in the bank, and drew from it until they passed away.
Today, it's common to spend 20 to 30 years in retirement. Here are some pointers on how to survive retirement in today's more demanding environment.
Don't be afraid of the market
It's understandable why a retiree would be leery of putting money into the stock market. There are no FDIC guarantees, and sometimes, the roller coaster ride can make you lose sleep at night. Last year was a good example. January kicked off the year with a loss of 5%. Then, there was a 5% drop in June when Britain elected to exit from Eurozone. Nevertheless, by the end of the year, the Standard and Poors index of the 500 largest U.S. companies was up 9.8%. If you count dividends, the total return was about 12.25%.
It would be nice if you could get a fairly consistent, good return while reducing some of the volatility of the market. The good news is, there is. There are 15 different asset classes in the market. They don't all go up and down at the same time, which is a good thing. You can structure your portfolio so that all the asset classes are represented, and balance those asset classes to give you the most consistent performance. This is the opposite of "putting all your eggs in one basket." This strategy has been proven to reduce market volatility and provide better downside protection when the market goes through a correction.
Have a plan
Depending on your financial circumstances, and how much you were able to save for retirement, you might be able to spend freely in retirement, or you might have to make some adjustments to stretch the money farther. How can you tell? Have your Certified Financial Planner™, CPA, or Registered Investment Advisory firm create a Comprehensive Financial Plan for you. This is especially useful just before you give notice to your employer that you're retiring. It's a financial roadmap that lets you know if all your retirement goals can be accomplished successfully. If there are gaps, your financial advisor can give you recommendations on how to fill them. Typically, the plan is updated every few years to make sure you're still on track.
Tap into your assets in the right order
Over the course of a lifetime, you probably have assets in many different places and types of investments: stocks, bonds, mutual funds, IRAs, 401(k) accounts, annuities, and pensions. Retirement is a good opportunity to consolidate these accounts, and devise a smart withdrawal strategy.
There's no one size that fits all, so your financial advisor can give you suggestions based on your unique circumstances. However, there are some general guidelines that make sense for many people --
▪ If you have bonds or CDs that have matured, they may no longer be earning interest. Since they are already liquid, this would be a good place to begin your withdrawals.
▪ Annuities are effective vehicles for accumulating money for retirement. They grow without getting taxed each year, so you have good compounding working for you. However, they are not great for passing on to the next generation. Any taxes that were due to you would also have to be paid by your beneficiaries. Therefore, it's often good to spend down annuities during your lifetime.
▪ When you turn 70 ½, you have to start taking annual Required Minimum Distributions from your retirement accounts, like Individual Retirement Accounts (IRAs), and employer-sponsored retirement plans like the 401(k), 403(b) or 457. At age 70 ½ the annual distribution is 4%. It goes up gradually. By the time you're 80, the distribution is about 5%. If your retirement account is invested in the market, it's very possible for the account to keep growing, even as you're taking out the RMDs.
▪ Finally, take withdrawals from taxable accounts. You only have to pay tax on the amount that the accounts grew, not on the principal. The capital gains tax is 15% for most people. For many retirees, it can be even better. People in the lowest two income tax brackets pay no capital gains tax at all.
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc. or performance returns of any Kondo Wealth Advisors, Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.