You've worked hard your whole life anticipating the day you finally retire. Well, the day arrived! But with it comes the realization that you must carefully manage your assets so that your retirement savings will last.
Review your portfolio regularly
Traditional wisdom claims that retirees should value the safety of their principal above all else. For this reason, some people change their investment portfolio to fixed income investments such as bonds and money market accounts, as they are approaching retirement age. The problem with this approach is that you will actually lose purchasing power if the return on your investments do not keep up with inflation.
While it generally makes sense for your portfolio becomes progressively more conservative as you get older, it may be wise to consider maintaining at least a portion of your portfolio in growth investments.
Spend wisely
Do not assume you will be able to live on earnings generated by your investment portfolio and retirement accounts for the rest of your life. At some point, you will probably have to start drawing on the principal. But you want to be careful not to spend too much too fast. This can be a great temptation, especially for early retirement.
A good guideline is to ensure your annual withdrawal rate is not greater than 4% to 6% of your portfolio. (The relevant percentage for you depends on several factors including the length of your payment period and your portfolio, its asset allocation.) Remember that if you cut away your main too quickly, you will not be able to earn enough on the remaining principal to carry you through the last few years.
Understand your pension plan distribution options
Most pension plans pay benefits in the form of an annuity. If you are married you generally have to choose between a higher retirement benefit paid over your life, or a smaller benefit which continues to your spouse after your death. A financial professional can help you with this difficult but important decision.
Other employer pension plans like 401 (k) 's typically do not pay benefits such as annuities, distribution (and investment) is available to you may be limited. This can be important because if you try to stretch your savings, you want to withdraw money from your retirement accounts as slowly as possible. This will preserve the principal balance and will also give them funds a chance to grow tax deferred during your retirement years.
Consider whether it makes sense to roll your employer retirement account into a traditional IRA. IRAS usually offers greater flexibility than an employer retirement plans. A rollover to an IRA also allows you to consolidate your retirement assets.
Plan for required distributions
Remember, you generally must begin taking minimum distributions from employer plans and traditional IRAS when you turn 70 ½, whether you need them or not. Plan to spend those U.S. dollars in early retirement.
If you own a Roth IRA, you are not required to take any distributions during your lifetime. Your money can continue to grow tax deferred and qualified distributions would be tax free. Because of these unique tax benefits, it is generally prudent to withdraw money from a Roth IRA last.
Know your Social Security options
You'll have to decide when to begin receiving your Social Security retirement benefits. At normal retirement age (which varies from 65 to 67, depending on the year you were born), you can receive your full Social Security retirement benefit. You can choose to receive your Social Security retirement benefit as early as age 62, but if you begin receiving your benefit before your normal retirement age, your benefit will be reduced. Conversely, if you delay retirement, you can increase your Social Security retirement benefit.
Consider phasing
For many workers, the abrupt change from employee to retire be difficult. Some employers, especially those in the public sector has begun to offer "gradual withdrawal" plans to solve this problem. Gradual withdrawal generally allow you to continue work on a part-time-you benefit by having a smoother transition from full employment to retirement and your employer benefits by retaining the services of a talented employee. Some gradual retirement plans even give you access to all or a portion of your pension while working part time.
Of course, to the extent you are able to support yourself with a salary less you'll have to dip into your retirement savings. Another advantage of delaying full retirement is that you can continue to build tax-deferred funds in your the IRA or employer-sponsored pension scheme. Remember however that you may be required to begin taking minimum distributions from your qualified plan or traditional IRA after you turn 70 ½ if you want to avoid harsh penalties.
If you continue to work, so make sure you understand the consequences. Some plans base your retirement benefit on your final average pay. If you work part time, your pension will be reduced because your wages have gone down. Also remember that income from a job that can affect the amount of Social Security retirement benefit you receive if you are under normal retirement age. But when you reach normal retirement age, you can earn as much as you want without affecting your Social Security retirement benefit.
Facing a shortfall
What if you're nearing retirement, and you decide that your retirement income may not be sufficient to meet your retirement expenses? If retirement is just around the corner, you may need to drastically change your spending and saving patterns. Saving even a little money can really add up if you do it consistently and earn a reasonable return. And by making permanent changes to your spending habits, you will find that your savings will last longer.
* Refinance your home mortgage if interest rates have fallen since you got your loan, or reduce your housing costs by moving to a cheaper house or apartment.
* Admission to the equity in your home. Use the proceeds from a second mortgage or home equity line of credit to pay off higher interest debt, or consider a reverse mortgage.
* Lay one of your cars if you have two. When your remaining car needs replacing, you might consider buying one used.
* Transfer credit card balances from higher interest cards to a low or no interest card and then cancel the old accounts.
* Ask about insurance discounts and review your insurance needs (such as your need for life insurance may be reduced).
* Reduce discretionary expenses such as lunches and dinners out.
By planning carefully, investing wisely and spending thoughtfully, you can increase the likelihood that your retirement will be a financially secure one.
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