Decumulation Phase

Question: Having just entered retirement, I’m concerned about outliving my funds. What suggestions do you have on how to switch gears from a saving and investing mode into spending and still preserving? 

Answer: Many investors have done a great job of accumulating assets and wonder what to do when it’s time to actually withdraw funds. There is a distinct psychological side of spending your retirement savings, especially as life expectancies increase.

 Uncertainty 

Many retirees are reluctant to spend because they don’t want to run out of money, and they want to leave behind larger sums for loved ones and philanthropic pursuits. In many cases, the hesitancy to spend is because they’re not sure how to determine what is a sustainable withdrawal rate that takes into account life expectancy and the unanticipated expenses and opportunities that occur during retirement.  

Over the course of a long-term retirement, inflation can erode savings. Portfolio returns can vary, and healthcare costs can quickly escalate. Only 25% of baby boomers believe their savings will last throughout retirement, according to the Insured Retirement Institute. By spending less and allowing their savings to potentially grow in the early years of retirement, they hope to offset some of the uncertainty.

Joining forces with your financial advisor may help increase your confidence about having enough money to live comfortably in retirement. Just like in your working years, you can establish a “just-in-case” cash cushion for emergencies and opportunities or a line of credit that helps provide reassurance. Having a sound distribution strategy in place that considers your income sources, lifestyle, asset locations and tax situation can help you enjoy the retirement lifestyle you envisioned.

Withdrawing

When it comes to withdrawing your retirement savings, here are a few things to consider: 

Organize your expenses. Three typical categories include essential expenses (think food, housing, and insurance), lifestyle expenses (vacations, hobbies) and unexpected expenses (healthcare costs, auto repairs). Consider paying for your essential expenses with predictable income sources such as Social Security or annuities. Use growth or income investments to pay for lifestyle expenses and maintain a cash reserve for any unexpected costs that might occur.

Be flexible. For instance, a downturn in the market is a good time to tighten the reins on your spending. But if you experience some unexpected investment gains, the timing might be right for that dream vacation. 

There’s little doubt your income needs will fluctuate during retirement. The early years may be filled with travel and other big-ticket items that require more substantial withdrawals. As time goes on, you’ll likely travel less, but your healthcare expenses may increase. Studies show that spending tends to decline in the later years of retirement, most likely the result of less travel and similar pursuits. 

People ages 55 to 64 spend on average $60,076 per year, while people ages 65 and over spend $45,221, according to the Bureau of Labor Statistics. Building in flexibility allows you to go with the flow. Just be sure to regularly touch base with your advisor so your budget can stay on track.

Review your plan. Work with your advisor to develop and review your retirement income and distribution strategies. You can run hypothetical simulations based on different withdrawal rates, how many years you will live in retirement or any other contingencies, which will allow you to develop a better idea of how much you can comfortably and confidently spend in retirement to help achieve your goals.

Everyone’s retirement situation is different. You may have encountered some unexpected circumstances, such as a layoff or forced retirement that occurred earlier than you planned, and you weren’t able to save as much as you hoped. On the other hand, leaving a legacy may be your primary goal. Whatever the case may be, establishing a withdrawal strategy that’s right for you while also keeping your emotions in check – is often a good plan of action. Stay focused and plan accordingly. 

Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professionals.