When it comes to retirement, most people focus on planning, saving and investing years before they leave their jobs. Yet they don't' always pay the same attention to how to draw down their wealth prudently after retirement.
Many retirees now have time to do things they always wanted to do, such as travel and explore new hobbies. However, people are living longer now — some may live more than 30 years past retirement — so they must consider inflation, rising health care costs and additional unknown variables in their retirement spending habits.
“It’s this crazy balance that we have to take,” says Patrick Strubbe, founder and owner of Preservation Specialists LLC in Columbia, S.C. “We don’t want our clients to hoard all their money in case they live to 100 and not enjoy any of it. But we also don’t want them to blow it and spend all their money in the first five years of retirement. We always say, ‘you can’t go broke on our watch.’ We are here to make sure that doesn’t happen. We want to find somewhere in that happy medium.”
So how do retirees spend their money in a fiscally responsible way? Strubbe says once people are closing in retirement or have reached retirement age, their investment strategy needs to be different. When you are younger, not only do you have time on your side but you can be more aggressive when contributing.
“You want to be thinking in terms of accumulation when you are younger and up until maybe five or 10 years and then as you get very close, then you really need to start thinking about ‘I am not actually trying accumulate the biggest number. Now I am actually trying to preserve that money and prepare it to generate income so I can live off of it,’” he says.
One of the first things those nearing or just starting retirement should do is figure out a budget.
“I always joke [budget] is a four-letter word to a lot of people because they have never done that before,” Strubbe said. “We just call it a spending plan. Anyone who is planning to retire but they have not actually thought through what are they going to be spending every month or every year, that is a major issue. For us to be able to give you a thumbs up on being able to retire, we have to have at least an idea of what you are going to be spending so we can figure out where that income is going to come from.”
Say you need $5,000 a month after taxes to live on but you only will be getting $3,000 a month from Social Security. You will need $2,000 a month for the rest of your life plus inflation to come out of your nest egg. “If you have a small amount of money, that’s a huge problem,” he said. “If you have saved a lot of money, then maybe that works out fine.”
Dorie Fain, founder and owner of &Wealth Partners, a boutique financial firm created for women with offices in Baltimore and New York City, is in favor of people putting a monthly deposit from their investment account into their checking account.
“They budget from that throughout the month and then they know the next month another deposit is going to come in,” she says. “It keeps people very much in a similar system to what they had when they were working, and it keeps them within their budget. They know exactly how much is coming in. A lot of angst in retirement comes from not having that system and not really knowing what is allowed to be spent if you will. This gives people a really clear idea.”
Sri Reddy, Prudential Financial senior vice president and head of full service investments in Hartford, Ct., says people often assume they will spend less in retirement than they do when they are working.
“Actually quite the opposite happens,” he said. “The first three to five years after retirement, people find they spend more than they anticipated because they are still young. They are healthy and they have plenty of idle time. All those things they have been looking forward to in retirement -- the opportunity is here now.”
Folks do slow down as they age but the money they are saving now may start to be eaten away by health care cost inflation and other costs of living associated with aging.
“When you are starting off [in retirement], the decisions you make in the first five to 10 years after retirement are going to be critically important on [whether] you are going to be successful with retirement because unfortunately there are no do-overs,” Reddy says. “... Many people say, ‘well, you know what? Worst case scenario -- I’ll go back and get a job.’ That is really good but you are assuming that jobs are available; you are physically capable of doing a job; and that whatever you get paid there will make up for the shortfall on any decisions you have made. Those are three really big assumptions.”
Here are a few tips Reddy offers those nearing retirement:
Delay taking their Social Security until age 70. “Every year you delay taking it from (age) 62 on to 70, you get a boost” in percentage rate.
Although retiring in the early 60s sounds good, you should reconsider. “If you are healthy and you enjoy your job, I would keep going as long as you can,” he says.
Retirees also have a tendency to be more conservative with their investments as time goes on. Reddy says this makes sense but you want to make sure you don’t make decisions so conservative that their returns fail to keep up with inflation.
A safe rule to use if you don’t know how much to withdraw in retirement is typically 4 to 5 percent. “If you have $100,000 saved, you could presumably take out $5,000 a year and be OK for the rest of your life. If you take out more than that, there is a chance that you are going to exhaust what is there.”