Starting Strong: Having a Strategy to Spending Your Money in Retirement
The irony of it all is that you’ve done the hard part already! Maybe you’ve sacrificed a little from every paycheck to save for retirement and now you’re practically here.
If you are like many Americans approaching retirement or recently retired, you too may be finding the decisions you must make on how to spend your money to be overwhelming. The decisions you make on how to generate retirement income can have substantial consequences. Studies have shown that while the value of a financial planner is often narrowly associated with their ability to “beat the market”, it’s their analyses and advice on these key decisions where they can really deliver for their clients. In fact, in 2013 Dave Blanchett and Paul Kaplan of Morningstar Research published in The Journal of Retirement the concept of “Gamma”, which they defined as the additional value that can be achieved by an individual investor from making more intelligent financial planning decisions. They found that a retiree can expect to generate 22.6% more income in retirement by using a more efficient retirement income strategy.
In English, that’s more money for you to enjoy in retirement if you make good decisions. While a good strategy is designed with your unique life goals and risks in mind, many Americans can make the mistake of glossing over numerous decisions, including:
- Income Streams (Social Security and Pensions): Nearly half of all Americans opt to take their social security benefits at the soonest possible time, age 62. By doing so, 25% of their benefit @ Full Retirement Age is lost. At odds with that fact is that we know one of the more common risks facing the average retiree is outliving their money, something by which a decision to delay one’s social security benefit would in theory help mitigate.
- After Tax vs. Pre-Tax money: Understanding how to navigate distributions from investment accounts and leveraging after-tax money along with pre-tax (retirement accounts) to reach an optimal taxable income can be quite valuable. A withdrawal strategy can help one take advantage of all tax deductions and exemptions while staying in lower tax brackets and extending tax deferrals.
- Understanding Income Guarantees: Some individuals have utilized guaranteed income investments like annuities as part of their investment strategy, but those guarantees can be complex and rife with opportunities to misstep. Owners of these investments will want to make sure they completely understand the investment or engage a professional that does, so that there is no room for misinterpretation and the guarantees are being maximized.
These are just some examples, but they articulate fairly well how one’s approach to generating income can change their retirement experience…for better or worse.