By Krista McBeath, McBeath Financial
You’ve worked hard your whole life anticipating the day you could finally retire. Well, that day has arrived! But with it comes the realization that you’ll need to carefully manage your assets to give them lasting potential.
Review Your Portfolio Regularly
Traditional wisdom holds that retirees should value the safety of their principal above all else. For this reason, some people shift their investment portfolio to fixed-income investments, such as bonds and money market accounts, as they approach retirement. The problem with this approach is that you’ll effectively lose purchasing power if the return on your investments doesn’t keep up with inflation.
While generally it makes sense for your portfolio to become progressively more conservative as you grow older, it may be wise to consider maintaining at least a portion of your portfolio in growth investments.
Don’t assume that you’ll be able to live on the earnings generated by your investment portfolio and retirement accounts for the rest of your life. At some point, you’ll probably have to start drawing on the principal. But you’ll want to be careful not to spend too much too soon. This can be a great temptation, particularly early in retirement.
Many professionals simply state your annual withdrawal rate should not exceed more than 4 percent to 6 percent of your portfolio. It’s a fair starting point, but I recommend a detailed financial plan to carefully calculate year-to-year distributions. A detailed analysis should be personalized and based upon a number of factors, including the length of your payout period, tax strategy and your portfolio’s asset allocation. Remember that if you whittle away your principal too quickly, you may not be able to earn enough on the remaining principal to carry you through the later years.
Understand Your Retirement Plan Distribution Options
Most pension plans pay benefits in the form of an annuity. If you’re married, you generally must choose between a higher retirement benefit paid over your lifetime, or a smaller benefit that continues to your spouse after your death. A financial professional can help you with this difficult, but important, decision.
Other employer retirement plans, such as 401(k)s, typically don’t pay benefits as annuities; the distribution (and investment) options available to you may be limited. This may be important because if you’re trying to stretch your savings, you’ll want to withdraw money from your retirement accounts as slowly as possible. Doing so will conserve the principal balance, and will also give those funds the chance to continue growing tax deferred during your retirement years.
Consider whether it makes sense to roll your employer retirement account into a traditional IRA, which typically has very flexible withdrawal options.1 If you decide to work for another employer, you might also be able to transfer assets you’ve accumulated to your new employer’s plan, if the new employer offers a retirement plan and allows a rollover.
Plan for Required Distributions
Keep in mind that you must generally begin taking minimum distributions from employer retirement plans and traditional IRAs when you reach age 72, whether you need them or not. You might consider spending these dollars first in retirement.
If you own a Roth IRA, you aren’t required to take any distributions during your lifetime. Your funds can continue to grow tax-deferred, and qualified distributions will be tax-free. Because of these unique tax benefits, it generally makes sense to withdraw funds from a Roth IRA last.
Know Your Social Security Options
You’ll need to decide when to start receiving your Social Security retirement benefits. At normal retirement age (which varies from 66 to 67, depending on the year you were born), you can receive your full Social Security retirement benefit. You can elect 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.
Facing a Shortfall
What if you’re nearing retirement and you determine that your retirement income may not be adequate to meet your retirement expenses? If retirement is just around the corner, you may need to drastically change your spending and saving habits. Saving even a little money can really add up if you do it consistently and earn a reasonable rate of return. And by making permanent changes to your spending habits, you’ll find that your savings will last even longer. Start by preparing a budget to see where your money is going.
By planning carefully, investing wisely, and spending thoughtfully, you can increase the likelihood that your retirement will be a financially comfortable one.
Krista McBeath is an Investment Advisor, Chartered Financial Consultant, a Licensed Insurance Advisor, and a Fiduciary. As an experienced tax advisor, she specializes in financial planning, investments and insurance. Phone 309-808-2224 or visit www.mcbeathfinancial.com for appointment information.
Krista is also the author of the Amazon Best Seller, “The Generational Wealth System – A Holistic Approach to Preserving Your Wealth and Legacy.” Learn more at www.wealth-book.com.
Advisory services are offered through Landmark Wealth Management Inc, dba McBeath Financial Group, an Illinois Registered Investment Advisor firm. Insurance products and services are offered through McBeath Tax and Financial Services, LLC. McBeath Financial Group and McBeath Tax and Financial Services, LLC. are affiliated.
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