Having spent decades saving for retirement, it can feel like a major shift for retirees to transition to spending down their hard-earned assets. Recent research from Ameriprise Financial revealed that 68% of retirees have not tapped into their retirement savings, except for taking required minimum distributions.1 Many of these retirees are reluctant to dip into their principal for fear of running out of money, the anticipation of increased healthcare expenses and other factors. If you share these or other concerns about the longevity of your savings, know there are steps you can take to help you feel more confident. Here are some tips to help you get started:
Understand the arc of retirement spending.
Annual expenses generally are highest within the first few years of retirement. This is because retirees are often taking advantage of their newfound leisure time to pursue hobbies, travel, dine out and shop. Spending tends to slow down with advancing age. You may find it reassuring to realize there’s a good chance your lifestyle expenses in retirement could level out or decrease over time.
Plan for healthcare costs.
Healthcare is consuming an increasing proportion of many retirees’ income. You can start preparing for these expenses today by researching your insurance and savings options and developing a strategy to cover your needs. Your options could include a combination of the following: Medicare, Medigap supplemental insurance, health savings accounts (HSAs), long-term care policies, continuing health insurance through your current or former employer, and other dedicated healthcare savings. Having funds and protection in place can help you feel more prepared to handle a medical emergency or more routine care.
Understand the level of risk in your portfolio.
As you turn your savings into income, it’s important to review your portfolio and assess your level of risk. This means ensuring that you have a diversified portfolio that suits your anticipated spending and balances your needs for liquidity and growth. For example, consider having a year to several years of easily accessible investments to provide income in case of a market downturn or an unexcepted financial event in your life. At the same time, it’s important to also have investments that are positioned for growth, or at the minimum, keeping up with inflation. Many retirees spend decades in retirement, so plan your investment strategy with longevity in mind.
Devise a sustainable withdrawal strategy.
A well-crafted retirement income plan can help you avoid running out of money and feel more confident about spending your hard-earned assets. Tally up your various sources of retirement income, which may include Social Security, annuities, retirement assets and other investment earnings. Then, decide which assets you will tap into first, and when you will claim Social Security benefits. Remember that at 70.5 years of age you are required to take required minimum distributions from your traditional IRA and employer-sponsored retirement plans, so work this income into your plan.
Consider the tax consequences.
Reducing the tax bill on retirement income is a priority for many retirees, yet according to the research, 53 percent of retirees feel understanding the tax impacts of drawing down assets is complex. If you share these sentiments, starting the planning process early and seeking guidance from a tax and financial advisor can help you feel more secure in your strategy.
1. The Making Money Last study was created by Ameriprise Financial, Inc. as part of the Ages, Stages & Money survey, which was conducted online by Artemis Strategy Group December 8–21, 2017 among 3,019 U.S. adults ages 30–79 with at least $100,000 in investable assets. The respondents included 1,075 retirees between the ages of 40–79. For further information and details about the study, including verification of data that may not be published as part of this report, please contact Ameriprise Financial or go to ameriprise.com/makingmoneylast.
Rocco A. Carriero, MBA, CRPC, is a Private Wealth Advisor with Ameriprise Financial Services, Inc. in Southampton, NY. He specializes in fee-based financial planning and asset management strategies and has been in practice for over 16 years. To contact him: 631-283-8482, 1673 County Road 39, Southampton, NY 11968 or roccocarriero.com. Advisor is licensed/registered to do business with U.S. residents only in the states of NY, NJ, TX, MA, PA, NC, NH, UT, NV, CA, NM, WA, VT, MS, MD, RI, FL, MO, SC, GA, MN, CT, AZ. Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser. Ameriprise Financial Services, Inc. Member FINRA and SIPC. © 2018 Ameriprise Financial, Inc. All rights reserved. File # 2163539