The answer to this question can help determine how you create your retirement strategy.
You may have heard stories of retirees who got up and dressed for work on Monday, only to realize they were retired when they pulled into the parking lot at their old jobs! When we retire, we can’t flip a switch and automatically change the way we’ve done things for 30 or 40 years... It takes time to adjust to this new way of life.
Much like your daily routine changes in retirement, your relationship with money may change, too. The predictable paychecks you relied on for decades to manage your finances have ended. In their place sits a large sum of money — one that requires careful planning to live off of successfully. The financial moves you make going forward could carry consequences throughout your retirement. You may need to figure out how much you can take out to cover your groceries, car insurance and living expenses. But you’ll also need to plan for that money to last your lifetime.
Spend too much too early and risk living out almost every retiree’s biggest fear — running out of money. Try not to spend a dime, and you still may not reach the end of your life with money left over, due to the risks of inflation and market volatility.
However, playing it conservatively could mean your retirement won’t be what you had hoped it would be.
Money is money, right? Shouldn’t it spend just the same? It’s common practice to leave your 401k and other investments as a large lump sum to live off of when you need it. The idea of being able to pay yourself whenever you want may seem great at first. Yet, when you try to determine how much you should withdraw each year, you could quickly see risks that your retirement assets may not go as far as you’d hoped.
If you use the popular 4% rule, meaning you withdraw 4% of your life savings to live off of each year, how quickly would your nest egg be depleted? Plus, this rule doesn’t take inflation or market volatility into account.
What makes managing a lump sum so complex is not knowing how long you — or your spouse — will live. And with more Americans living longer these days, the idea of reaching 100 is becoming a reality for a lot of people. You definitely wouldn’t want to make it that far without planning for that scenario.
None of us worked our whole lives to spend retirement with the fear of outliving our money. But when we imagine what would happen if we were to run out, the thought may lead you to not spend anything now.
The longer you live, the more exposure you have to your assets being impacted by market volatility... Milk used to cost $1 a gallon... now it’s $4. What will it be when you’re 90? If history is any indication of what's to come, prices for just about everything will continue to go up over time. And that’s just inflation. How could the money you have left to live off of be impacted?
If you feel overwhelmed by all of this, thankfully, you have options.
Many retirement income “strategies” aren't strategies at all. Rather, they involve taking unplanned, variable distributions from your 401k or IRA. These approaches may be the very source of the issues you may be struggling with now.
You often don’t know how much you can take each year. Plus, the amount you take can fluctuate due to market performance.
When you aren’t sure whether you can safely take a distribution of income from your savings, your retirement might not be as fulfilling as you intended. Many retirees simply don’t go on the dream vacation because they are naturally prudent, and will not spend money unless they are absolutely sure they can afford it.
This uncertainty has a domino effect. You don’t know how much you can safely withdraw. So you don’t know how much you can spend. There’s no regular paycheck to count on.
You knew how much money you had to work with each month. You knew when you’d receive it and that unless something unforeseen happened, it would always be there.
Whether it was formally in writing or not, you probably knew what your living expenses were. You knew what your savings goals were. You knew how much you had left for recreation, like weekend trips or family outings.
If there was something you really wanted to do or buy, you could save up and plan for it, or charge it and make payments. Either way, that item made it into the monthly budget, and was paid for without issue.
If you’re like most retirees, you used the income/expense method to handle all of your monthly finances. Remember checkbooks? Much like balancing our checkbooks, we managed our finances monthly using our paychecks as the guardrails for what we could save and spend.
Month in and month out, your finances ran like clockwork. Sure, unexpected expenses would pop up now and then — that’s life. You’d cover those costs out of savings, or take on a little debt and pay it down, then go on about your business. You’d even make time to plan — and take — vacations.
By replacing the things that worked so well during your career (without having to go back to work), you’re left with the freedom to make retirement what you’ve always wanted it to be.
Your retirement income plan gives you more than a retirement “paycheck.” It can help give you the retirement you deserve.
Regain the financial routine that served you well throughout your career.
Reclaim the ability to budget and plan for goals and expenses.
Gain the confidence to spend your monthly income knowing exactly what will be there next month.
But first, you need a retirement income plan to determine how much you can predictably pay yourself each month without running out of money.