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.
What's causing this complexity? The lump sum.
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.
As you can see, this large lump sum does not come with instructions on what to do with it.
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 do have options.
But not all retirement income plans are created equal.
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 are 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. There’s seemingly no end in sight, aside from the end of your plans for a rewarding retirement.
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.
Aren’t you tired of trying to guess how much you can take from your lump sum this year? Or next year?
What can you do instead?
The first step is to take a look back at the financial structure that served you well for decades.
During your career, you exchanged your time for money. But your job provided more than cash flow. It provided:
1. A steady paycheck: 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.
2. An actionable budget: 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.
3. Designated buckets for goals and challenges: 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.
4. A familiar budgeting approach: 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.
Wouldn’t you like to go back to managing your finances in a way you’re already really good at?
Fortunately, you can create a retirement income plan to receive "paychecks" in retirement and take advantage of the benefits that went along with them:
Your paycheck provided predictable income that allowed you to manage your finances on a monthly basis.
You knew how much monthly income you had coming in. You used that total to balance a budget, plan for big expenses like vacations, set aside savings for retirement, and most likely, rainy days and even emergencies.
That same, well-oiled routine you had all of those years can be applied to your finances in retirement.
When you use a portion of your savings to create ongoing monthly income, you do so much more than receive a check: You remove the weight off your shoulders of trying to make a lump sum last. You create a plan and budget that accommodates the lifestyle you want.
You set yourself up to receive predictable monthly income. And you get to manage your finances just like you always have.
No more guesswork about how much you can withdraw this year or next. You know how much you have coming in, year after year. And as long as you follow your income plan, you have the assurance that you won’t run out of money when you need it most.
When you designate a portion of your assets to create monthly “paychecks” and follow your retirement income plan, you can reclaim the control you once had over your finances. But more importantly, this approach offers the peace of mind to make retirement the reward it was always meant to be.
Receiving regular, predictable income can be the key to a fulfilling retirement. Many people assume happiness in retirement is about assets. However, studies have shown that the happiest retirees aren’t the richest — they’re the ones who receive reliable income.1
A steady retirement "paycheck" can replace the uneasiness you may have now with the certainty to help you enjoy this time in your life.
The process seems simple. But actually, it’s quite powerful.
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.
A good income strategy should help you:
1. Regain the financial routine that served you well throughout your career.
2. Reclaim the ability to budget and plan for goals and expenses.
3. Gain the confidence to spend your monthly income knowing exactly what will be there next month.
Doesn’t staying retired and getting a steady, reliable "paycheck" sound a whole lot better than going back to work to try and get some of the same results?
But first, you need a retirement income plan to determine how much you can predictably pay yourself each month without running out of money.
That’s where Heyday's free Retirement Income App comes in.