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Making the Transition From Saving to Spending in Retirement

A couple transitioning from saving to spending in retirement

4 Tips to Help You Worry Less About Spending

You face many challenges when it comes to planning for retirement. You may wonder, “Have I saved enough?” “How should I invest?” or “Will my loved ones be okay if something happens to me?” One question you may not have considered is, “Will I be able to make the psychological shift from saving to spending?”

You may be surprised to learn that many retirees find it difficult to spend their retirement assets. They may be afraid of outliving their retirement savings, worried about no longer having a regular paycheck, or stressed to see the value of their accounts drop.

Whatever the reason for your worries, the following tips can help you successfully transition from saving for retirement to spending down your assets.

#1 – Change your mindset.

Many people who are good at saving are horrible at spending. If that’s you, one of the first things you’ll need to do when you retire is make the mental shift from being savings-focused to spending-focused. That doesn’t mean spending all your assets in the first few years of your retirement, but it does mean getting comfortable strategically withdrawing from your retirement accounts.

A wealth advisor can help you develop a custom drawdown strategy to support your daily living expenses while preserving enough assets to last your lifetime. Having a strategy in place can give you the confidence to begin spending your retirement savings.

#2 – Focus on your priorities.

One of the best ways to wrap your head around spending your retirement savings is by focusing on your priorities. Remind yourself why you spent all those years putting money away. Now’s the time you’ve been dreaming of and planning for, so use your savings to make your dreams a reality.

#3 – Have a plan in place.

A great way to feel more confident about spending money in retirement is having a plan in place. There are three main strategies often used by retirees to establish a monthly stream of retirement income.

  • Systematic withdrawal strategy – This strategy simply refers to a scheduled withdrawal from your investable assets based on a reasonable withdrawal rate. For example, you may decide to begin withdrawing 4% from your retirement savings during your first year of retirement and adjusting that amount to account for inflation each year thereafter in order to maintain your spending power. Of course, your exact withdrawal percentage will depend on how much savings you have, your lifestyle goals, your life expectancy, your legacy goals, etc. The key to this approach is maintaining a diversified investment portfolio. While stocks are typically more volatile than bonds, they provide the potential for growth within your portfolio, which is important in helping you keep up with inflation. On the flip side, an allocation to bonds or other conservative investments can help protect your funds during periods of market volatility.
  • Traditional approach – Using this approach, you would withdraw from one account at a time. Typically, the order of withdrawals is from taxable accounts first, followed by tax-deferred accounts and, finally, tax-exempt accounts. This approach allows tax-advantaged accounts to continue growing tax-deferred for a longer period of time. The challenge with this approach is that you’ll likely have more taxable income in some years than others.
  • Proportional approach – This withdrawal strategy establishes a target percentage that will be withdrawn from each account each year. The amount is typically based on the proportion of retirement savings in each account type. This practice can help ensure a more stable tax bill from year to year. It can also help you save on taxes over the course of your retirement.

#4 – Invest wisely.

A common mistake made by worried retirees is shifting their portfolio assets from growth-focused to income-focused early in retirement in an effort to protect their retirement funds. However, this approach can have severe consequences for a retiree’s long-term income, as inflation erodes purchasing power over time. It’s not uncommon for retirees to live 20 to 30 years or more in retirement. That’s a long time, which means it’s important to take a long-term approach to investing.

At Creative Planning, we typically recommend our recently retired clients maintain the majority of their retirement savings in a diversified portfolio of assets with a focus on growth and inflation protection. While this portfolio should be in line with your overall risk tolerance and investment objectives, it can be invested in riskier assets because you won’t need to draw from it until later in retirement.

To fund our clients’ short-term income needs, we typically recommend they maintain three to five years of living expenses in a short-term, semi-liquid investment account. A mix of bond funds typically works well, as it provides capital for opportunistic rebalancing as well as a monthly income. Having a short-term allocation to bonds can prevent you from being forced to sell equities at a loss when markets are down.

Throughout retirement, your wealth manager will help you identify opportune times to transfer assets from your long-term savings to your short-term savings in a tax-efficient manner.

Could you use some help making the shift from saving to spending in retirement? Creative Planning is here for you. Our experienced teams work together to help ensure your financial life is optimized and working to achieve your personal financial goals. For more information, schedule a call with a member of our team. We look forward to getting to know you.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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