withdrawal rate

Fear of RUnning out of money in retirement

18Apr

When Rest & Relaxation in Retirement Becomes Fear of Running Out of Money

BlogApril 18, 2023

Retirement is supposed to be a time of rejuvenation and relaxation, but for many retirees, financial stress can quickly turn it into a time of worry and struggle. One of the biggest concerns for retirees is running out of money. Unfortunately, it is a major issue, and it can happen for a variety of reasons.
The following are some common reasons retirees run out of money in retirement:

Insufficient Savings: One of the primary reasons retirees run out of money in retirement is due to insufficient savings. Many people don’t start saving early enough, don’t save enough, or don’t have a good understanding of how much they will need in retirement. As a result, they may end up with a retirement fund that is too small to last their entire retirement period.
Increased Life Expectancy: People are living longer than ever before, which means retirement savings must last longer too. Unfortunately, many people do not plan for an extended retirement period, and their savings run out before they pass away. This can be particularly challenging if they require long-term care, which can be very expensive.
Inflation: Inflation is a fact of life, and it can significantly impact retirees’ ability to maintain their standard of living. Many retirees are on fixed incomes and may not be able to keep up with the rising costs of goods and services. This can lead to a situation where they need to dip into their retirement savings to cover their living expenses.
Health Care Costs: As we age, health care costs tend to increase. These costs can be particularly challenging for retirees, especially those without health insurance. According to some estimates, a couple retiring in 2020 will need about $295,000 to cover their health care costs during retirement.
Poor Investment Choices: Investing is an essential part of retirement planning. Unfortunately, some retirees make poor investment choices or do not understand how to manage their investments effectively. This can lead to a situation where their retirement savings do not perform as well as they had hoped, and they run out of money sooner than expected.
Debt: Debt can be a significant problem for retirees. Those who carry debt into retirement may find that they need to use their retirement savings to pay it off. This can quickly deplete their savings and leave them without a financial cushion.
Running out of money in retirement is a widespread problem that can happen for many reasons. However, with careful planning and thoughtful decisions, retirees can reduce or even eliminate this problem. While there are many strategies that folks can take, the most important step is to plan properly and consider the risks facing your retirement.

Withdrawal Rate Risk in retirement: methods and strategies that could impact your retirement

14Feb

How Your Withdrawal Rate Could Cause You to Run Out of Money Faster: Strategies to Know

BlogFebruary 14, 2023

Knowing how to withdraw your money from your retirement accounts doesn’t translate directly to sitting to one fixed method the entire time. Every CPA’s retirement is unique and what will work for one may not work for another. Some key factors that contribute to your withdrawal rate are:

Retirement Age
Predictable Income
Retirement Portfolio
Retirement Needs & Lifestyle
Other Risk Tolerance

Determine Your Investment Mix

Considering all the factors, the next step is to evaluate your investment portfolio. Do your investments support your long-term goals? Are they diversified enough to help reduce other risks you may face like inflation, longevity, or market downturn? The important thing to have in your retirement assets is the potential for growth while still withdrawing.

Strategy: 4% Rule

A fixed rate may be that perfect strategy for some retirees. Systematic withdrawals offer control for a specific period, but many people don’t consider these factors with the 4% rule:

Low interest rates make traditionally income-producing investments generate less income than expected
Inflation erodes the buying and spending power over time so you may need to withdraw larger amounts down the road
If the principal value of your investment is to decrease you will have less of your portfolio to withdraw from
Your income needs may become inconsistent due to increasing health care or medical costs. Thus, increasing the need for more money later in retirement

If you need a set amount withdrawn for a specific length of time, this method is perfect. Say you plan to work part-time for the first 5-10 years of retirement or are killing time until your Social Security benefits kick in.

Strategy: Buckets of Investment

Buckets help diversify your assets and provide different streams of income for you. One bucket may hold cash such as your emergency fund or another could hold fixed-income investments and protect principal. The last would hold the most growth for a longer period.

This strategy requires you work with an advisor to determine proper allocation and that your investments are protected and fit your long-term retirement goals.

Strategy: Interest-Only Income

Depending on your retirement accounts, you may be able to only pull from the interest earned without drawing on the principal balance. However, specific assets may unfortunately have penalties if you withdraw on interest only until a certain age.

This method does offer flexibility of switching from income stream to income stream yearly. This is another strategy that can be good for those transitioning from working full-time to part-time then to full retirement or those waiting for other income streams to kick in.

Important: Required Minimum Distributions

Federal tax rules deem you must begin taking required minimum distributions (RMDs) from tax-deferred retirement accounts such as 403(b)s or 401(k)s by April 1^st after you turn the Stated Age. Same with your IRAs. Your Stated Age is as determined: age 71 if born 1950 or earlier; 73 if born 1951-1959; and 75 if born 1960 or later. Failure to take your RMD on time could result in a 25% penalty.

Other things to consider with RMDs:

The set amount you must take depends on your age, life expectancy, and year-end account balance
For multiple accounts, each RMD needs calculated separately but you can withdraw the total amount from just one account
Roth IRAs and other non-qualified employee-sponsors plans do not require RMDs
You cannot rollover RMDs into other tax-advantaged accounts
If you are still working at your Stated Age, you may be able to defer RMD withdrawal from your 401(k) or 403(b). However, the same does not apply to IRAs.

Having a withdrawal strategy in place for your retirement is important to ensure your funds last as long as you do and to also help reduce other risks you may encounter during retirement (market risk, tax risk, inflation risk). The last thing you want is to outlive your money and die broke.

18Apr

How Inflation Silently Robs Your Retirement

BlogApril 18, 2022

Even with careful retirement planning, one risk that is often not planned for well-enough is inflation. Inflation alone can hit retirement assets the hardest. The budget retirees begin with will change easily within the first 5-10 years—even 20 years down the road. It is most likely that inflation, assuming a rate of 3-4%, will cause daily living expenses to double within 20 years. Retirees should plan for this because, according to life expectancy statistics, folks live 20-24 more years.

That said, the following things should be taken into consideration when planning the silent killer of retirement:

With aging comes more health concerns and more medical bills. Given that inflation will increase day-to-day life, it is predicted that health care costs and services will increase, too.
Social Security benefits will increase for retirees. In 2020, benefits went up by 1.6% which was an additional $24 paid out; accounted when considering cost-of-living adjustments. However, the extra money from SS is offset by huge cost increases across the board. For example, medical services and cost go up; as does Medicare costs. SS should only be considered a baseline for retirement funds.
As mentioned, living expenses are predicted to double within 20 years due to inflation. With inflation, spending power for retirement assets could drastically be reduced if not accounted for properly.

Tacking this silent killer and its concerns takes careful planning and risk managing.

With life expectancy, family medical history and personal medical concerns need to be discussed. Family history of heart disease and cancer will affect your life expectancy. This in turn will determine how long your funds will need to last. If your family members are known to pass away early on or live well into their 90s, this will also factor into how long your funds will need to last. Longer life expectancy means a longer time inflation will affect cost and standard of living.

Reviewing medical history in advance will also allow for the retirement budget to account for any major medical expenses that could arise. For example, a history of knee injuries could mean a knee replacement in your early 70s. Your occupational hazards could cause late-life conditions. If you spent your working years in a steel mill, you have a higher risk for COPD. Planning for these major medical expenses in advance will allow for inflation to be accounted for, for the money to be there if necessary. In retirement, folks spend $250,000-300,000 in medical costs alone.

To account for inflation a realistic budget plan should be set. This includes daily expenses, monthly bills, and additional spending such as travel and hobbies. Factoring into this budget, would be those said medical costs, too. Once a budget and cost-of-living expenses are decided, it is important to review how high inflation rates and the historically low interest rates affect other return rates and income during retirement.

Have a strategy addressing inflation in place. Begin with small withdrawal rates and increase as cost-of-living and inflation go up. During retirement, the small withdrawal rates will be a huge part of your income. Larger withdrawal rates will make deplete retirement funds much sooner—potentially running out of money before running out of retirement. If possible, during working years, saving more will go a longer way. Investing your future retirement younger will also help offset inflation. Consider different income sources: Annuities, long-term care policies, life insurance policies.

Creating an income strategy and working with a Retirement Risk Advisor is key to a safe and secure retirement. Discussing options that can reduce inflation and provide the best management for retirement will save you money and time and give you peace of mind.