By FPA member Scott M. Kahan, CFP®
Last Updated: November 22, 2010
Emotionally, the beginning of retirement can be a difficult time. From a financial standpoint, you just spent all those years trying to save enough for the future. If you are like most people nearing retirement, you have worked and collected a paycheck for the past forty or so years. You’ve methodically deposited your income into your bank account, paid your bills and with whatever was left over saved for the future. Now that retirement is here, it can be difficult to adjust to a new way of life — one where you shift from saving to withdrawing. Assuming you have done your retirement planning, you know it is safe to retire and that you have enough money to do so. One of the biggest dilemmas many retirees face is knowing how and when to properly access their retirement savings.
You will need to balance budgetary needs with Social Security income and retirement savings income, and know how to properly access those retirement savings to ensure it lasts throughout retirement. By following the proper steps, you can easily transition into retirement knowing that your income will continue flowing as needed.
Recalculate your budget needs.
Yes, you may have done this in preparation for retirement, but now that you are in retirement, it may be a more realistic budget. Look at your monthly fixed expenses and then less frequent fixed expenses. For example, your quarterly estimated tax payments (yes, you have to pay tax even in retirement!) and your semiannual insurance premiums to name a few. Then add in your discretionary expenses such as dinner out, travel, gifts for the grandkids, etc. Now you know what you need monthly, quarterly and beyond. However, keep in mind that this will change as you continue to settle into retirement. You will want to do this recalculation on an annual basis.
Review your list of retirement savings accounts.
Since retirees can expect a steady flow of Social Security income every month, you can factor this number into your expected income. Then a review of your retirement savings accounts will allow you to map out where and when to best generate your necessary additional income. More than likely, you may have any combination of 401(k)s, 403(b)s, Individual Retirement Accounts (IRAs) or other retirement accounts that you expect to pull income from, but it is important to know how to access those accounts and which to pull from first.
A good place to start is to separate accounts by taxable and tax deferred. For the taxable accounts, make sure all the cost basis information is correct. The cost basis is used in determining your gains or losses for tax purposes, so when it is time to sell an investment in a taxable account you will know the tax implications. Another reason to analyze taxable accounts versus tax deferred is to find out how your tax bracket may affect what you net out of a given account. For instance, many people wait until 70 ½, when Required Minimum Distributions (RMDs) kick-in to start IRA withdrawals; however, depending upon your tax bracket, it may make sense to start withdrawing before the RMD period begins. At the end of this analysis, you may find that it is advantageous to withdraw from various accounts rather than just one.
As you go through this step, You should also keep in mind that it is a good idea to keep one to two years of needed cash available to meet your withdrawal needs. When the time comes to reassess and rebalance your portfolio throughout the year, you can then systematically harvest gains to replenish your cash balances by the amount you have withdrawn over the year. By doing this, you will not be forced to raise cash when the markets are down and you may prefer to not sell a security.
Set-up automatic withdrawals to create your income stream.
When you decide which accounts to pull the money from and with what frequency (i.e. monthly, quarterly, etc.), contact each corresponding investment company or call your adviser to see what forms are needed to set-up the instructions for automatic withdrawals. You can easily set this up free of charge, so the needed money is deposited into your working bank account. Once you set-up these deposits with the necessary frequency, you have now created an “income” stream that replaces your paycheck.
Once the automatic withdrawal instructions are in place, you will still be able to easily access additional funds that may be needed whether they are for that trip you want to take, or a gift for your children. A call into your adviser, or through online account access, quickly gives you access to those needed funds, which can usually all be done without fees and will be there the next day.
Making sure you have the proper system in place for accessing your retirement income can make all the difference in reducing stress when transitioning into retirement. It’s not necessarily an easy task to undertake though, so if you do not already have one, you may want to consider enlisting the help of a financial planning professional to advise you throughout your retirement years.
FPA member Scott M. Kahan, CFP®, is president and founder of Financial Asset Management Corp. in New York City.