Retirement: The Early Years

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OCEAN CITY – In the first months and years of retirement, you might well respond to all your newfound free time you have by filling it with all the plans you’ve delayed: booking that dream trip, beginning a new career, seeing to home renovations and other projects, maybe even starting your own business. It’s a frequent and natural reaction to this transition into a new phase of life — but it’s also why many people in their early retirement years find themselves spending significantly more than they anticipated. Doing so can not only throw your long-term retirement income plans off track, but can also leave you in a more vulnerable position should unexpected expenses crop up.

Is denying yourself the pleasures of retirement in the name of preserving your resources the only alternative? By no means. We believe it can be possible to enjoy a luxury cruise, a new kitchen or daily golf while sustaining your assets over the duration of your retirement — as long as you factor those expenses into a flexible, thoughtful long-term strategy that fits your situation and that you revisit each year.

"The two most important things as you enter retirement are, first, to design a plan for the life you want to live, and second, to expect changes in direction — both ones of your own making and those thrust upon you," says Katherine Roy, Director of Personal Retirement, Innovation and Planning for Merrill Lynch. "The old rules of thumb about withdrawing no more than 4% of your savings for each year in retirement and tapping taxable accounts first don’t necessarily work well for the dynamic nature of retirement."

One way to avoid the kind of overspending that can throw your long-term plan off-kilter — and put you at risk of running out of money — is to do a bit of simple long-term planning. Unfortunately too many people who are entering retirement, or even well into it, are unaware of the importance of looking ahead. In one recent survey of pre-retirees, 69% of the respondents said they believe they can withdraw in the range of 7% to 15% of their portfolios each year in retirement.

"Sadly, some people think they can blindly and arbitrarily withdraw their retirement assets without considering the impact it will have on the longevity of their retirement savings," Roy says. "Without a disciplined spending approach, many will deplete their retirement assets too quickly."

However, Roy adds, spending more during your initial post-working years can be built into your long-term retirement plan — it’s all a matter of setting priorities.

"Withdrawing 8% of your retirement portfolio the first year for an around-the-world trip may well be possible, as long as you’re willing to offset the cost by spending less on travel in subsequent years," she says. "But if, for example, you have a chronic illness, you’ll probably be more worried about meeting future health-care costs than reaching the top 10 travel destinations on your list. So you may want to withdraw less from your portfolio early in your retirement."

Another step that’s generally wise is to evaluate your planned expenditures against market conditions. If the market is entering a bear cycle, you may want to scale back on discretionary spending until your portfolio recovers.

Before your retirement date, have at least one detailed conversation — several would be ideal — with your spouse and Financial Advisor to define your vision of retirement. That will prove valuable as you form your basic approach to retirement spending. Start by looking at your nondiscretionary expenses: Which ones are likely to go up, stay the same or go down? Once you have a handle on that, the next step is to take a closer look at the discretionary spending you want to do, separating the “must haves” from the "nice to haves."

Armed with this information, you can work with your spouse to come up with a list of expenses that separates those you consider necessary from the ones where you can be more flexible. "Making these decisions before you retire allows you to be more objective and candid about what is important to you," Roy says. "The exercise will also make it easier to pull back quickly on your spending if you have to."

She adds, "That plan, and your spending, really should be monitored and managed on an annual basis." In the course of a 30-year retirement, there could be numerous changes in your interests, cash flow needs, life circumstances, economic conditions, investments and tax laws — and your approach to income has to take all of them into account. What’s more, it’s almost a given that your personal priorities will shift over time; if charitable contributions replace golf in importance, that could have a significant impact on your cash flow needs. Therefore, it’s important to take a fresh look at both your discretionary and nondiscretionary spending priorities each year.

Adopting a proactive approach to your retirement income puts you in a better position to enjoy not merely the first years, but all the years of your life after work. "Retirement is a dynamic time, and planning for it requires an ongoing dialogue with your personal family and financial advisor," Roy says. "The more informed and thoughtful you are, the more satisfaction you’re likely to get from every stage of it."

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)

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