OCEAN CITY — For previous generations, retirement planning generally meant one thing: saving and investing for the time when you would no longer bring in an income. Nowadays, with people living longer, health care costs rising, pensions disappearing and people increasingly embracing more active, adventurous post-career lives, retirees need to be a lot more deliberate about making their money last.
"It used to be that retirement planning consisted of accumulating enough assets to achieve the number — some target of how much money you needed before stopping work," says David Tyrie, head of Personal Wealth and Retirement at Bank of America Merrill Lynch. "Then you calculated how much income you could safely draw from those assets each year. But a static, simplistic retirement plan no longer works as well."
Last week, we looked at a few questions to consider and here’s seven more.
What strategies can help me make the most of my potential sources of income? Although it’s easy enough to look to pensions, retirement accounts, Social Security and other possible resources, you need to consider a range of options before you decide how to make these resources work in concert with one another. Most experts would counsel you to find a guaranteed source of monthly income to cover the costs you can’t avoid. While some of that may come in the form of a corporate pension or your Social Security benefits, you may also need a supplemental income stream.
In what order should I consider tapping my assets? You generally could choose to take money from taxable brokerage accounts first, since your long-term investment profits (i.e., profits recognized on the sale of most investments held for more than one year) will be taxed at long-term capital gains rates — currently a maximum of 15% — whereas withdrawals from an IRA or 401(k) plan are taxed as regular income at rates as high as 35%. (Tax rates for all kinds of income are scheduled to increase in 2013.) But if investments in taxable accounts have appreciated substantially — or if you think they have great potential to grow — you could earmark those assets for your heirs.
Should I roll my 401(k) accounts into an IRA? Although you don’t have to roll your 401(k) accounts into an IRA once you retire, doing so will give you more investment options designed to generate income and may make it easier to access your money. Consolidating multiple 401(k)s into one IRA also helps you keep track of when you must take required minimum distributions, says Bill Hunter, director of Personal Retirement Solutions at Bank of America Merrill Lynch.
What about Social Security? "If you begin benefits at 62, the earliest allowable age, instead of waiting until full retirement age at 66, you’re locking in a permanent discount of 25% in your monthly checks," Hunter says. If, on the other hand, you can wait until age 70, you’ll get nearly a third more than if you had started at full retirement age — and about 75% more than by opting to begin benefits at 62.
How can I continue to potentially grow my assets? "Retirees today have to view themselves as long-term investors," says David Laster, director, Investment Analytics at Bank of America Merrill Lynch. That means keeping part of your portfolio in stocks, which over the long term have outperformed bonds and other fixed income investments. "People who want to maximize how much they can spend during retirement could allocate roughly 40% to stocks, though older retirees can afford to hold fewer equities than younger ones," he notes.
What about inflation? The inflation rate for retirees can be as much as a percentage point higher than the rate for the population as a whole, according to the Bureau of Labor Statistics. That’s largely because retirees spend more on fast-rising health expenses. One way to help your income keep pace with inflation is to allocate some of your bond portfolio to Treasury inflation-protected securities (TIPS).
What about health costs and longevity risk? "Even if you have a couple of million dollars in assets, an illness such as Alzheimer’s disease or Parkinson’s could totally exhaust your wealth," Laster says. Long-term care insurance can help guard against a catastrophic medical event wiping out assets for the surviving spouse or an inheritance. Meanwhile, what should be a happy surprise — living longer than expected — could ultimately imperil your retirement assets.
Do I need to adjust my strategy? Revisiting your drawdown strategy and making necessary course corrections along the way is a critical component in its potential long-term success. "Enjoying your wealth in retirement without fear of outliving your assets is a challenge for many retirees," Laster says. "But by regularly reviewing your drawdown strategy with your financial advisor, you can make the changes you need to, no matter what crests and crevasses appear in your retirement landscape."
(The writer is a senior financial advisor and can be reached at 410-213-8521.)