10 Mistakes to Avoid While Spending Down Your Assets in Retirement
You’ve fought the good fight, put in your years, saved, planned, and done everything else you were told to do to ensure you could eventually retire with dignity and in a manner consistent with how you and your family lived before retirement.
So now you, and possibly your spouse and others, are starting life post-retirement and everything seems just peachy.
Then a thought hits you, “What now?” You realize you have all types of plans and goals, but the fact you no longer have that bi-weekly payroll check coming in causes a wave of anxiety.
You realize at that moment that, “You don’t know what you don’t know.” Which is scary. “How do I go about smartly spending down my assets? What if I run out of money?”
The fact is many mistakes can be made while spending down those hard-earned assets. The good news is that you can avoid many of them by simply making yourself aware of those that are most common.
To that end, we are covering 10 common mistakes to avoid when spending down your assets in retirement:
- Not having a spending plan
- Treating the 4% rule too rigidly
- Taking on debt
- Saving your IRA money too long
- Going Too Conservative
- Failing to recognize the value of the dollars you spend
- Not accounting for inflation
- Holding too much of your company stock after retirement
- Paying excessive fees
- Firing your advisor
Not Having a Plan
This may sound self-serving for an advisory and planning firm to say, but the fact is that just as with the need for discipline, following rules, and avoiding pitfalls in the accumulation and pre-retirement phases, there are rules and best practices in the retirement phase need to be followed.
These things are critical when you are spending down your assets and can be the difference between living comfortably and outliving your savings.
Which accounts should you withdraw from first? What assets and in what order? How much? Should it be the same amount, or even the same percentage each year? What if I need to spend on something not anticipated – how should I adjust going forward from that?
Many think they should stop investing or simply go to bonds to be ultra-safe. You can’t just assume that will work, especially if you’re likely to live longer.
Additionally, you can create huge tax issues for yourself that will cost you dearly if not planned for and addressed in advance. Equally important, you could end up depleting your money much quicker than expected.
You should have worked with a financial advisor or retirement planner already, but if not, before starting to spend your hard-earned money in retirement you need to get with one to create a comprehensive spending plan that can assure your assets last and you pay the least amount of taxes while avoiding pitfalls while in retirement.
Treating the 4% Rule Rigidly
You’ve probably heard the old maxim that 4% of your total assets is the amount you can safely spend each year. It is a rule of thumb and not something rigid, as many factors play into what your spending rate should be.
The correct rate for you is affected by issues such as the age at which your retire, risk tolerance, goals, your balance sheet in terms of assets and liabilities, health, life expectancy, market returns in a given year, and much more.
At Oak Harvest, we believe that just as you should have a dynamic portfolio allocation, you should also have a dynamic spending plan that accounts for the things that come up in life. This includes the desire to have some fun (you might want to take the family on a special trip one year), positive and negative market returns in any given year, type of assets, which assets you spend first versus those you tap into later in your life, and more.
There will be times when you might need to spend more, while in others you don’t need to spend that set percentage. Having a dynamic spending plan that adjusts helps provide confidence so you don’t worry about your spending. And it helps to make your assets last.
Taking on Debt
When it comes to debt you should do everything you can in an organized manner to reduce or even eliminate it before retirement, especially when it comes to high-interest obligations, such as credit cards. The goal should be to balance reducing debt while also saving for your retirement. It can be done, especially with the help of an advisor.
You need to consider that every dollar of debt owed reduces your retirement income. Once in retirement, avoiding new debt by sticking to your spending plan is one of the most important habits you should embrace.
Sure, putting things on a credit card that provides good travel or other benefits can make sense, but then you must pay the balance in full each month to avoid the interest.
If you tend to fall into the habit of carrying a balance, then avoiding the use of credit cards altogether and paying cash or using your debit card is safer and will help you stay on track with your spending plan.
Saving Your IRA Money as Long as Possible
Sounds like a great plan. You saved using them diligently for all those years, so this is a no-brainer.
Not so much!
The fact is this could lead to a huge tax bill at a point in your retirement that could cost you significantly more in taxes in the year(s) you take a distribution from those accounts.
A better approach may well be to take some each year from different accounts (including IRAs) in a systemized fashion during your retirement spending. This is why you want to devise a spending plan – to help you know which assets, from which accounts, in what amounts, and at what point as you spend down your assets
Creating a spending plan is something most would probably be better off doing with a retirement planner, as they can help address tax implications and other issues that must be considered.
Going Too Conservative
It’s natural and prudent to change your asset allocation as you enter retirement and begin to spend your money. But automatically determining you no longer want exposure to the markets or the associated risk is often not a smart idea.
In fact, without some exposure, you can set yourself up for a nasty scenario of outlasting your savings…and much sooner than you might think.
Truth is that an allocation void of growth-producing assets, such as stocks, can leave you short. Bonds and similar assets can leave you with little return to help drive the portfolio, failing to outpace inflation and other issues.
Proper asset allocation will remain a critical element throughout your retirement, ensuring you have what’s needed to maintain your lifestyle, meet your goals, and be there for you and your family until you pass.
Failing to Recognize the Real Value of Dollars Spent
Having a spending plan doesn’t mean you can’t enjoy life…or that you should be prepared to live in complete austerity. Quite the opposite. We want you to be able to do the things you like and plan for all those years.
But just as in your pre-retirement phase, you have to do things prudently…balance is the key.
One of the big things is learning to connect with your assets. Part of that is understanding what you are spending and what it means to you, especially when it comes to doing so in retirement.
Troy offers an example of this very issue here. Taking the family on a trip when you retire at 60 that might cost $20k sounds great. Hopefully, you can do that if that’s what you want.
But when you do so you need to recognize that trip won’t cost $20,000. Those funds invested over just 20 years could grow to $80k realistically, so the trip could potentially cost you that amount versus just the $20,000. At that time in your life, such a reduction could certainly impact funding for long-term care or plans you have for passing on an inheritance.
As long as you know the outcomes of spending actions, you can make informed decisions with your money.
Account for Inflation
Death and taxes…the only sure things in life. Hmmm. Excuse us for pointing out the obvious, but there is something pretty significant that’s missing here. Something that will have an impact on your money and spending power – is inflation.
Don’t fail to account for inflation, period. We had a relatively long period of low inflation. But even when it’s relatively low over 5, 10 years, and more, it still adds up significantly.
Well, gone are the low inflation days, for now…wow!
High inflation has all types of implications for different assets and your overall portfolio. One, in particular, is bonds. They don’t do well in a high inflationary period.
That needs to be accounted for in your portfolio allocation even more important when it comes to your spending plan.
Simply stated, things will cost more in the future, so your plan has to incorporate this. Failing to do so is a recipe for real problems and an increased likelihood you will outlive your assets.
Don’t Get Stuck Holding the (Company) Bag
You hear and read it constantly – diversify your retirement portfolio. Goes without saying that this can be the most critical thing you can do to protect your nest egg.
Despite that, one area some people neglect to think about in retirement is the fact they may have accumulated a fair amount of their company’s stock. Makes sense – you might have received it discounted or matched, or you’re loyal and liked the idea of owning stock in the company you work for.
Whatever the reason, over-concentration in any stock or type of asset is a problem. You can easily end up with a decent portion of your wealth tied up in that company stock, which can create serious vulnerability for your portfolio.
If you didn’t begin to address this in the pre-retirement stage, you need to do so in retirement as you are spending your assets.
Avoid or Limit Fees
We get used to paying fees for almost everything we do, from banking, gym memberships, and wine clubs to associations, retail buying clubs, media/newspaper/newsletters/streaming services, etc.
When you step back and consider what you pay for all these things, you begin to realize they can add up to hundreds of dollars, and more, monthly. No matter how small or seemingly insignificant, they add up in a way that can be insidious. Some, probably many, are unnecessary. In paying them you negate the benefit of compound interest for each dollar spent.
Many services, retailers, and other organizations offer reduced or even eliminated fees for retirees and seniors – take advantage of them and your retirement funds can go further, especially when you might need them more as you advance in years.
Don’t Fire Your Advisor
Yes, we know this is another one of those things that sounds self-serving, but frankly, we would prefer that you use any advisor of your choice as opposed to doing it on your own.
It can’t be overstated how important it is to have a spending plan that has been properly constructed and reviewed. Doing so helps ensure you have the best opportunity for spending your assets with confidence and in a manner that will survive as long as you do…and beyond for your family, if that is a goal.
Bottom line, why would you want to go this period alone? A good advisor can help you deal with issues that will surely arise and provide answers to questions you WILL have from time to time.
It’s also important to remember that even with a spending plan in place, you can’t completely go on autopilot. Life is dynamic and keeps changing. As such, you are likely to need and want an advisor even more in your retirement years than when you were doing all the hard work and saving.
Spending down your assets in retirement can be complicated and can create some severe anxiety for many people. You don’t want to make mistakes that could cause your assets to disappear or get used up prematurely.
Let’s face it, nobody wants to face a future in which they outlive their assets.
Nor do you want to live in an overly austere manner. You are supposed to enjoy some of the fruits of your years of labor. And you don’t want to live in fear of spending.
In the end, it’s about finding balance, just as with all areas of life. The good news is that you don’t have to wonder how best to spend down your assets, or simply roll the dice. A robust spending plan created by a qualified financial advisor or retirement planner can take the guesswork out of this critical part of your life.
If you are ready to take the next step and talk to a team of retirement planners who can advise on a spending plan crafted specifically for you and your needs, and who will put your interests first, Schedule a call today!
Let Us Help You Achieve the Retirement You Deserve!
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