Marc A. Hebert's Money Sense: Answers to FAQs from people nearing retirementBy MARC A. HEBERT
September 15. 2018 8:46PM
After years of saving and investing, you can finally see your retirement on the horizon. But before kicking back, you still have some important planning to do. The following frequently asked questions about retirement income should help you begin the final stages of retirement planning on the right foot.
When should I begin thinking about tapping my retirement assets and how should I go about doing so?
The answer to this question depends on when you expect to retire. You need to consider important decisions such as how your portfolio should be invested, when you can afford to retire and how much you will be able to withdraw annually for living expenses. If you anticipate retiring earlier or enjoying a longer working life, you might need to alter your planning threshold accordingly. Start planning early.
How much annual income am I likely to need?
While studies indicate that many people are likely to need between 60 percent and 80 percent of their final working year's income to maintain their lifestyle after retiring, low-income and wealthy retirees might need closer to 90 percent. Because of the decline in the availability of traditional pensions and the increasing financial stresses on Social Security, future retirees might have to rely more on income generated by personal investments than today's retirees.
Review your own spending habits and estimate what you will need for income during retirement. Remember, you might need more for travel, hobbies and spending time with the grandchildren. Medical services are the other big expense, so research these costs carefully.
When planning portfolio withdrawals, is there a preferred strategy for which accounts are tapped first?
You might want to consider tapping taxable accounts to maintain the tax benefits of your tax-deferred retirement accounts. If your expected dividends and interest payments from taxable accounts are not enough to meet your cash flow needs, you might want to consider liquidating certain assets. Selling losing positions in taxable accounts might allow you to offset current or future gains for tax purposes. Also, to maintain your target asset allocation, consider whether you should liquidate overweight (i.e. more heavily apportioned) asset classes.
Another potential strategy might be to consider withdrawing assets from tax-deferred accounts to which nondeductible contributions might have been made, such as after-tax contributions to a 401(k) plan. Or you could make withdrawals from tax-deferred accounts in years in which little or no tax will be paid.
Are there other ways of getting income from investments besides liquidation of assets?
One such strategy that uses fixed income investments is bond laddering. A bond ladder is a portfolio of bonds with maturity dates that are evenly staggered so that a constant proportion of the bonds can potentially be redeemed at par value each year. As a portfolio management strategy, bond laddering might help you to maintain a relatively consistent stream of income while limiting your exposure to risk.
When crafting a retirement portfolio, you need to make sure it generates enough growth to prevent running out of money during your later years. You might want to maintain an investment mix with the goal of earning returns that exceed the rate of inflation.
Marc A. Hebert, MS, CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at firstname.lastname@example.org. Your question and his response might appear in a future column.