The retirement dream: time spent with family, extended vacations, exploring your hobbies and relaxing leisure time. These are the golden years you’ve worked so hard to secure. Be it decades away or months, you’ve likely shared the concern of so many: how do I live comfortably during retirement without running out of money?
Many financial planners use the analogy of climbing a mountain when it comes to retirement savings: going up, you’re accumulating wealth until you reach the summit of your retirement date. However, descending requires deft navigation so you don’t run out of money. It is this decumulation phase where it gets tough and many DIY investors fail.
CWA Partner and CPA Brian Bortz has one important piece of advice for people nearing retirement: don’t tap into your retirement savings without a plan.
“People are living longer. Over the last 50 years, life expectancy has grown by 10 years and your money has to last longer,” explains Brian, who has worked on retirement plans for over a hundred CWA clients, 56 of which are currently retired.
“The compounding of money in the accumulation phase is really important. If you make a mistake and you’re 40, that just means you have to work longer. If you make a mistake and you’re 70, what are you going to do?” asks Brian. “You can cover up your mistakes by working harder and longer in the accumulating phase, but you can’t do that when you retire.”
This dilemma is why a well thought-out and considerate approach with distribution rates in retirement is vital. Conventional financial planning wisdom often recommends a withdrawal rate of 3 to 4 percent. Utilizing 92 years of market data, Brian works with CWA clients to see how adjusting their distribution rate impacts retirement planning. What he has learned is that often there is much more flexibility than one would initially think.
What Should My Retirement Distribution Plan Be?
“If you do the math, a 5 percent withdrawal rate will last you 30 years, 96 percent of the time. We don’t plan for 100 percent certainty in anything in our lives, especially in retirement,” observed Brian. “If we did, our clients would over save and underspend, which isn’t as much fun and doesn’t always help them achieve a happy life in retirement.”
Here are other considerations Brian and CWA planners discuss with clients to help guide their retirement strategy:
1. Determine your normal monthly spending in retirement. Consider your lifestyle changes and what’s important for you to spend to be comfortable every month, no matter what.
2. Understand taxes. If most of your money is saved in a qualified plan and it is then rolled over into an IRA, when it is withdrawn it is taxed as ordinary income. When you incorporate the optimal tax savings environments into your withdrawal strategy, your retirement fund can last up to 12 years longer.
3. Know your income sources: social security, rental income, working part-time, etc. Cash flow streams matter much more in retirement, allowing you to take less from your savings.
4. Calculate your net need from your portfolio. This will help determine an appropriate withdrawal rate, alongside other factors like retirement age and your estimated years in retirement.
5. Know how many months of spending you have on hand. Aim to have 7-10 years of spending in cash, bonds or other liquid assets. With a healthy amount out of the stock market, you can worry less about market fluctuations.
A Higher Return On Your Happiness.
The psychology of retirement is also important to consider. Many dental professionals keep a busy and demanding schedule, and a sudden change can often leave retirees lonely, bored and without a feeling of purpose or identity. Think about it: How will you spend your time? How much traveling do you want to do? Would you like to volunteer? Would you like to work part-time to stay connected to patients?
To get past a glorified version of retirement and to meet the emotional needs of a retiree, Brian often asks clients: What does a normal Tuesday at 10:30 a.m. look like when you’re not working?
By thinking critically about what will bring you happiness in retirement, you can set realistic standards for withdrawal rates and achieve your preferred lifestyle in retirement. Do you actually use two country club memberships? Are you accustomed to nice wine and great steaks? Should you visit the coffee shop daily, or just a few times per week? Consider this story from Brian:
Early in retirement, one of my client’s distribution rates got as high as 7 to 8 percent. Based on market history for a new retiree, a distribution rate at that level would likely not last the remainder of life expectancy. That’s a big risk. We had many discussions about the danger of this, but they kept their spending the same for about five years. Their savings became a shrinking pile, causing their distribution rate to increase to as high as 18.8 percent.
At that point, we were at a crossroads. I told them that they needed to make a dramatic change, or terminate me. There was nothing that I could do, or anything that the market could do, to fix an 18 percent withdrawal rate. They would be out of money in six years and they were only in their late 70s. It took us two years and a major lifestyle adjustment but they managed to get their distribution down to 6.7 percent. The couple was now moving in the right direction, and by lowering their distribution rate they gave themselves more time through better financial options. Just the other day, my client called to say they have never been so happy because their life is so simple now. Ultimately, they learned they were spending money on things they didn’t value. Now, they don’t feel the stress of worrying about what they are doing.
Every situation is different. Every portfolio fluctuates. How we find happiness in retirement is sometimes unexpected. All of these reasons are why working with a knowledgeable advisor to develop a retirement plan and a distribution strategy custom to you is so important. It’s never too soon to start planning and the earlier you start, the more likely you are to have flexibility in retirement.
Unsure of where to begin? Schedule a complimentary consultation with a CWA planner. We’ll work through your numbers and a retirement lifestyle worksheet to put you on the right track.