Tuesday, September 12, 2023

Five Things You Should Be Doing In Retirement

From Charles Schwab, Inc.

If you've already gone from saving for retirement to living off your savings—or you're still making this shift—it probably doesn't surprise you to hear that retirement doesn't mean an end to your financial responsibilities.

"In some ways, they become more important," says Rob Williams, managing director of retirement income and wealth management at the Schwab Center for Financial Research.

"As your focus shifts from work to enjoying the fruits of your labor, your planning needs also change," Rob says. "If the priority before was to save enough to retire, the main job now is to preserve and protect—but also use your savings so you can enjoy the retirement you dreamed about."

Here are nine things you can do after you retire (or partially retire), to keep your goals on track.

1. Review your spending and income plan at least once a year

After years of working and saving, you likely started retirement with a plan for how much you can spend each year and which income sources you'll rely on for living expenses. If so, you're off to a great start. But what if your expenses or income fluctuate from year to year?

"Most retirees find they need to spend more or less than they planned at various points in their retirement," says Rob. "Changes and unexpected events that require you to adjust your initial plan—like home repairs, uncovered medical costs, and market volatility—are inevitable. But knowing this and planning for it can help."

Rob recommends continuing to review your plan and portfolio annually, and any time you have a major life event, to ensure you're on track and adjust as needed. It may also help to talk with a financial planner, who can help you anticipate your long-term spending patterns, identify potential surprises, and put proactive strategies in place.

2. Make sure your portfolio reflects your current risk capacity—not just risk tolerance

It's important to know your risk tolerance—how much risk you can stomach—and adjust your investments so you can sleep at night. But once you retire, you also need to know how much of your portfolio you can afford to lose without derailing your finances. That's where risk capacity comes in.

"Risk capacity is a function of how much cash you're likely to need over the next one to four years, based on your personal goals and situation," says Rob. "This is money you'll want to preserve, since you'll need it soon and won't have much time to try to make up for losses."

To get an idea of your risk capacity, try calculating how much cash you'll need in the coming year beyond what you can pull from predictable income sources like Social Security, a pension, income from a job, or an annuity. Then do the same exercise for the next two to four years.

This is the amount you'll need your portfolio to provide in the short- or intermediate-term. In general, it's a good idea to hold this portion in cash or cash equivalents—for example, high-yield checking or savings accounts, money market funds, short-term bonds, or certificates of deposit (CDs)—to help ensure the funds are there when you need them.

3. Understand how large withdrawals affect your savings

Another big benefit of keeping a short-term cash reserve on hand is that you're less likely to need to take a large, unexpected withdrawal from your portfolio when the market is down.

"A market drop in the early years of retirement can cost you years of potential growth and income, if you're forced to cash out to cover expenses," says Rob. "Later in retirement, market drops aren't usually as costly, because by then, you may not need your portfolio to grow as much."

Experts call this potential scenario sequence-of-returns risk. It refers to the importance of timing, when it comes to investment withdrawals. If you're forced to tap your portfolio as it's losing value, you'll have to sell more assets to raise the cash you need. That not only drains your savings more quickly, but it also leaves you with fewer assets for future growth.

Rob recommends giving yourself an ample cushion, including a year's worth of cash for withdrawals and spending that you may need to make from your savings and two to four years of cash you anticipate you may need to withdraw in relatively liquid, conservative investments. This can help you keep more of your money invested, regardless of market conditions—and give your portfolio more time to likely recover from market dips.

4. Have a tax-smart withdrawal strategy

If you don't already have a tax-efficient plan for when and in what order you'll liquidate various assets during retirement, putting one in place could help your savings last longer.

"Not all investments are taxed the same way," says Hayden Adams, CPA, CFP®, director of tax and wealth management at the Schwab Center for Financial Research. "A tax-efficient withdrawal strategy can help you take advantage of different tax treatments across your income sources and may result in significant tax savings."

Hayden recommends a step-by-step approach, working with a financial planner or tax professional if you need to: Take your RMDs. Make required minimum distributions on tax-deferred accounts, like a traditional IRA or 401(k), your top priority since not taking the full withdrawal by the deadline can trigger a 50% tax penalty.1 RMDs start the year you turn 73.
Tap interest and dividends. Next, turn to interest and dividends from your taxable accounts. But leave the original investment alone for potential growth and income.
Collect principal from maturing bonds and CDs. Reinvesting principal on mature bonds and CDs is ideal. But if you still need cash after RMDs, interest, and dividends, it may make sense to liquidate them next, since the original principal isn't generally taxed.
Sell other assets as needed. Taxable and tax-deferred accounts are your next stop for more cash. But first, ask yourself if RMDs are likely to push you into a higher tax bracket. If so, drawing down taxable and tax-deferred accounts at the same time may help keep your taxable income lower. If not, selling brokerage assets that have lost value, followed by those you've held a year or more may make more sense.

5. Create a long-term care plan

About 60% of people over 65 will need long-term care at some point in their lives, and it can be an expensive proposition. The median cost for assisted living is $54,000 a year ($4,500 a month),2 for example, and a private room in a nursing home costs more than double that.

"If you don't already have a strategy for long-term care in your overall plan, it's important to consider the possibility of these costs and how you would cover them if you need to," says Rob. "A financial planner can help you look at a range of options that align with your specific needs and preferences, including long-term care insurance, if it makes sense."

In addition to insurance, options for covering long-term care costs include caregiving from family members and paying costs out of pocket with retirement assets, such as money withdrawn from a traditional or Roth IRA, 401(k), or a health savings account (HSA).

As with other parts of your plan, the goal is to put a long-term care plan in place that will work for you whether you need it or not—so you can focus on other things.

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