• Financial Planning
  • Retirement Planning
  • From Saver to Spender: Managing Your Money in Retirement

    by Carrie Schwab-Pomerantz

    We all know that “retirement” no longer means just one thing.

    Some may stop working altogether, but many others will continue to work in some capacity—whether or not that includes receiving a paycheck. Many of us will choose to seize these years as a time to try something new, to follow a long-held passion.

    Regardless of the lifestyle choices you make, you’re part of the smart minority who have crunched the numbers and followed a plan. You understand how the financial markets work, and you’ve built a well-diversified portfolio. In short, you’ve done everything right.

    But now that your once-distant dream of retirement is at hand, what surprises you is how unsettling it can feel to switch from being a saver to being a spender. All the pie charts and spreadsheets in the world can’t necessarily alleviate your fears about outliving your money or maintaining your lifestyle.

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    Carrie Schwab-Pomerantz , CFP, is senior vice president at Charles Schwab & Co., Inc. (Member SIPC). Her weekly personal finance column is syndicated nationally and also available at www.schwab.com/askcarrie. She is also the author of the book “The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions” (Crown Business, 2014).


    Discussion

    Robert Mount from MD posted over 2 years ago:

    If one is fortunate enough to have cash and cash like investments to satisfy lifestyle needs then the remainder can be 100% stocks. I find that using this philosophy and keeping my stock investments in income producing stocks my investments seem to stay well below market fluctuation. Of course I don't have the giant gains but I also don't have giant losses. Why don't advisers put advice in these terms instead of sticking to the 30-60-10 type of plans?


    Jim Y from FL posted over 2 years ago:

    The 3 asset class model is very limited. With REIT's, MLP's, real estate and hedge funds it all gets far more complicated than stocks, bonds and cash. Even within the equity class there is a huge range of options unless one buys the S&P and calls it done. I have yet to find a retirement tool that goes beyond the 3 asset classes.


    Ken from TX posted over 2 years ago:

    Would you take out long term investments first to take advantage of the tax benefit?


    Dave Gilmer from WA posted over 2 years ago:

    Ken,
    It's not really about taking out long term investments (which I assume would be stocks.) A better play actually turns out to be spending down the fixed assets first and letting the growth stocks grow. If you start with 25/75 bias at retirement (25% stocks) and spend down the fixed income first, the result will be much better than the other way around. Of course, right now bond income is not all that great, so I use dividends in this portion of my portfolio for the fixed income equivalent.


    Leon Taterus from PA posted over 2 years ago:

    THOSE IN PRE RETIREMENT YRS. SHOULD CONSIDER ELECTRIC AND /OR MULTI UTILITIES WHICH ALSO SUPPLY NAURAL GAS OR PROPANE, USING THE DIVIDEND REINVESTMENT OPTION.STOCK PRICE FLUCTUATIONS ARE MINIMAL. RARELY IF EVER ARE DIVIDENDS CUT OR ELIMINATED.

    MLPS ARE ALSO GOOD DIVIDEND PAYERS, AND IF ONE IS NOT COMFORTABLE CHOOSING INDIVIDUAL MLPS, THE ALERIAN MLP ETF (AMLP) IS A GOOD CHOICE. THE DRIP OPTION HERE IS ALSO A GOOD CHOICE.

    REITS ARE ALSO AN OPTION IN THIS CASE, BUT I HAVE AVOIDED THEM BECAUSE OF THE MANY VARIABLES INVOLVED IN THEIR STRUCTURE. THE ABOVE ARE ESPECIALLY REWARDING IN TAX DEFERRED ACCTS.


    Pete B from NJ posted over 2 years ago:

    This is a well-written and informative article although I note the "conventional wisdom" tip in #2 that it may be best to defer starting social security (SS) until age 70. That frequently is NOT accurate.

    I've done quite a bit of analysis on this using as a figure of merit the Net Present Value (NPV) of the after-tax social security receipts from start date to death.

    That word "after-tax" is crucial and I think many analyses ignore it.

    When crunching the numbers consider:

    * your MRD "income" starting at age 70, which may increase your tax bracket just as the tip would have you start SS. A significant (relative to SS income) MRD stream can push the cross-over date out 2 to 4 years just because you're in a higher tax bracket for a longer period of time.

    * your other taxable income, which affects your marginal tax bracket.

    * inflation, since the COLA increases your SS payments which may affect your tax bracket.

    * If you're planning for a couple, when do you expect the first person to die? This reduces the tax bracket farther out in life and can push the cross-over age-of-death at which starting SS at age 70 has highest NPV beyond 100.

    Some observations for a single person with no MRD stream:

    If you expect inflation to average 3% annually for the rest of your life, starting SS at 62 is best if you live to at most 87. Starting SS at 70 makes sense if you live until at least 93.

    If you expect inflation to average 4% then the corresponding ages are 94 and somewhere above 100.

    If you expect inflation to average 2%, the ages are 82 and 88.

    An MRD stream that puts you into the 35% bracket for, say, ten years or so pushes all these ages out about 2 years.


    Richard Halberg from NY posted over 2 years ago:

    Recent research by Wade Pfau demonstrates the wisdom of increasing stock allocations once you can cover essential expenses in point #5. He shows that doing this actually increases the likelihood of outliving your money. Once you have your essentials covered market fluctuations are more easily tolerated.


    Stephen Menninger from VA posted about 1 year ago:

    Social Security is NOT an investment that you feel you must get your
    money back after so many years. The goal should be to maximize
    the monthly payout, regardless of how long you receive payments.
    Unless you are in poor health or absolutely need the money, waiting
    to age 70 is always the smart decision, especially if you are married
    and want to leave the largest monthly payout to a spouse.

    just my 2 cents


    Joseph Gal from CA posted about 1 year ago:

    I suggest folks explore the permanent portfolio investment strategy which applies from cradle to grave. Simple, safe, stable and only 0.15% annual cost. It earned over 8% per year compounded the last 40 years with low volatility. Plus it only takes a few minutes each year to self manage.

    Joseph TekniGal.com


    Victor Stankevich from NC posted about 1 year ago:

    Agreeing with Stephen about Social Security. Delaying SS to 70 (which may have included filing and suspending at FRA to maximize the spousal benefit) creates a sort of 'longevity insurance'. Unless your health begins to fail, waiting to 70 gets you the maximum payout for both you and your spouse which is what you want in case you indeed outlive your nest egg. Even if that won't cover your fixed expenses at that point, it's still better than less.


    Paul from CA posted about 1 year ago:

    Young tax advisors don't understand that after 80 or so you don't want to travel as much and your quality of life changes. Also if you take Social Security earlier you get to use it longer. Also if you don't use it but invest at 6% the two cross over at about 80. If you die before 80 you are better off to start early.

    Consider quality of life. Start SS at 62 or 65 forget advice from youngsters. I am 82 now and still can hike 4 or 5 miles at altitude. But I dread getting on an airplane and flying to Europe or China, even first class.


    Robert Adams from IL posted about 1 year ago:

    I retired from the federal government and only used the CSRS retirement system for my retirement contributions during my working years. I've been told I didn't need to take an RMD at age 70 1/2 and beyond because I only have my civil service retirement annuity. Is this true? I sure hope so or I owe a bunch of penalties.


    Charles Rotblut from IL posted about 1 year ago:

    Robert,

    I would consult a tax professional who can review your personal situation and give you the appropriate guidance.

    -Charles


    Michael Arighi from CA posted 7 months ago:

    Replying to Robert Adams above (sorry, only recently an AAII member, so didn't respond sooner). I'm responding as a recent CSRS retiree, since few people here will know the system or understand the issues.

    CSRS is a defined-benefit pension plan. It is NOT tax-deferred, like an IRA or 401(k)/403(b), so you do NOT need to take an RMD from it. You pay taxes when you get it on any part of it that is not the money you put in originally (which was taxed then).

    The rationale for the RMD rules is that the IRS let you put the money away for retirement without paying taxes, but they want some assurance they WILL get to tax it before you die. So you are required to take a portion out, which is then taxed as ordinary income.

    If you invested in the TSP, which is basically a 401(k) by a proprietary name, then you WILL need to take RMDs from that. But not from your CSRS.


    Sanford Levey from MA posted 7 months ago:

    Does it make sense to take an RMD when the market is high,because presumably it would take less shares to equal the RMD?


    Michael Skinner from CA posted 3 months ago:

    A simple thought. The IRS life expectancy table
    used as a divisor on your total financial assets can provide a useful benchmark on what might be safe to withdraw, spend, gift ahead to heirs or favored charities. Just consider this.


    Victor Stankevich from NC posted 3 months ago:

    Updating comment I made a year ago given SS rules have changed (no more filing then suspending to maximize the spousal benefit). As I understand it now, spousal benefit gets maxed out when retiring spouse is 65. Waiting to 70 to file means the spouse will have gone without the spousal benefit for approximately 4 years. That needs to be factored in now.


    Bud from Nevada posted 3 months ago:

    Man-oh-man, this article must have been written by the same people who were giving me investment advice for many years. I am 78 years old, have been retired for 18 years and find that about the only difference in my investment strategy is that I am now more in value and dividend producing investments than growth. My wife and I do a lot more travel and generally spend at least as much on things like golf and resort getaways as we ever did before. No more "saving for retirement" alone produces a lot more cash to spend than I ever realized I would have.

    Mostly, what made the article lose credibility for me, almost immediately, was that table of where to put your "year's worth of cash." Geesh! Was it prepared in the 80's? Has anyone looked at how much interest bearing checking and savings accounts yield lately? As for CD's: The best tool that was ever invented to make money for the banks from investment challenged individuals—like my depression era mother, may she rest in peace.

    Enough said.


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