This is the problem many Americans face after retirement.
They spend years developing good financial habits so, if all goes well, they have enough money saved up by the end of their working years. And when it comes time to transition, we often struggle with the transition from saving to spending our nest egg.
A year without stress suddenly turns into a year full of stress.
“It’s unfortunate that in the first few years of retirement you’re constantly stressing about your portfolio income generation strategy,” said Andy Baxley, senior financial planner at Planning Center.
But “there are things you can and should do to alleviate that stress,” he says.
Here are some of his and other experts’ top tips for a smooth retirement. Note: Not all of these steps are suitable for all situations. Therefore, it is always a good idea to consult a financial advisor if you can afford it.
Read more: How to find out your Social Security COLA increase in 2024
Step 1: Phase out jobs gradually
Baxley believes in what he and others call “phased retirement.” In other words, instead of retiring all at once, you can gradually quit your job and “maybe go for a third time or half-time,” or even find another job that accommodates such plans.
“That kind of splits the difference,” he said. “You’re starting to rely a little bit on your financial assets, but you’re still getting a paycheck, which really helps ease the transition, not just financially but emotionally.”
Step 2: Increase contributions to retirement accounts
Julie Virta, CFP at Vanguard, explained that people tend to think they will spend less in retirement. However, contrary to popular belief, they often spend the same amount, especially if they have plans such as traveling.
Ideally, after about five years, soon-to-be retirees should start increasing their IRA and 401(k) contributions to boost their retirement savings, Virta said. That’s often not only good for your nest egg, but also for your mental state. Additionally, tax law now allows people age 50 and older to set aside more pre-tax retirement savings. According to the I.R.S.
”[It] You have the opportunity to actually increase your savings over the five years leading up to your actual retirement. ” she said. “It may also be a good time to review your budget and consider how you would spend from your portfolio if you had no income.” ”
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Step 3: Create a “retirement fund”
One great way to lower your stress meter is that Baxley encourages her clients to “recreate something they experienced while they were getting paid.” This means that instead of withdrawing a year’s worth of cash from his retirement account, he will receive regular payments.
“It’s easy to recreate the feeling of a paycheck by simply setting up automatic withdrawals from your IRA or 401(k), monthly or even bimonthly withdrawals,” Baxley says. “So this could be a way for the experience of growing income from your portfolio to feel very similar to the experience of receiving a paycheck, in terms of pace, predictability, etc.”
Virta agreed, saying he typically advises clients to withdraw 3% to 5% of their total savings in the first year of retirement. Beyond that, he said retirement expenses such as inflation, market returns and medical costs need to be adjusted.
In some cases, retirees may be forced to start withdrawing funds. For traditional IRAs, SEP IRAs, SIMPLE IRAs, and retirement plan accounts, when he reaches age 72, or “if he reaches age 72 on or after December 31, 2022, he is age 73.” Required minimum distributions begin when . Please refer to. Here are the IRS rules.
Step 4: Pay attention to taxes
Virta also advised soon-to-be retirees to take advantage of tax benefits and develop a concrete drawdown strategy during retirement. He explained that customers can reduce their annual taxable income “by spreading out withdrawals and withdrawing funds from both taxable and tax-free sources before required withdrawals.”
Specifically, you can take funds from both a 401(k) plan and a Roth IRA or other qualified distributions to maximize your effective tax benefits and lower your effective tax rate. A tax accountant will assist you with the procedure.
“I think the biggest mistake is not thinking about tax planning opportunities in your spending strategy,” Virta said.
Step 5: Optimize your Social Security benefits
Baxley said Social Security plays an important role in the transition from saving to spending, which is “often the most influential decision retirees make.” Some people may claim Social Security at their “full retirement” age (67 if born after 1960). Others can claim later and watch their profits grow.
There are many paths you can take, and your financial advisor can guide you through them.
For example, some people may want to take reduced benefits at age 62 if they have a short life expectancy or really need the money.
But in some cases, it makes sense to wait longer, he said. He noted that soon-to-be retirees will see their benefits increase by about 8% each year past full retirement age. For example, a person may retire at age 67 and wait three years for Social Security benefits to accumulate before claiming at age 70.
“I always encourage people to make a distinction between their retirement date and the date they claim Social Security, because ultimately you can claim Social Security starting at age 70,” he said. “And if you’re really healthy and rely heavily on Social Security for your retirement income, it makes sense to wait that long.”
Dylan Kroll is a reporter for Yahoo Finance.
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