It would be easy to assume that, once you enter retirement, your work as a retirement investor is done. But the truth is you can never really stop working to maintain your nest egg. The easiest way to manage your post-retirement funds is to create a plan ahead of time that addresses the potential pitfalls known to affect retirees. After all, it's harder to fix errors once you're retired -- mainly because you're no longer making consistent contributions and can't make as many financial adjustments to compensate for mistakes.
The best-case scenario would be to start planning at least five years before you retire. If that timeline has passed you by, don't fret. It's never too late to utilize an effective approach.
Here are four considerations to keep in mind as you develop your strategy:
1. Carefully plan your annual distribution amount. Stick with the withdrawal rate you planned, even when the market is up. Resist the urge to take larger withdrawals when you see a spike in your account balance. There will be down times as well, and the dips will hurt far worse if you don't take advantage of the upticks.
Your distribution strategy should take into account all of your income streams, including Social Security benefits. In addition to your withdrawal rate, pay special attention to your tax liability. Since your income level determines your tax bracket and your ability to take certain deductions and write-offs, it's worthwhile to work with an investment advisor to ensure you're taking distributions at an optimal rate.
Your distribution plan should actually look similar to your contribution plan -- but in reverse, of course. Regimented and steady distributions will have an effect similar to regimented and steady contributions. Each represents a form of dollar-cost averaging, and both will help your investments withstand long-term market fluctuations.
2. Know when to take correct required minimum distributions at the correct time. Traditional individual retirement account and 401 (k) account holders must begin RMDs the year he or she reaches age 70 1/2.
Failing to take an RMD results in a 50 percent tax on the amount not withdrawn. In addition, the distribution is still subject to ordinary income taxes if it was contributed on a pretax basis.
The timing for RMDs, as well as how to calculate the amount of the RMD, is a little complicated. A retirement advisor or tax advisor should be able to help you determine the amount of your RMD for each of the accounts you hold.
3. C laim your Social Security benefits at the correct time. For those born in 1960 or later, waiting until full retirement age (67) to collect Social Security benefits means your monthly benefit will be about 30 percent higher than if you'd started receiving benefits at age 62, when you first become eligible. You can increase your payments another 8 percent annually (via delayed retirement credits) by applying for benefits at full retirement age and then requesting to have payments suspended until you turn 70.
Determining a strategy for maximizing your investments and Social Security income can be complex, and depends on your personal situation. An investment advisor can help you work through the various scenarios and provide you with a plan that will be most advantageous to your retirement goals. This will also enable you to see which claiming option would gross the most money over time. The time span is pertinent because the whole equation is dependent upon your longevity, so be prepared to estimate how long you think you'll live.
4. Understand the importance of staying invested throughout retirement. Although you can't spend your retirement years using the same aggressive investing strategy as a 25-year-old, as your needs are different, don't move everything to bonds and cash.
Consider this: Retirement lasts somewhere in the neighborhood of 20 years -- maybe more. During that time inflation will erode the value of a dollar. Savings accounts and bonds rarely earn a rate-of-return sufficient to keep pace with inflation. You need the gro wth potential of a well-balanced portfolio to truly combat inflation. Furthermore, stock funds can enable retirees to continue to build a nest egg even during retirement.
Once you establish a strategy to reach your ideal retirement, it is extremely important you stick to it -- even as a retiree. Take the time now, at an early stage in your planning process, to assess and adjust the ways to maximize your opportunities in the future.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.
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