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The distribution phase of retirement begins when the retiree starts using the savings and investments built up during the accumulation phase to supplement regular income from Social Security, pensions, and other income streams. While this new stage of life can be fun, the idea of spending money with no income from work can also be stressful. At Kiplinger, John Carruthers, a financial planner for Decker Retirement Planning, offers four steps investors can take to determine their retirement income needs, take distributions smartly, and retire comfortably.
Establish Priorities
Investors planning to travel extensively will want to factor that into their retirement budget. Likewise, those planning to regularly stay home will want to gear their priorities more toward home maintenance and spending on hobbies.
If applicable, an investor saving for retirement should have an honest conversation with their spouse to learn their priorities. They should write down the top five things that matter to them and discuss them together.
Focus on Principal-Guaranteed Accounts
Most retirees can expect to spend 20% more in retirement than they did during their working years. So, it’s important to know where the money will come from.
One dependable stream is from a bucket containing principal-guaranteed accounts, such as certificates of deposit, fixed annuities, market-linked CDs, and fixed-index annuities. The other bucket contains growth accounts, which contain investments that can fluctuate in value, such as stocks.
The idea is to draw distributions from cash but not from the stock bucket. The stock bucket can be partially liquidated occasionally whenever necessary to replenish cash, but only when the market is up.
During the distribution phase, it’s important to control the withdrawal rate so the savings aren’t exhausted during the retiree’s lifetime.
Convert to a Roth IRA
Converting portions of a traditional IRA to a Roth IRA over a series of years well before retirement makes sense for three reasons: all the growth in a Roth will be tax-free, income taken from the account will be tax-free and penalty-free, and money bequeathed from a Roth IRA will go to the beneficiaries tax-free.
Prepare for and Protect Against the Worst
Creating a sound distribution strategy can help prepare for volatility scenarios. An investor who knows how an account balance might be affected in years where investments lose money can go more conservative or set aside a few years of cash distributions.
One way to stress-test a portfolio is to conduct a Monte Carlo simulation, which can show how a portfolio might perform in a wide range of possible circumstances.
Nationwide a variety of actively managed ETFs for advisors that cater to a range of investment exposures and strategies for those seeking retirement income options for their clients as part of their bigger retirement planning pictures.
For more news, information, and strategy, visit the Retirement Income Channel.
