We understand the concerns that come with retirement, particularly the fear of running out of money, can keep you up at night. Pure’s Financial Planner, Kyle Stacey, CFP®, AIF®, provides practical strategies to navigate inflation and the rising cost of living. His aim is to help you thrive, not just survive, in retirement.
He discusses:
- The 4% rule
- Dynamic withdrawal strategies
- Income floor strategy
- Tax management
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Transcript
One of people’s biggest fear in retirement is running out of money—this could be a double-edged sword because they want to live for today and enjoy what they have built up over their entire working career. So, beyond some of the obvious answers with spending less money, working longer, or retiring a little later, we’re going to explore some strategies today that may help you stretch your retirement savings to last just a little bit longer.
That all starts with creating a withdrawal strategy on how you’re going to manage the distribution of your assets. This is going to be paramount in making sure you don’t run out of money before you expire. Above all, this manages sequence of returns risk, this is the concept where if stock market falls and you start taking money from the portfolio, your balance may never fully rebound even if the stock market does. In other words, you want to avoid having to withdraw money from your accounts when the market is down.
So, let’s talk some strategies:
One of the biggest ones, and the most well know is the 4% rule. This is the most popular mostly because it’s tried and true. Essentially, every year, look at the overall balance of your retirement assets, you multiply that by 4% and that would effectively give you a number that you can withdrawal safely. So, let’s say let’s say you have half a million dollars, 4% of that is going to be $20,000. That would effectively be the amount of money you could pull from that portfolio and not be terribly concerned about running out of money, assuming you’re growing the assets at around 6%.
You can look at a dynamic withdrawal strategy. So, with a dynamic withdrawal strategy, that helps you respond more appropriately to changing market environments and your changing needs. Let’s say in one year your investment mix goes up double digits, say 10 to 12%. Perhaps that year is a year in which you can pull more than just the 4%, as the previous strategy suggested. But you also have to take into consideration that markets don’t only go up, sometimes they go down so you may need to adjust your spending downward to align with what the market environment is providing you.
You can also look at an income floor strategy or “flooring” strategy which helps you control how long the money will last by making sure you don’t have to sell stocks when the market is down. That way, you always know your basic expenses are covered even when the markets go down so you can use your invested savings for discretionary expenses. So, it works like this: figure out the total dollar amount for your essential expenses; housing, food, keeping the lights on, Netflix and that is guaranteed from other income sources, such as Social Security, bond ladders, dividends, CD interests, etc.
So, let’s talk taxes. Taxes is a huge way to save money. Understanding the tax implications of where you are creating retirement income will have a long-lasting effect on the wealth and its sustainability. Controlling taxes has a direct correlation to making sure your money last longer as taxes tend to be one of the larger expenses throughout retirements’ lives.
For example, let’s say you need $50,000 from your retirement account, if all of that came from a pre-tax 401(k) account that would be taxed as ordinary income, so you would need way more than $50,000 to net 50 from a retirement account to account for taxes. Now, if you need that same $50,000 but you’re pulling from a Roth IRA, you would pay nothing in taxes. If you’re pulling it from a non-retirement account like a brokerage account, maybe you pay capital gains taxes which would be significantly less than ordinary income.
Here’s a few more ways, but not necessarily pertaining to just your retirement assets:
Look for savings and discounts, low-cost memberships to retirement organizations. I mean as a senior, you can score lots of discounts if you just simply ask. Use your age to your advantage and that can help increase your purchasing power.
You can also consider downsizing your home or where you live. Some of you may have a much bigger home than what you need at this point in your life, so downsizing to a smaller home can significantly reduce some of your living expenses. Some of you may have dead equity in your home that can really boost your lifestyle if that was liquid. Even if you’ve already paid off your mortgage, your maintenance and utility costs could be substantially lower with a smaller home. Also, your primary residence has certain tax exemptions to it where if you sell your home, depending if you’re married or single, you could avoid up to $500,000 in capital gains or $250,000 if you’re single.
Knowing your spending habits and sticking to your withdrawal once you know what your withdrawal amount is, whether that be through the 4% rule, dynamic income strategy, or income floor strategy, you need to be able to stick with that amount. It’s not going to matter if you’re spending a couple of bucks on Starbucks or going out to dinner, but knowing how much you can spend is going to help you keep on track. If you need help or would like to go over your plan with a professional, take advantage of our free financial assessment.
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IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC, a Registered Investment Advisor.
• Pure Financial Advisors LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
