Learn four financial principles and objectives to consider as you approach your retirement years.
Retirement is a time of adjustment and change. Some retirees may ditch the alarm clock. Others say they’re busier in retirement than they were in their working years. Either way, retirees tend to change the way they spend their time.
There may also be a psychological adjustment when it comes to finances, as you shift from earning a paycheck and accumulating assets to spending those funds in retirement. This fundamental change in your approach to money can be a bit overwhelming for some retirees.
When you're in retirement, your approach to managing money is different from your approach when you’re saving for retirement,” says Matt Sadowsky, director of retirement and annuities with TD Ameritrade.
Here are four principles to consider as you step over the threshold into retirement. (Keep in mind that it may not be a linear process.)
For years you’ve been saving and building up your nest egg. Now it may be time to start drawing down your savings to make ends meet.
“Dividends and interest might not be enough to pay bills,” Sadowsky said. Unless you have low living expenses or sizable wealth stored up, you'll likely need to draw down your assets to pay bills and maintain your standard of living. And that may be just fine.
“You need to change your accumulation mindset when entering retirement,” Sadowsky said. “It’s OK to spend down, although it’s not always a comfortable change after decades of practiced behavior of saving and growing your nest egg. If you have a plan in place, you’ll feel better."
Defend your nest egg against risk to make it last as long as possible. One of the big risks—longevity—is kind of a double-edged sword. Living a long, healthy life in retirement is something we all strive to achieve, but longevity also means that you might outlive your savings. A long life is good, but running out of money isn’t.
According to Sadowsky, you shouldn’t plan for the average life expectancy. “Half of the time you’re going to be wrong,” he said. Instead, plan for the possibility of a longer than normal retirement.
Remember that there are also black swan market events that, by definition, can’t be anticipated.
Some retirees seek guaranteed lifetime income, such as an annuity, to add to their Social Security benefit. This can help protect against market risk, especially in the early years of retirement.
A tricky part of retirement planning is knowing how to optimize four key retirement objectives when you don't know exactly how long you’ll live.
Of course, there are trade-offs among these four objectives. For example, the more of your assets you spend during your retirement, the less you’ll have for the next generation. But setting funds aside for the next generation, perhaps by placing assets in a trust, might inhibit your liquidity.
Finally, consider the order in which you'll access your assets once you're retired. Will you tap taxable accounts first (e.g., your brokerage account)? Your tax-deferred retirement accounts? Or some combination of the two? You don't necessarily have to use your IRA or employer retirement plan as your primary account for withdrawing funds. Depending on your situation, it may make sense to draw more from your taxable accounts first because the amount lost to taxes may be less.
The goal is to minimize your tax bill each year to help your nest egg last longer. The less you pay in taxes, more of your money keeps working for you.
Again, retirement is a time of change and adjustment. But if you can shift your mindset and take a principled approach to finances in retirement, you may be able to embrace the change.
Matt Whittaker is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59 1/2, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. Optional riders are available at an additional cost. All guarantees are based on the claims paying ability of the insurer. An annuity is a tax-deferred investment. Holding an annuity in an IRA or other qualified account offers no additional tax benefit. Therefore, an annuity should be used to fund an IRA or qualified plan for annuity features other than tax deferral. Product features and availability vary by state. Restrictions and limitations may apply.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2022 Charles Schwab & Co. Inc. All rights reserved.