Whether you're in or near retirement, keeping a watchful eye on your spending—and its effect on your principal—can be pivotal in determining whether your funds will last at least as long as you do.
Tapping your investment portfolio for income during retirement requires a balance between withdrawing too much—and running the risk of depleting your principal—and not withdrawing enough to maintain a comfortable, affordable standard of living that can keep pace with inflation.
In determining how much money to withdraw from your retirement funds, you need to establish:
Many newly retired individuals actually spend more money during the first several years of retirement than they did while working, because they catch up on travel, take time to visit the grandchildren, or dedicate themselves to new hobbies. This relatively high level of spending tends to taper off over time.
However, while expenses for items such as travel and entertainment may lessen during the later retirement years, health-related costs could increase faster than the general inflation rate. Your financial advisor can assist you in modeling these varying lifestyle expenses throughout your retirement and keep you on track in managing your retirement resources.
A typical rule of thumb suggests spending a "fixed real" amount equal to a designated portion of your wealth at retirement, keeping the balance invested in a mix of stocks and bonds. The appropriate withdrawal rate is determined by the amount of income you need during your retirement years less income from other sources.
The rate should be calculated with a number of factors in mind, including the assets you currently own—and the potential impact of inflation on those assets.
You also should consider the state of your health, the expected volatility of your investments, and, of course, the financial legacy you plan to leave your heirs.
In most cases, holders of qualified retirement plans must make a minimum withdrawal each year beginning at age 701/2. Your financial advisor can assist you with calculating your required minimum distributions from your qualified retirement accounts each year.
Your financial advisor has the tools and resources necessary to assist you in addressing many of the challenges that retirees face.
John J. Grande, CFP®, Traudy F. Grande, CFP®, and John S. Grande, CFP® are co-editors of Money Matters. John J. Grande, CFP®, and Traudy F. Grande, CFP®, are owners and principals of Grande Financial Services Inc. and registered principals of Raymond James Financial Services Inc., member FINRA/SIPC.
Their son, John S. Grande, CFP®, has been in business with them for more than a decade. He has a degree in finance from Lehigh University, Bethlehem, PA.
The Grandes lecture at the Johns Hopkins University School of Medicine, and they advise ophthalmologists across the country on a diverse range of investment and financial matters. Readers may submit their financial questions to them at 800/722-1258 or [email protected]