A Guide to Rethinking Retirement
The whole concept of retirement is changing.
In the past, retirement was sort of a “one time, one size fits all” event; The retirement party, a gold plated wristwatch gift, then banishing off to a condominium in the sun for 7,9 years of bridge and bingo. Think “On Golden Pond”… with Norman Thayer played by Henry Fonda swaying in his rocking chair. Today, most retirees have different lifestyles. Many are working (part-time), are active in their communities, travelling, learning, volunteering et cetera.
Financially, in the past, aging Americans would rely mostly on Social Security and Pensions for retirement income. Not so for some of todays and most of tomorrows retirees. The next wave will need to be more fiscally “self-reliant” in retirement. Here are some key points to consider in that context:
Your Withdrawal rate: The thoughtful financial advisor William Bergen first put forth the 4% rule in a 1994 article. His thesis asserted that retirees who withdrew 4% of their portfolios each year – adjusting for inflation - should be able to make their funds last 30 years. He “backtested” to show this has proved sound for every 30 year period since the 1920′s.. including the periods that overlapped the great depression. (In my practice, we will often go as high as 5%)
Your Depletion order: Retirees (hopefully) will have different “buckets” of investments to draw on to replace pensions. These include Tax-deferred investments (401-K, 403-B, IRA et cetera), taxable accounts and tax – free accounts including Roth IRAs or municipal bonds. In what order should one spend down these accounts? While each case is different, the depletion order that usually makes the most sense is:
1) Taxable 2) Tax – deferred 3) Tax free
Your Social security: My assumption is that social security will be there for you – in full – if you are over around age 35. If you are younger, it’s harder to tell. In any event, the only decision we have direct control over is simply when to begin taking benefits. The first step is to determine your full retirement age. Currently if you were born after 1938, it’s age 65. If you were born after 1960, it’s 67. If you are in between, it’s in between. For example, if you were born in 1957, your full retirement age is 66 years, 6 months and so forth. From this point you can choose a reduced benefit earlier (as early as age 62) or an increased benefit later (as late as age 70). Increasingly, I am advising retirees to delay benefits, but it’s probably a good idea to sit down with your accountant and/or financial advisor to weigh the options based on your circumstances.
Retirees have come a long way since On Golden Pond was made in 1981. For many, it’s an opportunity to explore opportunities that weren’t available in their working and child rearing years – assuming they stay healthy…. and are prepared financially! And planning your withdrawal rate, depletion order and timing of social security are 3 steps in the right direction!