By Carl Lachman, CFP®, MBA

It’s Time to Travel

Many of the people our financial planning firm works with take a vacation soon after they retire. They finished up at their job, they were given congratulations by their co-workers, and a weight has lifted off their shoulders. They leave their home in Fullerton, California, and take the vacation they have been thinking about for a long time. They finally have the free time to do what they want.

Free Time Is Expensive Time

The vacation is a great stress reliever, and they have a wonderful time. It also cost a lot of money, which is on their mind when they return home and get their first credit card bill. They soon discover that all of the wonderful things they want to do with their new work-free time are rather expensive. After we retire, most of us in Orange County fill our time with activities that cost money. Free time is expensive.

How Do I Start Using My Retirement Account?

The average person we work with as financial advisors has spent 30–40 years putting money into their 401(k) plan but hasn’t thought about how to get the money out. How does that happen when one is no longer working? The actual mechanics are pretty easy, but you might make a big mistake if you don’t have a plan or consult an expert for the best strategy. Your money that was supposed to last 25 years may be gone 10 years early.

Rollover Is Not Just a Trick for Dogs

When you retire, you have a “separation from service,” which allows you to move your retirement funds out of the company’s retirement plan. You have the same sort of separation when you change employers. In both cases, you can move those funds to a more flexible IRA account that allows a lot more investment choices. Such a move is called a “rollover.”

Your company retirement plan probably had 20–40 investment options, but if you get a low-cost brokerage IRA account, you will have thousands and thousands, plus lower costs if you shop around.

If you worked in a litigious business and expect to be sued when you retire, then leaving your money in a 401(k) might more safely shield those retirement assets. Such retirement assets can rarely be seized if you have a judgment against you. In California, where our fee-only financial planning is located and most of our clients live, there are also very strong protections for IRA assets. So, if you live in our area, liability is generally not a concern for moving retirement assets to an IRA.

How Did You Spend Money While Working?

If you have spent your life with a monthly pattern of income and expense, why not use that same pattern that you are used to when you retire? You received your salary each month and you paid bills each month—like many people, you may find it easiest to get monthly transfers from your retirement account.

Withhold the Taxes

When you put money into your retirement account, you avoided it being taxed as income. But, when the money comes out of the account, income taxes are now due.

With your tax preparer, estimate a percentage to take out of every withdrawal from your retirement account, and send it to the IRS and your state tax authority. You might want to withhold 15–20% for federal taxes and 5–7% for state taxes.

If that money comes out first when you get your monthly “draw” from your retirement account, you don’t have to worry about paying quarterly estimated taxes on your retirement withdrawals.

In Your First Years, Don’t Spend Too Much

In the first years of retirement, you have a lot of things you want to do with all of your free time, but you need to take it easy on spending, nonetheless. You need to be conservative. It is not uncommon in Orange County for people to retire and start spending their retirement savings at a much faster rate than is appropriate.

The appropriate rate based on research is to spend no more than 4% of your savings per year, but that is still too high for some people.

If you spend too much early in retirement and your investments take a big dive at the same time, you may never be able to recover and get back to the level of spending you want to be able to afford.

These unrecoverable situations are most likely to happen in the first 10 years of retirement, so be careful you don’t spend too much at first when you retire. A fee-only fiduciary financial planner with CERTIFIED FINANCIAL PLANNER™ training can help you decide how much is too much.

Keep Investing and Consider Inflation

When you retire, your money still needs to last 20–25+ years, so you can’t move all of your retirement funds into certificates of deposit (CDs). They won’t produce enough income to stay ahead of inflation.

Fixed income investments (CDs, bonds, bond mutual funds) will almost always fall behind in the income they produce, so there’s a good chance you won’t be able to keep up with inflation. You need to own at least some companies (stock, equities) in your retirement account to have a fighting chance of keeping up with prices that rise with inflation.

Your investments in your retirement account also can’t be allocated too conservatively. In fact, they probably need to be a little riskier and more aggressive than you would otherwise be comfortable with.

Although retirement is a big step and you no longer have the financial safety of a job, you are still investing for the long term. You can’t think short term unless you retire when you are 90 years old. Get help and some education from an investment manager that has a good track record of helping clients make their money last.

The IRS Requires Distributions

Once you reach 70 ½ years old, the IRS is going to start requiring that you take a certain amount of money out of your retirement accounts each year. These are called required minimum distributions (RMDs) or minimum required distributions (MRDs).

There is a calculation that must be completed each year, and that RMD must come out of your account so it can be taxed as income. You don’t have to spend the money, but you do need to get it out of the retirement account. Your situation may be such that you can only spend half of the RMD, so don’t assume the IRS knows how much you can spend.

Retire TO Something, Not FROM Something

Turning savings into income when you retire is not terribly hard if you know how to do it or if you have an experienced financial planner helping you. Make sure your financial consultant or advisor is a trained professional who is paid in a way to look out for your best interest, not just a salesperson who sells financial products and gets paid a commission, like an annuity salesperson.

The much bigger and more serious challenge is what you do once you retire. What do you do with all of your time? As a rule, don’t just retire from something, but instead make plans so you retire to something.

Know what you are going to do, and have a plan for that retirement time. You might write a book, pursue the hobby you love, become a consultant, volunteer at a nonprofit, or take classes. But no matter what, have a plan.

Money is often a relatively easy issue to solve and a fee-only financial planner can help do that for you, so spend a lot of time thinking of what you are going to retire to before you put your “last day” on the calendar.

Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.