Why saving is only half the equation for a comfortable retirement?

Why saving is only half the equation for a comfortable retirement?

By: Jeff Wuorio/ March 30 2016

When it comes to the finances of retirement, most attention has fallen on the savings end of the equation.

Justifiably so — according to recent Federal Reserve statistics, the typical household with persons approaching retirement age had a paltry $14,500 in retirement savings. Even worse — nearly one-third of all households had no retirement savings whatsoever.

But what about those who are the exception, who've reached retirement with a goodly stash? They are better off, for sure, but they are not entirely without challenges, especially (and ironically) if they’re in good health.

“The single greatest risk retirees face today is simply their own good health,” said Matthew Cosgriff, a Bloomington, Minnesota, certified financial planner. “People are living longer and longer, which means people need to continue to keep their money working for them.”

Here are some tips to help those fit retirees manage their money to make it last.

Match planning with reality

The first step in setting up a post-retirement money management plan seems straightforward enough — make a budget.

That, said Portland, Oregon, financial planner Glen Clemans, is the “traditional method” that unfortunately seldom proves useful.

“We give you a budget worksheet to fill out. You fill out everything that you spend. We then adjust for the things that will change in retirement,” he said. “The huge problem with this is that most folks dramatically underestimate what they spend, so they don’t write down nearly enough.”

One alternative, said Clemans, is to look at a person or family’s current net after tax income as a starting point to gauge what may be required in retirement.

“The vast majority of people spend their net income, whatever that might be,” he said. “We then just add and subtract. Add in things like extra for medical coverage, extra for travel. Subtract things like debt payments that will be gone in retirement, other expenses that you know will go away.”

Other planners find that tracking current cash flow can be an accurate barometer of post-retirement financial needs, provided it’s monitored on a regular basis. Andrew Feldman of AJ Feldman Financial in Chicago uses a cash flow worksheet which is reviewed at every client meeting to ensure that spending estimates are in line with actual cash outflow.

“I don’t look into the details of where it was spent — excluding large one-off items such as a car. I look to see if the estimate matches reality,” said Feldman. “For example, if you estimate you are spending $3,000 total a month, I should see this movement in your cash. Once the client and I have a reasonable idea on what is being spent we can plan accordingly. My job is not to say ‘don’t buy this, buy that’ but to help clients understand how their spending habits effect their cash flow.”

Keeping spending in check

When working with a planner or other financial professional to map out a retirement financial strategy, be sure to ask about a long-term withdrawal rate forecast. This, as the name implies, examines how long a person’s overall financial resources — including savings and other income sources — will last at various withdrawal rates.

A longstanding rule of thumb holds that a maximum of 4 percent a year is the best hedge against running out of money too soon. However, given changes in market performance and paltry interest rates, that formula has been questioned of late — making a forecast specific to your needs more relevant.

If a forecast suggests your current level of spending may drain your finances too quickly, look at ways to trim current expenses. For instance, consider downsizing to a smaller, less expensive housing alternative. In addition to housing expenses, give some thought to a locale's property taxes, food and medical care, public transportation and walkable amenities. An article by Kipplinger details a number of budget-friendly retirement destinations throughout the United States.

Relocation may be particularly attractive if you live in one of the 13 states that currently taxes Social Security benefits in one way or another, according to the Tax Foundation.

Keep your money working

One of the biggest challenges in mapping out and managing a post retirement spending strategy is an expected shift in mindset from saver to money manager.

“It’s the transition from an accumulator that’s a difficult one for both advisers and clients,” said Cosgriff. “Withdrawing assets in a tax-efficient manner and at prudent times is very different than accumulating.”

New York certified financial planner Erika Safran recommends coordinating withdrawals from tax-free vehicles such as Roth IRAs with other taxed sources (such as conventional IRAs) so that no one year in retirement is particularly burdensome.

“It’s a good idea to roll over IRA assets into a Roth in low-income years to create future tax-free gain and withdrawals,” she added. Here’s more information on the ins and outs of rolling over an IRA.

The shift also means keeping your money in vehicles that allow for continued growth. Being conservative to stretch savings may seem the most sensible course, but being unduly cautious — stashing significant amounts in savings accounts, certificates of deposits and other choices with returns that don't keep up with inflation — can only serve to drain savings more quickly.

Ask your financial adviser to help devise a post-retirement investment strategy that is sufficiently aggressive but with safeguards to protect against any short-term volatility.

“It is important to not be too conservative,” said Cosgriff. “People need to stay invested in a broadly diversified basket of stocks and bonds, and not feel comfortable sitting largely in cash. Review your portfolio to make sure it is appropriately allocated between stocks and bonds, as well as having some liquid cash, to help weather any potential market downturns.”

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