While it is essential to save money for retirement, it is even more important to know how to manage your retirement savings to enjoy the retirement you deserve.
Opening and operating retirement accounts is a good step in the right direction. However, effective management of those accounts is crucial to a satisfying retirement.
How do you manage your retirement savings for a satisfying retirement?
Evaluating Asset Allocation
The first step is to review and evaluate the asset allocation in your retirement accounts. This evaluation includes your savings in a 401(k) and your savings in an IRA. You should evaluate your investments in the former even though the latter provides you with broader investment options.
This evaluation aims to ensure that there is sufficient diversification in your investments to match your time horizon. By the time horizon, I mean the years you have until retirement.
Generally, the farther away you are from retirement, the more you want to invest in stocks and stock mutual funds that provide higher returns in the long run. Because these types of investments are subject to market fluctuations, you need to have enough time to weather those short-term fluctuations.
As you come closer to retirement, you want to increase investments in fixed-income securities like bonds, high yield savings accounts, bond funds, etc.
A useful formula is to subtract your current age from 100 (or 110) to derive the percentage of your investments that should be in growth stocks. For a 30-year-old, between 70-80% of investments should be in stock. For a 60-year-old, between 40-50% should be in stock while the rest should be in fixed income securities.
Do not choose an asset allocation formula at 30 and leave it there until you retire. Ensure you are regularly evaluating your asset allocation formula to match your current time horizon.
The Bucket Approach
Some financial planners suggest a bucket approach to managing your investments. In this approach, there are three buckets of investments. The first bucket consists of low risk, fixed-income investments like bonds. On the second bucket, you have high yield, moderate risk, fixed-income securities like dividend-paying stocks, and balanced mutual funds (mutual funds that balance stocks with fixed-income securities). The third bucket consists of high growth, high-risk investments like growth stocks, stock mutual funds, and ETFs.
Dividing your investments into these buckets and identifying an asset allocation formula that works with the different time horizons will help you manage your retirement savings for a satisfying retirement.
On the expenses side, you need to create a viable spending plan for retirement. This might be hard to do, depending on how close you are to retirement. Some financial planners suggest you budget for 80% of your current spending.
However, many people will love to spend time in retirement doing some things that will be expensive – traveling, vacations, etc. Therefore, it is possible your expenses are the same or even higher at retirement.
The goal here is to spend enough to enjoy retirement but not to deplete your savings quickly.
Striking this balance needs a realistic spending plan. You will do well to divide your retirement expenses into needs and wants. The former include the daily expenses on food, clothing, and others. For this category, you will most likely spend less than you currently do. The latter category (wants) include traveling, hobbies, new car, new home, donations, etc.
Understanding your expected retirement expenses (the life you want to live at retirement) will help you decide if you need more savings or you need to be more aggressive with your investments.
Making Withdrawals from Retirement Accounts
Perhaps the most crucial decision during retirement is how you will make withdrawals from your retirement accounts.
For retirement accounts like a 401(k) and traditional IRA, there is a required minimum withdrawal (there is a penalty for not making the withdrawals) when you reach age 72. Roth IRA, on the other hand, does not have a required minimum withdrawal.
There are specific ways you can get around the minimum withdrawals (and their tax implications) if you do not need the money. You can delay retirement, convert your accounts to Roth, donate the money to charity, or limit distributions in the first year.
Before making withdrawals from your retirement accounts, you should consider retirement income from social security, pension, and annuity. When these income sources cannot meet your expenses requirement, you can tap into your retirement account.
The rate at which you withdraw from your retirement accounts should be flexible rather than fixed. Some may withdraw a higher amount earlier in retirement when they have the strength to travel around the world. Others may withdraw a higher amount later in retirement when the medical troubles begin to set in.
The important thing here is to have a plan and stick to that plan as much as possible.
Leaving a Legacy
If you implement a sound retirement plan, you should have enough retirement savings to last you until you die.
The issue that surfaces then is what you will do with the money remaining in your retirement accounts.
No matter how young you are, you cannot shelve away the issue of legacy. The most important thing when you plan to leave a legacy is that the money will go to the causes and the people you want.
This is where you want to enter the murky waters of estate planning. Estate planning can be very complicated. Consequently, you might need an expert to handle it for you. However, instead of seeing estate planning as an independent financial plan you can pick up when you are very old; see it as part of your retirement planning.
You may decide to manage your retirement savings by yourself or employ financial advisors to do it for you. Whatever you choose, you cannot have a hands-off approach to retirement planning (set it up and wait until retirement).
To enjoy a satisfying retirement, you need to keep a tab on your retirement savings, managing it for maximum results.
In the next article, we draw our series on retirement planning to a close. If you have enjoyed the ride, watch out for the conclusion.