We spend our career working toward accumulating enough money to retire. The withdrawal phase deserves the same meticulous attention. Getting the golden years right matters just as much to our financial health as saving during our salaried years. Here are a few ways your finances will change as you withdraw money from your nest egg.
Your balance will grow more slowly. Your investment returns during the withdrawal phase will be different than the accumulation period even if you don’t change the bond to stock ratio. This is due to no longer having incoming capital to add to the portfolio via a regular contribution from your salary. Instead, you will need to periodically sell investments to meet expenses, which can reduce your portfolio performance and eventually cause your net worth to decline.
Staying the course may be harder during retirement. If you need money to, say, replace a car that unexpectedly broke down during a bear market, the paper loss is no longer a temporary loss, because you don’t have money coming in to save more. It’s one thing to be able to hang on and stay the course when you still have income coming in every month that can cover surprise bills, but your tolerance for risk might decline when you know future income is unlikely. Staying the course is crucial in both cases, so make sure you make a plan you can stick with through thick and thin in retirement.
You aren’t likely to be able to continuously follow a withdrawal strategy. I love plugging numbers into a calculator to see how much I can safely spend in retirement. Yet, these calculations won’t come close to what I’ll do in retirement, because I know I won’t follow those rules. I won’t figure out a spending number at the onset of retirement and stick with it no matter what happens in the markets. My expenses will fluctuate from year to year, like they have throughout my life, and I will stay flexible.
Your retirement life will be different than you imagine it will be. You may be one of the lucky few who had the foresight to carefully plan your post-career life, so you know exactly what the first few years of retirement will be like. But it’s almost impossible to be too specific about how you will go about your activities after a decade or more of retirement, because no one knows what will happen. These days you can check your investment portfolio at will, but phone trades and quarterly paper statements were still extremely common fifteen years ago. There will probably be new innovations in investment management in another 15 years from now. You will encounter many new things in retirement, and the best you can do is adapt when changes happen.
You tax rate is likely to decline. Between a progressive tax system, lower tax rates for investment than earned income and an inflation-adjusted tax bracket, many people will be surprised to see their tax rate fall during retirement. Relocating to a place without a state income tax could reduce your tax burden even further. There are a lot of opportunities to reduce your tax rate in retirement if you spend some time optimizing your situation.
You will be tempted to start collecting Social Security early. You get larger monthly payments for each year you delay claiming Social Security payments up until age 70. One of the best longevity insurance strategies available to us is to wait as long as possible to collect Social Security. But it’s incredibly difficult to wait for that many years to collect. I plan to delay claiming, but I know that it won’t be easy. You can claim a reduced Social Security payment beginning at age 62, and you need to forgo eight years of income in order to get the biggest possible payments at age 70. Eight years is a really long time to hold out for a dependable check every month. I will try to wait, but I can’t guarantee that I will be able to avoid the temptation.