
Retirement Planning
How Your Spending Changes in Retirement
Household spending generally drops at retirement and then continues to decline throughout retirement. Here’s how people’s spending changes the most and how it can effect your saving plan.
Decumulation, also referred to as de-accumulation, is the process of deploying your savings to fund your lifestyle in retirement. It’s essentially the opposite of accumulation, or the process of building wealth during your working years. How you decide to decumulate your assets is the most important decision you’ll make as you approach retirement. By estimating how and when you will need to spend during your retirement, you can be sure to meet your spending needs.
When deciding how to decumulate your assets, be sure to consider the three following things:
Safer investments mean lower expected returns but more protection. Riskier investments could produce higher returns, but puts your principal at risk. You’ll want to think about what portion of your money you need access to in the next few years versus what can remain invested for a long time.
With a systematic withdrawal plan, you could set up set dollar or percentage amount withdrawals from your portfolio. The government’s methodology, known as required minimum distributions (RMDs), has you draw down your IRA based on life expectancies. Either way, you must consider which of your investments are being liquidated to fund the withdrawal and how market upturns and downturns could impact your plan.
For nearly everyone, an optimal retirement portfolio includes both. If your Social Security and any existing pension benefits do not cover your basic expenses, you could cover the gap by converting some of your assets into a steady retirement paycheck that continues for life (as with the Personal Pension or an income annuity). Consider the tradeoff between liquidity and the certainty of income you can’t outlive.
Household spending generally drops at retirement and then continues to decline throughout retirement. Here’s how people’s spending changes the most and how it can effect your saving plan.
The average human lifespan is increasing, and with that retirement is too. It’s important to consider these three questions so you don’t outlive your savings during retirement.
Unsure of the best way to save for retirement during your working years? There’s no right answer, but having a strategy and knowing of the available saving vehicles doesn’t hurt.