Spending your retirement

You’ve followed your financial adviser’s advice on how much you need to save and how to invest it, and now you are retiring. The question is, what do you need to be aware of as you shift from saving to spending your investments?

“There is a huge psychological shift in retirement,” says Kim Rosenberg, financial planner and investment advisor at Rosenbaum Financial (RosenbaumFinancial.com). “When you are not retired, you are trained to save for your retirement. When you decide not to get income from work anymore, it’s a huge psychological shift. People don’t know how to spend in retirement. It’s a new time and new transition.”

With today’s rapidly evolving medical breakthroughs, Kim advises retirees to plan to live to 100 unless they have immediate health issues.

Kim has identified four risks retirees face and has suggestions on how to counter them.

Risk one: Running out of money. Think about your values and goals and what you want to do in retirement. Figure out a spending plan based on fixed costs and special goals such as travel, activities with grandchildren or a new car. The third most expensive cost in retirement is health care – you need to decide how you will pay for health problems or long-term care before you need it.

Risk two: Spending from wrong source at the wrong time. For most people it is best to delay taking Social Security benefits until age 70 when you will get the maximum amount per month (up to 32% more than if you started at age 62). It ensures you have more money later in life when your other investments are declining. Also consider your tax burden when deciding which funds to withdraw – you have already paid taxes on regular investments, so you will only pay capital gains on those; on traditional IRAs and 401Ks, you will pay income taxes on withdrawals.

Risk three: Prepare for inflation. The funds for your day-to-day living expenses should come from conservative investments. Other funds should be designated to grow enough to pay for the increased costs 30 years from now – in other words, investments that will fight the inflation of the future. Invest some of your savings in long-term investments such as the stock market that will grow over time.

Risk four: Stock market swings. You can’t assume you can take the same amount from stock investments every year – sometimes the market is up and sometimes it is down (statistically, the market is down 30% of the time). Plan how much you will need a year in advance and designate liquidity for that amount as you plan your investments. Revisit your strategy every year to decide how much is appropriate to take based on market factors.

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