Note: This is the sixth in a series of Lifecycle Planning articles for every age group.
In this series of articles, we have been describing some of the personal financial planning challenges faced by Americans during different life stages. Here, we look at one’s 70s, which is the life stage when most people either have made the transition to full-time retirement or are planning to make the transition soon.
Shifting Financial Gears
Some people think that when they enter their 70s and retirement, the importance of personal financial planning will diminish. However, this couldn’t be further from the truth. While the life-long challenge of saving money for retirement is probably now a thing of the past, this is replaced by a new financial priority: Making sure the retirement nest egg you have spent decades building will last you the rest of your life.
Or put another way: The financial emphasis in your 70s will likely shift from asset accumulation to asset drawdown and preservation. There are two key planning components to this new financial priority — budgeting and portfolio distribution. These go hand in hand, as your budget will dictate how much of your retirement portfolio you must withdraw each month to meet your living expenses.
If you haven’t lived on a budget before, now would be a good time to learn the discipline of budgeting. Simply write down all of your fixed monthly expenses (like rent or mortgage, utilities, insurance premiums, transportation and groceries) on a sheet of paper, or enter them in a spreadsheet, and add them up. Then add an allowance for variable expenses, like entertainment and travel. This will give you a good idea of how much it costs to maintain your basic standard of living.
Now you need to decide how you will withdraw money from your retirement portfolio to meet your monthly living expenses. There are two main approaches you can take: the fixed amount approach and the percentage of account approach. With the former, you will withdraw the same amount of money from your portfolio every month to meet your expenses. With the latter, you will withdraw a fixed percentage of your portfolio every month to meet expenses.
The fixed amount approach provides more income certainty, which can make living within your budget easier. However, the percentage of income approach tends to give you more control over your portfolio’s drawdown. Based on the amount of your portfolio and assumed rates of return, you can determine how much you can afford to withdraw each month to make sure your money lasts until a certain age. However, you might have to adjust your monthly budget if you determine that the percentage you can afford to withdraw results in an amount that is less than your currently monthly expenses.
An ideal strategy is to plan your retirement budget and distribution strategy so you can live off of the income generated by your investments and never have to withdraw the principal. This virtually guarantees that you will not outlive your retirement savings while possibly also enabling you to leave an inheritance for your heirs. However, unless your portfolio is allocated entirely to laddered fixed income investments, there will be income variability to account for.
Other Important Points
Here are a few other important points to keep in mind when it comes to personal financial planning in your 70s:
- Don’t Delay the start of your Social Security benefits past age 70. For seniors who continue working past 62, or 65, it may make sense to delay the start of your Social Security benefit payments. Waiting until after your full retirement age (which is between 65 and 67, depending on when you were born) to start receiving benefits will result in a larger monthly check, but only up to age 70. Speak to your financial advisor, accountant, or a Social Security representative to determine the right age for you.
- Re-examine your asset allocation mix. Once you enter retirement, it is probably smart to shift a good portion of your investments out of more volatile asset classes like stocks and into fixed-income instruments, like Treasury bonds and AAA-rated corporate bonds, and cash equivalents, like savings and money market accounts and CDs. This is because asset preservation is usually more important during this life stage than asset accumulation. That said, if your portfolio is substantial enough to weather short-term losses without harming your standard of living, it may make sense to keep a portion of your portfolio allocated to stocks, where potential returns are higher.
- Watch out for RMDs. If you have assets in traditional IRA, SEP IRA, SIMPLE IRA, 401(k) or other type of qualified retirement plan, you generally must start taking minimum withdrawals no later than April 1 of the year following the year when you turn 70 if you are retired. These minimum withdrawals are referred to as required minimum distributions, or RMDs. Note that RMDs do not apply to funds held in Roth IRAs.
For example, if you are retired and you turned 70 on June 30, 2014, you reached age 70½ on December 30, 2014. Therefore, you must take your first RMD for 2014 by April 1, 2015. But if you are retired and you turned 70 on July 1, 2014, you reached age 70½ on January 1, 2015. In this case, you do not have an RMD for 2014, but must take your first RMD for 2015 by April 1, 2016..
The RMD for any year is your account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” Worksheets for calculating the amount of your RMD can be downloaded from the IRS website.
Failure to take RMDs on time can be very costly. If you don’t take distributions on time, or if the distributions you take are too small, you will likely be subject to a 50 percent excise tax on the amount of money you should have withdrawn but didn’t.
Working in Your 70s
It is worth noting that not everyone decides to retire when they enter their 70s. The labor force participation rate for older workers has been on the rise for over a decade, reports the Bureau of Labor Statistics.
Some people prefer to keep working in their 70s in order to stay healthy, both physically and mentally, while others enjoy the social interactions that a job provides. Still other 70-somethings are starting businesses they have always dreamed about but did not have the time or money to launch before. In addition, some 70-somethings need to keep working on either a part-time or full-time basis in order to make up for shortfalls in their retirement portfolio.
Whether your 70s represent a time of rest, relaxation and adventure in retirement or you prefer to keep working, you will need to continue to make personal financial planning a priority throughout this life stage. Keep the points presented here in mind as you plan personal financial strategies for your 70s.
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