Making the transition to retirement is rarely as easy as packing up your desk and flipping a switch on your portfolio. But moving from “saving” to “spending” doesn’t have to be overwhelming.
You already know the basics: As you enter into retirement, consider gradually moving your portfolio into more income-oriented investments, keeping a portion invested for long-term growth.
There’s a lot more to consider, though, that’s often overlooked, such as how to allocate and manage your assets, which savings and investment vehicles may be most appropriate, and how to transition smartly from a savings to a withdrawal strategy.
Taxes and Social Security can also be big factors in your retirement, though they’re often considered as an afterthought. Instead, they should be addressed squarely in the context of your overall portfolio and retirement plan.
Consider these four factors to help avoid some of the biggest pitfalls on the retirement road.
1. Position your portfolio
Begin by evaluating your asset allocation over the full course of your retirement. For a 60-year-old nearing retirement, a 50% or so allocation in stocks may be appropriate. But the right mix is personal. You’ll need to consider your risk tolerance, as well as your investing timeframe. You’ll also want to balance your need for income now (or soon) with the need for portfolio growth, to help ensure that you don’t run out of money.
That, of course, is easier said than done. Inflation poses a great risk to a portfolio that’s overly invested in fixed income and cash. Even a relatively low inflation rate can have a significant impact on a retiree’s purchasing power. Inflation reduces the value of a fixed amount of money over time, so that your purchasing power decreases significantly over time.
2. Prepare for taxing times
While nothing may be certain but death and taxes, there’s still some wiggle room with the latter. Some smart strategies have the potential to help minimize your tax burden and maximize your savings. For example, keeping your money in your UC Retirement Savings Plan accounts for as long as possible could help you avoid a big hit on taxes.
3. Make the most of Social Security
If you are eligible for Social Security benefits, the decision about when to start to take your benefits needs to be made in conjunction with your overall portfolio planning. You can start to take Social Security benefits as soon as you’re eligible, at age 62, or wait until your benefits increase as much as possible.
If you start taking Social Security at age 62, rather than waiting until your full retirement age, you can expect up to a 30% reduction in monthly benefits with lesser reductions as you approach full retirement age. Remember, full retirement age now ranges from 66 to 67, depending on your date of birth.
Waiting to claim your Social Security benefit will result in a higher benefit. For every year you delay your claim past your full retirement age, you get an 8% increase in your benefit. That could be at least a 24% higher monthly benefit if you delay claiming until age 70. But, make sure to evaluate your decision based on how much you've saved for retirement, your other sources of income in retirement, and your expectations for longevity.
While many people could benefit from waiting to age 70 to take Social Security payments, others may need this source of guaranteed income sooner to help pay their bills, or they may anticipate not living long enough to reap the rewards of delaying.
4. Plan for tax-smart withdrawals
Once you’re ready to start tapping your retirement accounts, it’s not as easy as hitting the ATM. You’ll need to take your tax situation and your portfolio allocation into account.
One strategy is to have funds in different types of accounts with different tax consequences upon withdrawal. This sort of tax diversification has the potential to help minimize your tax bill in retirement.
For example, any money withdrawn from a traditional IRA or from pretax contributions and earnings from your UC 403(b), 457(b), or DC Plans will be taxed as ordinary income. If those withdrawals are made in addition to other taxable income (from, say, your UCRP pension plan), they may increase your tax bill and possibly push you into a higher tax bracket.
If you have Roth contributions to the UC 403(b) or 457(b) Plans, or a Roth IRA, your withdrawals are not taxed, provided you’ve followed the rules regarding your age and the length of time the account has been open.1
Consider the potential tax consequences of all your income sources before making withdrawals. It can mean a lot to your savings.
The bottom line
When it comes to retirement, you have to create a path that’s right for you. Begin by talking with your family about your personal goals for retirement. Consider our four key factors as you fine-tune your plan. For help, schedule a meeting with a UC-dedicated workplace financial consultant or call 1-800-558-9182.