Making the transition to retirement is rarely as easy as packing up your desk and flipping a switch on your portfolio from “saving” to “spending.”
But it 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 the following four key factors to help you avoid some of the biggest pitfalls on the retirement road:
Begin by evaluating your asset allocation over the full course of your retirement. Some people find themselves too heavily invested in stocks as they approach retirement, especially if they’re nearing retirement at a time when stocks are doing well. Others go too conservative too early. 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.
For instance, imagine you have $50,000 today. Assuming a relatively low 2% rate of inflation, your $50,000 would be worth just $30,477 in 25 years, assuming you keep it in cash rather than investing it. What happens if inflation ticks up to 3%? That same $50,000 cash balance would drop to an equivalent of $23,880 value 25 years from now. Of course, the inflation rate is dependent on economic conditions and varies over time.1
Some retirement income sources, such as Social Security, track inflation automatically through annual cost-of-living adjustments or market-related performance. If any of these sources can cover most—if not all—of your essential expenses, you’ll have more flexibility in choosing more growth-oriented investments elsewhere in your portfolio to help you try to cover your remaining expenses.
Early in retirement, you may want to consider “locking in” part of your nest egg by purchasing an annuity.2
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.
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.
Be aware that if you elect to take Social Security early, you will forfeit future increases in your monthly checks. Suppose you’re 62 and eligible to receive $1,200 per month. That amount will rise 33%, to approximately $1,600 per month, if you wait until your Full Retirement Age (FRA) of 66 to claim benefits. Conversely, claiming at 62 reduces your benefits approximately 25% below your FRA amount. In this example, benefits will jump another 32%, to $2,112 per month, if you delay taking benefits until you are 70. And remember, your annual cost-of-living adjustment (COLA) is based on your benefit. If you begin Social Security benefits at 62, your COLA will be lower, too. And while you are eligible for reduced Social Security benefits at 62, you won’t be eligible for Medicare until age 65, so you will probably have to pay for private health insurance in the meantime.
But waiting isn’t always the best option, especially if you need to rely heavily on your retirement savings to provide income. This can cause you to drain those assets more quickly than you otherwise would—an especially acute problem during times of poor market performance, when your accounts won’t replenish themselves and could, in fact, run dry.
It’s a delicate balance: The less you have in assets, the slower the growth potential. The higher your expenses, the more likely it is you’ll need to take Social Security benefits earlier, even if it means sacrificing any benefits that would accumulate by delaying.
One important note: Married couples can claim benefits based on either spouse’s earnings. Spousal benefits are equal to 50% of what your spouse gets if you begin drawing them at your full retirement age, less if you start taking them earlier. The ability to delay your own benefits while taking spousal benefits can become a significant part of your larger retirement income and portfolio strategy.
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.
Any money withdrawn from your UC 403(b), 457(b), or DC Plans or a traditional IRA, for instance, 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 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.3
Consider the potential tax consequences of all your income sources before making withdrawals. It can mean a lot to your savings.
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, call a Retirement Planner at 1-800-558-9182.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
1 This hypothetical example is provided for illustration only. It assumes a lump sum of $50,000 kept in cash for 25 years, with no contributions, loans, or withdrawals. Taxes are not taken into account in this illustration. Your own experience may differ.
2 An annuity is a contract issued by an insurance company and purchased by a consumer for long-term investing. An annuity is not a mutual fund. There are various fees and expenses associated with annuities and, in certain situations, withdrawal penalties may be applicable. Guarantees are subject to the claims-paying ability of the issuing insurance company.
3 A distribution from a Roth IRA is tax-free and penalty-free, provided that the five-year aging requirement has been satisfied and at least one of the following conditions is met: you reach age 591/2, suffer a disability, make a qualified first-time home purchase, or die.
Fidelity Brokerage Services LLC, member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
© 2019 FMR LLC. All rights reserved.