MONEY retirement income

Retirement Withdrawal Strategies That Can Pay Off Big

To figure out the right pace for your retirement withdrawals—and to avoid ending up in higher tax brackets—start planning before you stop working.

Having your own tax-deferred retirement account is a bit like having one of those self-titrating morphine buttons that hospitals use: Press it whenever you need quick relief.

But once you’re retired and able to tap your 401(k) or individual retirement account (IRA), it’s not easy to titrate your own doses of cash. Withdraw too much, and you use up your nest egg too quickly; too little, and you might unnecessarily crimp your retirement lifestyle.

Overlaying the how-much-is-enough question are several finer points of tax planning. Because you can decide how much money to pull out of a 401(k) or individual retirement account, and because those withdrawals are added to your taxable income, there are strategies that can help or hurt your bottom line.

That’s especially true for early retirees trying to decide when to start Social Security, how to pay for health care and more. Here are some money-saving withdrawal tips.

CURB TAXABLE INCOME

If you are buying your own health insurance via the Obamacare exchanges, keep your taxable income low to qualify for big subsidies, advises Neil Krishnaswamy, financial planner with Exencial Wealth Advisors in Plano, Texas.

“It’s a pretty substantial savings on premiums,” said Krishnaswamy.

Here’s an example using national averages from the calculator on the Kaiser Family Foundation web page. Two 62-year-old spouses with annual taxable income of $62,000 would receive a subsidy of $8,677 a year, against a national average premium of $14,567. If they took another $1,000 out of their tax-deferred account and raised their taxable income to $63,000, they would be disqualified from receiving a subsidy.

Not every case may be that dramatic, but it’s worth checking the income limits and available subsidies in your own state.

DELAY BENEFITS

If you retired early, consider taking out extra money to live on and delaying Social Security benefits until you are older. Withdrawing money from retirement savings hurts. You not only lose the savings, you lose future earnings on those savings. And in most cases, you have to pay income taxes on withdrawals from those tax-deferred accounts.

But Social Security benefits go up roughly 8% a year for every year you don’t claim them. And even after you claim them, they rise with the cost of living and are guaranteed for life. When you draw down your own savings to protect a bigger Social Security payment, tell yourself you are buying the cheapest and best annuity you can get.

PLAN IN ADVANCE

Plan ahead for mandatory withdrawals. In the year you turn 70 1/2, you have to begin drawing down your tax-deferred IRAs and 401(k) accounts and paying income taxes on those withdrawals. Unless you expect to be in the lowest tax bracket at the time, it makes sense to start withdrawing at least enough every year before then to “use up” the lower tax brackets.

For single people in 2014, you’re in a 10% or 15% marginal tax bracket until you make more than $36,000 a year. For married people filing jointly, that 15% bracket goes up to $73,800. It’s a lot better to pull out that money in your 60s and use up other savings to live on, than it is to save it all until you are 70 and then withdraw large chunks at higher interest rates.

GET A GOOD ACCOUNTANT

You may want to use early years of retirement to take the tax hit required to move money from a traditional IRA into a Roth IRA that will free you of future taxes on that money and its earnings.

You may pull a lot of money out of your account in one year and spend it over two or three years, to keep yourself qualified for subsidies in most years.

You may titrate your withdrawals to keep your Medicare premiums (also income linked) as low as possible.

The best way to optimize it all? Get an adviser or accountant who is comfortable with a spreadsheet and can pull all of these different considerations together.

Related:

When do I have to take money out of my 401(k)?

How will my IRA withdrawals be taxed in retirement?

Are my Social Security payouts taxed?

MONEY retirement age

How to Know When It’s Time to Retire

Birthday candles
Fuse—Getty Images

I’ve long argued that one’s quality of life should be a principal factor in deciding when to retire. At the same time, however, financial considerations can’t be ignored. With this in mind, here are three rules of thumb to help you decide whether you’ve reached the perfect age to retire.

1. Have you saved enough money?

The “multiply by-25″ rule is a popular tool that retirement experts encourage people to use to estimate whether they’ve saved enough money to stop working and, at least hopefully, begin a life of leisure.

Here’s how it works: Multiply your desired annual income in retirement, less projected annual Social Security benefits, by 25. If your savings are greater than that, then you’re in good shape. If not, then you may not be financially ready to retire.

For example, let’s say that Bob and Mary Jane estimate they’ll spend $40,000 a year in retirement. Using the rule of 25, they’ll need savings of $1 million.

A slightly different iteration of this is the “multiply by-300″ rule. This is the same thing, but it focuses on months instead of years — that is, take your average monthly expenditures, minus your monthly Social Security check, and multiply that by 300.

If your savings are greater than that, then you’re all set. If not, then you might want to continue working for a few more years.

2. Will you have enough income?

This question is related to the first one, but it attacks the issue from a slightly different angle. As such, it also has its own rule of thumb: the 4% rule.

This rule holds that you can safely withdraw 4% from your portfolio every year and still be confident it will last through retirement. Thus, to determine if you’ll have enough income in retirement, multiply your portfolio by 4% and then add in your projected annual Social Security benefits — to learn one potential problem with this rule, click here.

If the sum of these two numbers is enough to cover your expenses, then you’re ready to retire. If not, then it may behoove you to put off retirement for a while longer, as doing so should allow your portfolio to continue growing. It will also give your Social Security benefits time to accrue delayed retirement credits.

3. Is your portfolio properly allocated?

Finally, determining if you’re ready to retire isn’t just about how much you’ve saved, it’s also about how your savings are allocated into various asset classes — namely, stocks and bonds.

To be ready for retirement, you want to make sure that your assets are invested in as safe of a way as possible. To do so, it’s smart to steer your portfolio increasingly toward fixed-income investments like bonds as you approach your desired retirement age.

Experts use the following rule to determine the proper allocation: “The percentage of your portfolio invested in bonds should equal your age.” Thus, if you’re 60 years old, then 60% of your portfolio should be in bonds and 40% in stocks. If you’re 55, then the split is 55% to 45%, respectively.

While this may seem like it has less to do with the timing of retirement than the former two rules, the reality is that it’s of equal importance. As my colleague Morgan Housel has discussed in the past, one of investors’ biggest mistakes is to underestimate the volatility in the stock market. According to Morgan’s research, stocks fall by an average of 10% once every 11 months.

Suffice it to say, a drop of this magnitude would have a material impact on both of the preceding rules, as a 10% decline in your stock holdings would equate to a much smaller income under the 4% rule and, as a corollary, it would call for a delayed retirement date under the multiply by-25 rule.

And the impact of this would be even more exaggerated if the lions’ share of your assets were still in stocks as opposed to bonds. Consequently, the culmination of your strategy to bring your portfolio into accord with this final rule is a key step in determining the perfect age at which you’re ready to pull the trigger and actually retire.

MONEY mortgages

The Surprising Threat to Your Financial Security in Retirement

House made out of dollar bills with ominous shadow
iStock

More Americans could face a housing-related financial hardship in retirement, according to a new Harvard study.

America’s population is going to experience a dramatic shift during the next 15 years. More than 130 million Americans will be aged 50 or over, and the entire baby boomer generation will be in retirement age — making 20% of the country’s population older than 65. If recent trends continue, there will be a larger number of retirees renting and paying mortgages than ever before.

A recent study published by Harvard’s Joint Center for Housing Studies describes how this could lead an unprecedented number of America’s aging population to face a lower quality of life or even financial hardship. However, the same study also points out that there is time for many of those who could be affected to do something about it.

Housing debt and rent costs pose a big threat

According to the data Harvard researchers put together, homeowners tend to be in a much better financial position than renters. The majority of homeowners over 50 have retirement savings with a median value of $93,000, plus $10,000 in savings. More than three-quarters of renters, on the other hand, have no retirement and only $1,000 in savings on average.

While renters — who don’t have the benefit of home equity wealth — face the biggest challenges, a growing percentage of those 50 and older are carrying mortgage debt. Income levels tend to peak for most in their late 40s before declining in the 50s, and then comes retirement. The result? Housing costs consume a growing percentage of income as those over 50 get older and enter retirement.

How bad is it? Check out this table from the Harvard study:

Source: "Housing America's Older Adults," Harvard University.
Source: “Housing America’s Older Adults,” Harvard University.

More than 40% of those over 65 with a mortgage or rent payment are considered moderately or severely burdened, meaning that at least 30% of their income goes toward housing costs. The percentage drops below 15% when they own their home. If you pay rent or carry a mortgage into retirement, there’s a big chance it will take up a significant amount of your income. In 1992, it was estimated that just more than 60% of those between 50 and 64 had a mortgage, but by 2010, the number had jumped past 70%.

Even more concerning? The rate of those over 65 still paying a mortgage has almost doubled since 1992 to nearly 40%.

The impact of housing costs on retirees

The impact is felt most by those with the lowest incomes, and there is a clear relationship between high housing costs and hardship. Those who are 65 and older and are both in the lowest income quartile and moderately or severely burdened by housing costs spend up to 30% less on food than people in the same income bracket who do not have a housing-cost burden. Those who face a housing-cost burden also spend markedly less on healthcare, including preventative care.

In many cases, these burdens can become too much to bear, often leading retirees to live with a family member — if the option is available. While this is more common in some cultures, this isn’t an appealing option to most Americans, who generally view retirement as an opportunity to be independent. More than 70% of respondents in a recent AARP survey said they want to remain in their current residence as long as they can. Unfortunately, those who carry mortgage debt into retirement are more likely to have financial difficulties and limited choices, and they’re also more likely to have less money in retirement savings.

What to do?

Considering the data and the trends the Harvard study uncovered, more and more Americans could face a housing-related financial hardship in retirement. If you want to avoid that predicament, there are things you can do at any age.

  • Refinance or no? Refinancing typically only makes sense if it will reduce the total amount you pay for your home. Saving $200 per month doesn’t do you any good if you end up paying $3,000 more over the term of the loan. However, if a lower interest rate means you’ll spend less money than you do on your current loan, refinance.
  • Reverse mortgages. If you’re in retirement and have equity in your home, a reverse mortgage might make sense. There are a few different types based on whether you need financial support via monthly income, cash to pay for repairs or taxes on your home, or other needs. However, understand how a reverse mortgage works and what you are giving up before you choose this route. There are housing counseling agencies that can help you figure out the best options for your situation, and for some reverse mortgage programs you are required to meet with a counselor first. Check out the Federal Trade Commission’s website for more information.

All that said, avoiding financial hardship in retirement takes more than managing your mortgage. A big hedge is entering retirement with as much wealth as possible. Here are some ways to do that:

  • Max out your employee match. If your employer offers a match to retirement account contributions, make sure you’re getting all of it. Even if you’re only a few years from retiring, this is free money; don’t leave it on the table. Furthermore, your 401(k) contributions reduce your taxable income, meaning it will actually hit your paycheck by a smaller amount than your contribution.
  • Catching up. The IRS allows those over age 50 to contribute an extra $1,000 per year to personal IRAs, putting their total contribution limit at $6,500. And contributions to traditional IRAs can reduce your taxable income, just like 401(k) contributions. There are some limitations, so check with your tax pro to see how it affects your situation. Also, while contributions to a Roth IRA aren’t tax-deductible, distributions in retirement are tax-free.
  • Financial assistance and property tax breaks. Whether you’re a homeowner or a renter, there are assistance programs that can help bridge the housing-cost gap. Both state and federal government programs exist, but nobody is going to knock on your door and tell you about them. A good place to start is to contact your local housing authority. The available assistance can also include property tax credits, exemptions, and deferrals. Check with your local tax commissioner to find out what is available in your area.

Stop putting it off

If you’re already in this situation, or know someone who is, then you know the emotional and financial strain it causes. If you’re afraid you might be on the path to be in those straits, then it’s up to you to take steps to change course.

It doesn’t matter whether you’re a few months from 65 or a few months into your first job: Doing nothing gets you nowhere and wastes invaluable time that you can’t get back.

MONEY retirement income

To Invest for Retirement Safely, Know When to Get Out of Stocks

201209_GAM_BERNSTEIN
Bill Bernstein Joe Pugliese

Investment adviser William Bernstein says there's no point in taking unnecessary risks. When you near retirement, shift your portfolio to safe assets.

A former neurologist turned investment adviser turned writer, William Bernstein has won respect for his ability to distill complex topics into accessible ideas. After launching a journal at his website, EfficientFrontier.com, he began writing numerous books, including “The Four Pillars of Investing” and “If You Can: How Millennials Can Get Rich Slowly.” (“If You Can,” normally $0.99 on Kindle, is free to MONEY.com readers on June 16.) His latest, “Rational Expectations: Asset Allocation for Investing Adults,” is written for advanced investors. But Bernstein, who manages money from his office in Portland, Oregon, is happy to break down the basics.

Q. Retirement investors have traditionally aimed to build the biggest nest egg possible by age 65. You recommend a different approach: figuring out how much you’ll need to spend in retirement, then choosing investments that will deliver that income. Why is this strategy a better one than the famous rule of withdrawing 4% of your portfolio?

There’s really nothing wrong with the 4% rule. But given the lower expected portfolio returns ahead, starting out with a 3.5% withdrawal, or even 3.0%, might be more appropriate.

It also makes a big difference whether you start out withdrawing 4% of your nest egg and increasing that amount by inflation annually, or withdrawing 4% of whatever you’ve got in your portfolio each year. The 4%-of-current-portfolio-value strategy may mean lower income in some years. But it is a lot safer than automatically increasing the initial withdrawal amount with inflation.

I also think that it makes sense to divide your portfolio into two separate buckets. The first one should be designed to safely meet your living expenses, above and beyond your Social Security and pension checks. In the second portfolio you can take investing risk in stocks. This approach is certainly a more psychologically sound way of doing things. Investing is first and foremost a game of psychology and discipline. If you lose that game, you’re toast.

Q. What are the best investments for a safe portfolio?

There are two ways to do it: a TIPS (Treasury Inflation-Protected Securities) bond ladder or by buying an inflation-adjusted immediate annuity. Neither is perfect. You might outlive your TIPS ladder, and/or your insurer could go bankrupt. But they are among the most reliable sources of income right now.

One other income source to consider: Social Security. Unless both you and your spouse have a low life expectancy, the best version of an inflation-adjusted annuity out there is bought by spending down your nest egg before age 70 so you can defer Social Security until then. That way, you, or your spouse, will receive the maximum benefit.

Q. Fixed-income returns are hard to live on these days.

Yes, the yields on both TIPS and annuities are low. The good news is that those yields are the result of central bank policy, and that policy has caused the value of a balanced portfolio of stocks and bonds to grow larger than it would have in a normal economic cycle—so you have more money to buy those annuities and TIPS. That said, there’s nothing wrong with delaying those purchases for now and sticking with short-term bonds or intermediate bonds.

Q. How much do people need to save to ensure success?

Your target should be to save 25 years of residual living expenses, which is the amount that isn’t covered by Social Security and a pension, if you get one. Say you need $70,000 to live on, and your Social Security and pension amount to $30,000. You’ll have to come up with $40,000 to pay your remaining expenses. To produce that income, you’ll need a safe portfolio of $1 million, assuming a 4% withdrawal rate.

Q. Given today’s high market valuations, should older investors move money out of stocks now for safety? How about Millennial or Gen X investors?

Younger investors should hold the largest stock allocations, since they have time to recover from market downturns—and a bear market would give them the opportunity to buy at bargain prices. Millennials should try to save 15% of their income, as I recommend in my book, “If You Can.”

But if you’re in or near retirement, it all depends on how close you are to having the right-sized safe portfolio and how much stock you hold. If you don’t have enough in safe assets, then your stock allocation should be well below 50% of your portfolio. If you have more than that in stocks, bad market returns at the start of your retirement, combined with withdrawals, could wipe you out within a decade. If you have enough saved in safe assets, then everything else can be invested in stocks.

If you’re somewhere in between, it’s tricky. You need to make the transition between the aggressive portfolio of your early years and the conservative portfolio of your later years, when stocks are potentially toxic. You should start lightening up on stocks and building up your safe assets five to 10 years before retirement. And if you haven’t saved enough, think about working another couple of years—if you can.

MONEY retirement income

Retirement Income: Five Steps to a Sound Plan

You want to be sure that your income will last throughout retirement. A financial planner offers key guidelines.

The moment you announce your retirement is a big deal. Few voluntary life transitions—besides marriage or having children—can match it. So before you tell your boss that you’re calling it a career, it’s important to make sure your retirement income plan is really ready.

My advice is based on the growing body of research about generating a sustainable retirement income. Some of this is my own published research, including the first-ever study to show how higher safe withdrawal amounts are possible—if you can be a bit flexible in your spending following years with especially poor investment returns.

And I’ve also learned a lot from watching dozens of our clients implement this advice to achieve a comfortable retirement. Based on this research and experience, I’ve come up with five guidelines to help you get ready to tap your nest egg:

1) Set a sustainable income target. To meet your core expenses, including health care and taxes, you’ll need a regular stream of payments that will increase with inflation. Start by detailing your core retirement spending needs, then determine the portfolio withdrawal rate it will take for your assets to fund them. Make sure your plan is based on solid research and your level of spending flexibility.

2) Get the most out of Social Security. If you’re married and one of you is in good health, try to wait till age 70, when you can file for the largest possible benefit. Otherwise, you may be leaving tens of thousands on Uncle Sam’s table. Remember that the bigger check is what the surviving spouse keeps regardless of who dies first. To make this strategy work, you may have to tap other income sources to fund your spending while you wait.

3) Choose the right asset allocation. Holding too little in stocks can be even more costly than holding too much—that’s because equities are likely the only assets able to generate the long-term returns needed to sustain your retirement income. Make sure you’re well-read on the recent research that’s been published on navigating the inevitable market ups and downs. Yes, stocks are risky, but even the recent market crash didn’t sink most plans unless you panicked at exactly the wrong time.

4) Be smart about taxes. Your current tax bracket matters a lot less than your bracket when you or your heirs take IRA distributions. A good strategy can be to spread out these withdrawals so their taxation can occur at lower federal tax brackets. Delaying can cause higher taxable amounts that may push your into much higher brackets. In 2014 singles are taxed at just 10% on their first $9,075 of taxable income after deductions; for married couples filing jointly, it’s $18,150. Rates then rise to 15% until $36,900 for singles and $73,800 for married couples. The next bracket jumps to 25%. In years when your income is low, take full advantage of the opportunity by doing Roth conversions in modest amounts that won’t trigger a move up in brackets.

5) Leave room for splurges. You don’t want to jeopardize your financial security, but you want to enjoy your retirement too. Set aside 5%-10% of your nest egg as a discretionary fund for that trip to Paris or seasons tickets to your local team’s games. That way, you can have your fun and still avoid poking dangerous holes in your retirement income plan with each extra “just-this-time” withdrawal.

Once you launch your retirement, you’ll want to keep tracking your spending and keep your plan on course. Consider setting up a withdrawal policy statement as a guide for the adjustments you may need to make along the way. Having these policies in place can help keep your emotions from getting the best of you during choppy markets or life’s upheavals.

If you found yourself confidently checking off these items as you read, chances are your retirement income plan is well on its way to being ship-shape. Bon voyage!

_____________________________________

Jonathan Guyton, CFP is a nationally-recognized financial planner and a retirement columnist for the Journal of Financial Planning. A Principal at Cornerstone Wealth Advisors, a fee-only advisory firm in Minneapolis, he can be reached at jon@cornerstonewealthadvisors.com.

MONEY retirement planning

Forget the 4% Withdrawal Rule

Wade Pfau, 36, professor of retirement income, American College, argues for a 3% drawdown. © M. Cody Pickens Photography 2013

Is it time to rethink one of the best-known retirement guidelines?

Choppy markets and rising health care costs needn’t stop you from having the money for the retirement you want. We asked five of the brightest minds in retirement planning for their big ideas to help you cruise through the obstacles.

Below, advice from our first expert, Wade Pfau, an economist who studies retirement strategies.

Big idea: The most important retirement rule has changed

Almost every asset you can invest your nest egg in now looks expensive by historical standards. What’s more, argues Wade Pfau, this has big implications for how you draw down from your savings the money you need to live on. If he’s right, it throws one of the best-known retirement guidelines right out the window.

When Pfau, a professor of retirement income at the American College for Financial Services, says both stocks and bonds are expensive, he isn’t predicting an imminent crash — the Ph.D. economist is a number cruncher, not a tea-leaf-reading market forecaster. But he argues that basic math suggests asset prices have less room to rise, meaning the long-run outlook is for lower returns ahead.

Based on studies of stock and bond returns since 1926, financial planners had settled on a benchmark for how much a retiree could spend each year without fear of running out of cash. It turned out that a person who invested half in stocks and half in bonds could spend 4% of his or her wealth in the first year, adjust that dollar amount for inflation in subsequent years, and still have money 30 years later. That worked in every historical 30-year period, as well as in most computer simulations based on the historical rate of return. Even drawing a hefty 5% worked more often than not.

But without strong stock and bond returns to help refresh your nest egg as you spend from it, those old numbers can’t be relied on, argues Pfau.

“The probability that a 4% withdrawal rate will work in the future is much lower,” he says. His new safe starting point: a 3% drawdown. That means that if you’ve saved $1 million, you’re living on $30,000 a year before Social Security and any other sources of income you might have, not $40,000. Ouch.

You may be relieved to hear that Pfau’s idea is controversial. Michael Kitces, partner and director of research, Pinnacle Advisory, who has worked with Pfau on other research (more on that later), is one of many experts who think that the long historical record is still a decent guide to the future.

Yet William Bengen, the planner who in 1994 came up with the 4% rule, says some rethinking may be in order. “I think Pfau has done a great job of looking at the issues,” he says. “Market valuations are important, and he may be right.”

Here’s the story the numbers tell, according to Pfau: The 10-year Treasury recently yielded only 2.6%, compared with its 3.5% historical average. Current 10-year yields generally tell you the total return you can expect over the next decade. (Even if yields go up from here, today’s owners of bonds will suffer a loss of capital, since bond prices fall when yields rise.)

As for stocks, large companies listed on the S&P 500 index are priced at 25 times their averaged earnings over the past decade, according to measurements by Yale economist Robert Shiller. This gauge stands significantly above its average of 16. When Shiller’s price/earnings ratio is high, lower returns typically follow over the next 10 years.

As a result, Pfau estimates a fifty-fifty portfolio of stocks and bonds is likely to deliver a long-run annual average return after inflation of just 2.2%, less than half the historical rate. In a study with Michael Finke of Texas Tech and David Blanchett of Morningstar, Pfau found that with returns in that range, taking an inflation-adjusted $40,000 year out of a $1 million portfolio will drain your assets about 57% of the time, depending on the pattern of good and bad years. (More bad years early mean you will be more likely to run out.) Ratcheting back to $30,000 lowers to 24% the chance you will outlive your savings.

MAKE THE RIGHT MOVES

Save more if you can. That’s the easy takeaway from Pfau. Not that it’s easy, especially if you are close to retirement. To get $40,000 from a 3% withdrawal rate, for example, you’ll need $1.3 million instead of $1 million. Working longer can help, but it won’t fill all the gap. Other adjustments you can make, however, can take the sting out of Pfau’s message.

Use diversification to stretch your cash. Even given the same long-run returns, a less volatile portfolio will tend to last longer. A portfolio that’s not just large-cap stocks plus bonds, but is instead spread out to include small-company stocks, foreign stocks, and other asset classes, Pfau says, lets the safe drawdown from $1 million in savings rise to an initial $35,000 from $30,000.

Stay flexible. You can kick off your retirement with a larger starting income — closer to the 4% rule — as long as you are willing to correct your course when the market doesn’t go your way. For example, in a year when your portfolio falls by 10%, you could try to reset your spending at 4% of the new, lower amount. If that’s not enough to make ends meet, adjust what you can and then plan to skip cost-of-living increases for a few years.

Wade Pfau earned his Ph.D. in economics at Princeton and wrote his dissertation on Social Security privatization. From 2003 until 2013 he worked in Japan teaching officials from developing nations. But he made a mark in the U.S. by publishing attention-getting studies of retirement strategies. He now teaches at a college that certifies planners and has started a doctoral program in retirement planning.

Click below to see more big ideas from some of the retirement-planning world’s sharpest minds:

You’ll spend less as you age: David Blanchett, director of research, Morningstar Investment Management

Plan to pay for future health costs: Carolyn McClanahan, president, Life Planning Partners

Plan for the critical first decade: Michael Kitces, partner and director of research, Pinnacle Advisory

Social Security is the best deal: Alicia Munnell, professor of management, Boston College

MONEY retirement planning

Do Your Retirement Dreams Match Your Partner’s?

Your dream is nonstop travel; your spouse wants to stay put. You’d like to quit now; she’s not ready. Learn about eight retirement issues that can cause a rift, and how to get on the same page.

  • Where to live

    Thirty-four percent of retiring couples disagree about where or whether to move.

    According to a 2013 Hearts & Wallets survey, deciding where to settle down in retirement is one of the biggest areas of disconnect between couples. “Typically the question of where to live is wrapped up in bigger issues like the partners’ connection to the community and obligations to other family members,” says Catherine Frank, executive director of the Osher Lifelong Learning Institute in Asheville, N.C.

    Can’t agree on a location? Start with a compromise: a season or two renting in the area that one of you dreams of. If the rental works out, you might buy a second home, assuming you can truly afford it.

    Expect to pay about 1% of the home’s cost annually for maintenance, on top of insurance, utilities, and any homeowners association fees. And don’t forget to factor in the cost of transportation to and from the new property.

  • Part-time work

    Many employees suspect they’ll be happier if they don’t quit work cold-turkey, but few end up actually taking part-time jobs.

    In fact, only one-quarter of people ever work for pay in retirement, according to the Employee Benefit Research Institute. The benefit of downshifting to a part-time job you enjoy, however, is far greater than the extra spending money.

    Studying several hundred college professors who cut down their hours upon retiring but didn’t completely quit, researchers found that the greater the involvement in part-time work, the more likely the professors were satisfied with both their retirement and life in general.

    While you may like staying in the game, be aware that you’ll increase strife on the home front if you use your workload as an excuse to avoid taking out the garbage and picking up food at the grocery store. A separate study of retired physicians — 95% of them male — found that the increased time that the doctors spent on household chores in retirement was significantly associated with wives’ life satisfaction. Sometimes love is just about making dinner — and doing the dishes.

  • Staying healthy

    Health dips for both men and women in the first years of retirement, according to a study by University of Missouri sociology professor Angela Curl. The likely culprit: a decline in social connections and physical activity.

    You don’t need drastic measures to stay healthy. A daily 45-minute walk can improve your blood pressure and blood sugar levels, according to recent studies. Researchers have also found that you’ll be more likely to stick with the program if you’re paired with a buddy — say, the one you’re married to.

  • Family finances

    Spouses often end up splitting household responsibilities, but that can create big problems with money in retirement years. Only 43% of husbands, for example, are confident their wives can manage the family finances.

    Women share this lack of confidence, according to a 2013 Fidelity survey — a big problem, since they will likely outlive their husbands.

    “Men have tried to shelter women from those details,” says Boca Raton, Fla., planner Mari Adam. “But that ends up as a huge disservice.” Along with mundane details like account numbers and passwords, both of you should know all about your investments, savings, and insurance policies.

  • Syncing retirement

    How happy you are in retirement might depend on whether you and your partner stop working at the same time.

    University of Minnesota professor Phyllis Moen found that newly retired men were least satisfied when their wives kept working; wives with newly retired husbands also reported lower levels of marital satisfaction than those in two-income or two-retiree marriages.

    Fewer couples nowadays — especially those with multiyear age gaps — are willing or able to sync retirement. Many boomer women who temporarily exited the workforce when their kids were young are nearing their career peak, says Miriam Goodman, author of Too Much Togetherness: Surviving Retirement as a Couple — just as their husbands are ready to taper off.

    To get the timing right in your household, analyze the costs and benefits for each of you of staying in the workforce. Is one of you just shy of a pension? How big could your Social Security checks grow? Weigh those benefits against each spouse’s desire to retire.

    If you decide one of you should go first, start planning how the retired spouse will be occupied and what you’ll be doing together. “When one partner feels abandoned, that’s when resentment builds,” says Goodman. And take heart: Moen found that marital satisfaction rebounded a few years after both partners retired.

MONEY 401(k)s

Get (Nearly) Free 401(k) Advice at Work

As you approach retirement, take a second look at the help your 401(k) plan is offering.

It’s the best-kept secret in 401(k)s: free or low-cost professional investment advice.

Three-quarters of 401(k) plans offer some form of help, from target-date funds and online tools to managed accounts. And taking advantage of this guidance can pay off, especially when it comes to reducing risk.

For many workers, professional advice starts and stops with target-date funds, which simply shift your asset mix to be more conservative as you age. When you’re nearing retirement, though, you typically need more help than a single investment can provide.

With most 401(k)s, you’ll find retirement calculators and tools; 39% also offer managed accounts.

For a cost of 0.2% to 0.7% of assets a year (on top of investment fees), you’ll get a customized mix of your plan’s mutual funds geared to your goals and risk tolerance, either run by the plan’s investment provider or an outside adviser, such as Financial Engines, Guided Choice, or Merrill Lynch.

Total assets in managed accounts, which tend to be held by pre-retirees, grew to $108 billion in 2012, up from $71 billion in 2010, according to Cerulli Associates.

In 2012 workers using Guided Choice plan advice earned 2.1 percentage points more, with 50% less risk, than their colleagues who didn’t. Over the past five years, managed account returns lagged slightly, Vanguard data show. But, crucially, investors working with pros tended to be better diversified and saw steadier returns.

Still, paying for advice isn’t right for everyone. Here are the three key times to do it:

When you’re unsure where you stand. You can use your plan’s retirement calculator to check your progress. But you may find it more helpful to have a pro run projections, especially if you’re uncertain about what investment return, saving, and spending assumptions to make, or you need to take outside assets into account.

When it’s time to trim risk. As you approach retirement, you need to shift to a safer allocation that will produce steady income. “The goal is to minimize the risk of a market crash just as you retire by creating an income cushion,” says Financial Engines CEO Jeff Maggioncalda.

A target-date fund would give you that more conservative tilt. But with complicated finances that make diversifying difficult — such as company stock, outside IRAs, or a spouse’s plan — you’re a candidate for a managed account. Make sure the fee is reasonable — no more than 0.5% of assets.

When you’re ready to retire. Both Financial Engines and Morningstar recently launched services that adjust your mix and calculate your withdrawals in retirement.

If your 401(k) doesn’t offer this program (only 28% do) or you aren’t up to devising your own income strategy, hire an outside planner who charges by the hour or a percent of assets. You’ll also get help with taxes, insurance, and Social Security. After all, your 401(k) is only one piece of the retirement puzzle.

MONEY withdrawal strategy

How Much Can You Withdraw From Your Retirement Savings?

Recalculate each year how much you can safely take out of your retirement savings. illustration: paul blow

From the years you spend tending to your portfolio to the time when you finally get to enjoy sweet success, you face questions about what to do. Ace these and prosper.

This story is part of Money magazine’s story 5 retirement choices: Get ‘em right, live well which covers big decisions that can dramatically boost your income in retirement.

Once you determine how much of a saver you are, you have several more decisions to make — including how to safely draw down your retirement savings.

Decision No. 5: How much can you draw from your savings?

The decision: After you stop working, you’ll have to figure out how much you can safely take out of your retirement portfolio each year — a daunting task.

Why it’s important: The conventional strategy is to start with a modest withdrawal rate — typically 4% or so — and then adjust for inflation annually.

Doing that usually means you’ll have an 80% or so chance that your savings will last at least 30 years.

Related: 3 tips for tapping your nest egg

When it comes to tapping your retirement accounts, however, you’re walking a fine line: You don’t want to run out of money — even a 4% withdrawal rate can deplete your savings quickly if the market dives right after you retire.

You also don’t want to be so frugal that you end up with a huge balance you could have enjoyed earlier. Follow the 4% regimen strictly and see your investments perform well, and you could wind up late in life with as much money, if not more, than you started with, which means you would have scrimped more than was necessary.

Best move: Recalculate your withdrawals every year to take into account your current account balances and the fact that your nest egg doesn’t have to support you for as long.

Morningstar estimates that annually adjusting the amount you pull from savings rather than simply upping your initial draw by the inflation rate can increase the amount of spendable income you pull from your portfolio by nearly 9%.

“It’s the single most effective way of boosting your income during retirement,” says Morning-star’s Blanchett.

As a practical matter, though, recalculating your withdrawal rate this way can be quite complicated. So unless you’re working with a financial planner capable of doing the number crunching for you, your best bet is to go to an online tool like T. Rowe Price’s Retirement Income Calculator every year, plug in your most up-to-date information, and adjust your withdrawals up or down as necessary.

With a decision this big, you don’t want to blindly stick to the 4% rule or any other rigid system for spending down the hard-earned rewards of your years of careful planning, saving, and investing.

 

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