Spending that Nest Egg Wisely in Retirement

It’s difficult enough to plan and save right for retirement, given today’s topsy-turvy financial markets. What’s more, it can be a bit of a puzzle in those Golden Years to come up with the right withdrawal plan. The idea, of course, is to find that balance between spending down a portfolio while maintaining the right asset allocation to capture future growth possibilities.

One method that investors often use for spending during retirement is the ‘bucket strategy.’ According to an overview in the American Association of Individual Investors (AAII), more than thirty-percent of financial professionals recommend this approach to their clients:

The ‘bucket strategy’ segments retirement assets by certain categories; generally based on the risk level of the assets and the needs or expenses these assets are expected to cover over the period of time in retirement when the assets are expected to generate income. With the help of a qualified financial advisor, the bucket approach can help bring that all-important sense of control to the investor’s concerns about having enough income during their lifetime.

A financial advisor can also help an investor assess their individual risk tolerance in handling the financial strains put on the portfolio during the market’s dips. Using a questionnaire that asks basic questions about risk preference, an advisor can determine an appropriate allocation given a client’s time horizon and other sources of income, such as pensions and social security.

Ultimately, no one strategy fits all investors. Consulting with a qualified advisor can help you develop a withdrawal plan that will keep you on your best path forward.

The Importance of Maxing out Contributions to Employer Sponsored Plan Accounts

According to the Employee Benefit Research Institute, only about 4 in 10 workers contributed to an employment-based retirement plan in 2011.  This means that the other 60 percent of workers could be missing out on one of the most valuable retirement tools available to them.

There are some significant benefits associated with contributing to such a plan.  And these benefits could easily add tens of thousands of dollars or more in value to such an account over the course of a career.

Matching contributions

The first major benefit that probably comes to mind when discussing employer sponsored retirement plans is a matching employer contribution.  While not every plan comes with such a benefit, many do.  And such employer matches could range from 5 percent all the way up to a dollar-per-dollar addition to your retirement funds.  According to 401kHelpCenter.com, in 2012, “Companies contributed an average of 4.1% of participants’ pay to the plan.”

These contributions can act not only as great incentives to put more money into such plans, but they could also be viewed as protection against potential losses.  When an employer is putting up their own money, it can act as a sort of buffer.  Say your employer provides a match of 50 cents for every dollar you contribute to your plan.  Well, even if the stock market has a tremendous fall as it did during the financial crisis and loses 20 or 30 percent of its value, that matching contribution by your employer could make up for a substantial portion of those losses without touching a dime of your own contributions.

Lower tax liability

Contributing to an employer sponsored plan account can also help reduce your tax liability.  Contributions to such plans can be pre-tax, which can reduce the amount of taxable income you must report annually.  By putting several thousand dollars into an employer-sponsored plan – and adding to that an employer match – you could find yourself saving hundreds of dollars or more that might otherwise have been spent paying taxes in the short term.

Dividend reinvestment results

Selecting investments with healthy dividends can help build account value over time and supplement your employer’s – as well as your own – contributions.  Harnessing the power of dividends and reinvesting them into your account over time can also better dollar cost average your contributions.  Buying shares at low, middle, and high prices over time can help balance your overall share price average, helping to smooth the hills and valleys of stock market swings.

Generation X and Last-Minute Retirement Planning

Procrastination is rarely a good thing. When it comes to retirement planning, Generation X can’t afford to wait until the last minute. According to a recent Pew Charitable Trusts study and a PwC survey cited by Bankrate.com, Generation X is struggling to save for retirement. Moreover, experts say Generation X was hit hardest by the housing crash, which means many of them won’t be able to rely on the equity in their homes when they retire. It’s not too late for people in their late 30s and 40s to improve their retirement outlook and start planning for a secure future.

Make saving enjoyable

One key is to make saving a joy instead of a painful experience. Most people avoid pain and gravitate toward pleasure. According to Bankrate.com, encouraging Gen-X’ers to put aside 10 or 20 percent of their income backfires by giving them a feeling of deprivation. Instead, experts suggest putting half of future raises into savings. View your balance on a yearly basis so you can experience the pleasure of seeing how your money has grown.

Automate your finances

Another retirement planning strategy is to have money automatically deducted from your paycheck and funneled into a 401(k). If a company match is involved, save up to that level. Otherwise, have money deducted from your paycheck and moved into a Roth IRA. A married individual who doesn’t have earned income can open a Spousal Roth IRA as long as the spouse has earned income. Automating your retirement savings makes it easy.

Avoid lifestyle inflation

Another key aspect of retirement planning is to know what kind of lifestyle you want to have in retirement. Then you need to have enough of an income stream when you are older to support your desired lifestyle. By avoiding “lifestyle creep” or lifestyle inflation, you can make up for lost time. In other words, choose a simpler and less extravagant lifestyle. Buy a home that you can easily afford to pay off in 15 years instead of 30 years. With no mortgage to pay in retirement, you can more easily live on dividends generated from investments.

Although it’s not necessary to know where you want to live in retirement or how you want to spend your days, it is good to set some financial goals. If you plan to financially support children or grandchildren in retirement, you’ll need to have more money invested. A financial adviser can help you set priorities for retirement and make sure you are in a balanced position.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.