3 basic rules for managing your finances during retirement

June 22nd, 2011 John Evans

As a new retiree you’ve probably asked yourself “how shall I go about spending my retirement savings?” more than a few times. Don’t worry, you’re not alone.

You’ve spent the vast majority of your life saving as much as you possibly can for your golden years. Now that you’ve retired, the focus has shifted from saving money, to how to manage and spend the money. After all these years, this change in perspective can be a big jolt to the system.

We’ve put together three basic rules for retirement spending that will help you regain your focus and continue to make smart money decisions in the years ahead.

Rule #1: Create a realistic budget and spending plan

Creating a budget and spending plan for your retirement is a crucial first step towards financial success. Not only will it help you create a roadmap for the years ahead, it will also prevent you from committing the classic money management mistake of overestimating how much you have and underestimating how much you need.

The amount you have saved will clearly matter a great deal in how you build your budget. But so will your portfolio withdrawal rate — the percentage of your assets that you take out each year for living expenses. You want it to be high enough to afford fun and generosity but low enough that you have little risk of running out of money. Many people recommend the 4-percent strategy.

Here’s how it works: Withdraw 4% of your retirement savings in the first year. In the subsequent years, take the dollar figure from the first year and increase it by the inflation rate. Let’s say, for example, that you retire with $900,000. That means you could spend $36,000 in your first year of retirement ($900,000 x4%=$36,000). Assuming inflation during the year is 2%, you could then spend $36,720 in your second year of retirement ($36,000 + ($36,000 x2%)=$36,720)

The advantage of this approach is that you continue to grow your spending each year by the prior year’s inflation rate, regardless of what is happening to your investments.

Keep in mind, however, that everyone’s situation is unique. In fact, in recent years, many financial planners have determined that as much as 5% or even 6% percent is still considered “prudent.” The bottom line is that it’s up to you to determine what will work best. Sit down with a financial advisor to evaluate your options and determine an appropriate strategy for you.

Rule #2: Rebalance your portfolio on a regular basis

Rebalancing your portfolio is a crucial component of your retirement investing strategy. After all, the ups and downs of the financial markets will naturally adjust your portfolio’s proportions as different investments earn different returns.

What is rebalancing? Rebalancing is when you re-assess your investment portfolio and adjust your holdings such that you return to the percentage allocations you planned for when you

started the year. For example, if you started the year 80% stocks, 20% bonds and, through the course of gains and losses, you find yourself at 75% stocks and 25% bonds at the end of the year – you should rebalance it by selling off some of your bonds and moving it into stocks.

Doing this on a regular basis will help you maintain the allocations you had planned for and prevent you from veering off course from your strategy.

Rule #3: Remember – planning is an ongoing process

If the past few years have taught us anything it’s that financial markets are unpredictable. Future returns and inflation rates will vary and are anything but predictable. That’s why it’s important to stay flexible in your planning.

Look at planning as an ongoing process, as opposed to a one-time event. Expect to sit down at least once a year with a financial planner to make necessary adjustments to your current withdrawals and to determine a strategy for the years ahead.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate to you, consult your financial advisor prior to investing.

Securities offered through LPL Financial, Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

MidWestOne Bank and MidWestOne Investment Services are not registered broker/dealers and are not affiliated with LPL Financial.

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John Evans

About the author

John Evans is Investment Services Manager at MidWestOne Bank. He specializes in investments and retirement planning.

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