How you’ll spend when retired as important as how you save for it

The Baltimore Sun

You’ve saved and invested decades for retirement, then that day arrives. Now, you’re forced to switch gears and figure how best to spend your nest egg so you won’t outlive your savings.

It’s not an easy adjustment. "It’s a mind-set change," said Judith Heltzel, a financial planner with Capital Financial Planners in Salem, Ore.

"Saving for retirement is a concept people can relate to. It’s putting away nuts for the winter like a squirrel. But then comes eating them. How long is the winter going to last?" Heltzel said. "There is no next crop. This is all you got."

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Often, retirees are reluctant to tap retirement assets, said Jane Larsson, vice president of Fidelity Investments’ Retiree Services in Boston. "The key to being comfortable is to have a plan in place and a sense of what you can comfortably withdraw without fearing that you’ll outlive your assets," she said.

There are no uniform rules.

Of course, a major factor is retirement assets. How much have you saved? Do you have a traditional pension, a 401(k) or both?

Will you retire before 59 1/2, the age at which you can draw money penalty-free from tax-deferred accounts, or later? Will you work part-time? Will you take Social Security benefits early?

Then, of course, there are the issues of lifestyle, health, life expectancy, tax bracket, long-term care and whether you want to leave money to heirs.

Ideally, workers should begin thinking about these issues five years before retirement, said Joseph Healy, retirement specialist at T. Rowe Price Associates in Baltimore.

Here are some of the basic questions you’ll face as a new or soon-to-be retiree over the age of 59 1/2:

What to do with your employer’s retirement account? The plan often dictates options.

For instance, some companies allow workers to take traditional pensions either in a lump sum distribution or in an annuity that pays a monthly check during the retiree’s life. Others require an annuity.

Or, retirees might be able to keep their 401(k) with their former employer, roll the balance into an individual retirement account or ask for an annuity.

Most often, workers roll their retirement account into an IRA and pay ordinary income tax on the money when withdrawn, experts said. Generally, that’s a good move because you will have greater control of how the money is invested and easy access, said Twila Slesnick, co-author of "IRAs, 401(k)s &Other Retirement Plans: Taking Your Money Out."

When should you collect Social Security benefits? You can take reduced Social Security benefits early at 62 or wait a few years to collect full benefits. (If you wait until 70, you collect even more, although most people don’t wait that long.)

How much can you withdraw from your nest egg each year? "It’s the withdrawal amount that will be the primary driver of success or failure," Healy said.

Unfortunately, this isn’t easy to calculate and people tend to overestimate how much they can withdraw by 20 percent to 25 percent, he said.

The withdrawal rate is more than just adding up monthly expenses. The equation must also factor in that retirees will be selling investments in up and down markets and that the amount they pull out must rise to keep up with inflation, he said.

For instance, a retiree withdrawing $2,085 per month today will need $4,496 a month in 27 years to maintain the same lifestyle, Healy said.

Price’s Retirement Income Manager program, which incorporates millions of computer calculations, helps retirees with choosing the best withdrawal rates and developing an investment plan for a $500 fee. The company’s free online Retirement Income Calculator at www.troweprice.com/ric enables people to try out different withdrawal rates based on their assets.

A rule of thumb is withdrawing no more than 5 percent of assets annually for a 20-year retirement, 4.5 percent for 25 years or 4 percent for 30 years, Healy said.