) -- The focus for retirement plans has always been on accumulation, building your lifetime of invested assets into a pool large enough to sustain your lifestyle once you stop working.
But that's only half the battle. Increasingly, investors and their advisers are paying as much attention to the flip side of the equation: decumulation, or how and when those savings are optimally drawn down.
With roughly 77 million baby boomers entering retirement, much old, standard advice is being challenged by growing human longevity and retirees' risk of outliving their money.
In the not-so-distant past, that second phase of retirement planning was viewed rather simplistically -- a one-size-fits-all approach being to draw down roughly 4% of your savings during each year of retirement and supplement those withdrawals with Social Security stipends.
Now, with roughly 77 million baby boomers entering retirement, that advice is being challenged by longevity (and with it the risk of outliving your money) and the financial burdens of the "sandwich generation," in which retirees find themselves retiring with sizable debt and obligations to younger and older family members. Stock market volatility, a low interest rate environment, the uncertainty of future taxes, inflation and health care costs complicate the equation even more.
The following are three things to think about as you consider a plan of attack for finally spending the money you worked so hard to save:
Know the rules
There are some
courtesy of the IRS to abide by carefully. Failing to follow the letter of the law can cost you big time.
Just how much you will need to withdraw -- the Minimum Required Distribution -- is a confusing calculation based on an actuarial assumption of lifespan. The IRS has worksheets, and there are a variety of online calculators to help determine the amount. Your plan sponsor and administrator, as well as your financial adviser if you have one, can crunch the numbers as well.
If you have a 401(k) plan or IRA, the IRS requires that retirees take the first distribution by April 1 of the year after reaching age 70.5. In subsequent years, annual distributions are required by Dec. 31. Failing to do so will mean having to surrender a 50% excise tax on the amount you were supposed to have withdrawn.
Given the shaky state of employment in this economy, there is at least some slight good news if you are forced into an earlier-than-expected retirement: The IRS allows you to start taking 401(k) withdrawals upon turning 55 without facing the usual penalty of paying income tax and a 10% early penalty on what you withdraw.
Philanthropically inclined owners of traditional IRAs, once they are 70.5 or older, have the option of donating up to $100,000 from their account to a qualified charity and letting that donation satisfy the MRD. This allowance may not be renewed.
Roth IRAs, because taxes are paid upfront rather than at the time of distribution, have no RMD requirements.
There are nuances to what the IRS allows and doesn't allow regarding required distributions. Discussing your situation with your plan's administrator or an adviser could be crucial.
It could also be helpful to consult with a tax professional; withdrawal amounts could shift you into a higher tax bracket. Investment income could also trigger a tax on 50% of your Social Security benefit if it pushes you above annual income limits.
Develop a plan
A recent study by Fidelity Investments found that 62% of those soon to retire are stressed about making the transition from saving for retirement to living off those assets. Despite that, 75% of pre-retirees do not have a formal retirement income plan in place.
One reason folks may be putting off this important step is "loss aversion."
"Over the years, as money has gone into your retirement account, you've hopefully made a point of not touching it," says Eric Gold, a behavioral economist who studies the psychology of financial decision-making at the Fidelity Center for Applied Technology. "But when you retire, all of a sudden you need to write a check out of that account. You wouldn't think that this would be a problem, but it is. Spending your retirement savings isn't an easy thing to do. People fear the unknown and they fear loss. It can make them feel anxious."
A survey by Putnam Investments polled 3,290 working Americans between the ages of 18 and 65 to gauge their thoughts of retirement readiness. One in four workers said they fear running out of money in retirement.
While it goes without saying that having enough money saved is top priority, a plan of attack for managing these assets is crucial.
Recently, Fidelity launched its
, an online tool intended to help investors nearing or early in retirement assess their income needs and structure a portfolio and withdrawal strategy.
In doing so, it attempts to wrap together the myriad factors that need to be considered, among them: retirement vision (whether retirees plan to work, how they want to spend their leisure time, etc.), health status and expected life span; expected retirement income sources; and essential and discretionary expenses.
Other financial firms and individual advisers have their own methods for working with clients to draft a post-retirement road map. What's important is that you have such a plan in place, one that assesses your financial needs accurately and shows how to provide for them while preserving principal, ensuring a degree of liquidity and, most of all, making sure you never run out of money.
Shop around for alternatives
Longevity, coupled with low interest rates, have made it difficult for retirees to merely shift assets into "safe" or cash positions for the long haul as they lose the returns needed to ensure a two- to three-decade span.
A growing focus on having a post-retirement income stream, rather than relying on withdrawals from a finite pool of assets, has inspired a variety of new products, as well as old ones with new wrinkles.
The top names in the financial world -- among them
, Fidelity, Vanguard and Pimco -- have introduced products known as either "managed payout" or "income replacement funds."
Although the funds have their uniquenesses, the basic pitch is that an investor chooses a fund with a desired payout (or one that adjusts over time, based on a future target date) and the professionally managed mix of holdings seeks to preserve principal and pay those expected goals from returns.
The upside: steady and predictable monthly income and the preservation of principal. The downside: There are no guarantees, and returns may fall short.
Also in the mix as an alternative to old-fashioned draw-downs are various annuity products.
Earlier this year, the Government Accountability Office issued a report that, in summary, advocated that middle-income households without traditional pensions consider using a portion of their savings to buy an income annuity to help fund their retirement.
Among the annuity flavors to hit the market since that report is New York Life's Guaranteed Future Income Annuity. It allows a policyholder to make an initial premium payment, which can be drawn from a 401(k) or IRA, and set an income start date in the future.
Earlier this month,
Allianz Life Insurance Company of North America
launched Allianz 360, a fixed-index annuity intended to offer a hedge against longevity and inflation.
"You can calculate what inflation does to your purchase power over 20 years at 3.5%," says Eric Thomes, Allianz Life's senior vice president of sales.
As withdrawal options Allianz 360 buyers can elect predictable income or choose income that can increase each year. Thomes explains that the longer you hold Allianz 360 before taking lifetime income withdrawals, the greater the percentage of income available for lifetime withdrawals will be.
If you do opt for a retirement income solution, be sure to research the product carefully and consult with an adviser. The upsides and downsides could affect you for the rest of your life.
-- Written by Joe Mont in Boston.
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