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Often Overlooked

Adam M. Grossman

PERSONAL FINANCE pundits love to debate safe withdrawal rates—the amount a retiree can withdraw each year from a portfolio without depleting it too quickly. I agree this is an important topic. In fact, I’ve addressed it a few times myself in recent months.

In July, I discussed the well-known 4% rule. A few weeks ago, I described an alternative called the bucket strategy. But as you build your retirement plan, withdrawal rates shouldn’t be the only consideration. Below are six additional, often-overlooked topics to consider.

1. Time allocation. How will you spend your time after you retire? This might not seem like a financial question. But the way you allocate your time will have implications for both your income and your expenses.

On the income side, do you envision a traditional retirement—that is, stopping work entirely—or would you like to taper down to part-time, perhaps taking on a new job or starting a small business? I once knew a fellow who worked part-time at a marina pumping gas. It seemed like an odd choice for a high-net-worth retiree. But he loved the water, it was an opportunity to socialize, and it brought in extra income.

This might seem like an idiosyncratic example, but it illustrates a more general reality: that retirement doesn’t need to be a binary decision. Sure, some people shift overnight from the office to the hammock. But it isn’t always that way. I’ve seen just as many people downshift for a period of five to seven years before fully retiring. There’s no one-size-fits-all.

On the expense side, housing is usually the biggest variable. Do you think you’ll remain in your current home, downsize, or maybe buy or rent a vacation home? How do you see this changing over time? Over the summer, I ran into a neighbor who described “outliving” Florida. It turned out that he had bought a place in Florida when he retired in his 60s. For 20 years, he enjoyed spending winters there and summers up north. But over time, his preferences shifted. He grew tired of traveling back and forth, and he also wanted to lower his expenses, so he consolidated back to a single home.

Strategies like the 4% rule assume that a retiree’s portfolio withdrawals will be the same every year, increasing only with inflation. But that’s probably not true for most people, as these examples illustrate. That’s why time allocation is such a key pillar of any financial plan. Everyone’s retirement income and expenses go through different phases. Can you predict in your 50s where you’ll be in your 80s? No. As you build your plan, it’s worth considering a range of possibilities.

2. Income taxes. In retirement, you’ll generally have much more control over your tax bill than during your working years. In the past, I’ve discussed Roth conversions and other strategies to engineer your retirement tax bill. These strategies might or might not work for you.

But something every retiree should consider is the manner in which withdrawals are taken to fund living expenses. Suppose you have some money in a taxable account, some in a tax-deferred account and some in a Roth IRA. In what order should you tap these accounts each year? This should be an important part of your planning process, so your tax bill isn’t left to chance.

3. Debt. Do you have a mortgage or other loans? If at all possible, I recommend arriving in retirement without any significant debt—for two reasons. There’s the peace-of-mind benefit. In addition, the cash flow flexibility gained from being debt-free will make it easier to manage your taxes in the ways noted above. One exception: If you have a home equity line of credit you use for rainy-day purposes, you might want to renew it while you’re still working. It’ll be infinitely easier to get approved while you still have a regular income.

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4. Family. If you find yourself in the “sandwich generation,” with both children and parents requiring help, that may impact where you’re able to live. It likely will also impact your time allocation. Making predictions in this area can be difficult. But again, it’s worth thinking through the range of possibilities and how each might affect your finances.

5. Estate planning. When it comes to planning for the next generation, I’ve found that every family is different. Some want to leave every dollar possible to their children, while others don’t mind if their estate ends up writing a check to the government. Other families have more specific considerations, such as a child who’ll require long-term care. Probably because it isn’t such an uplifting topic, many people procrastinate when it comes to estate planning. But it’s worth being intentional about this, for the same reason you want to be intentional about income taxes—to avoid a result that isn’t what you would’ve wanted.

6. Mechanics and mindset. I’ve heard more than one person say that the prospect of retirement makes them uneasy. Even when new retirees know there’s enough money in the bank, it can trigger anxiety to think about drawing down those assets. That’s why it’s worth pondering not just the math of portfolio withdrawals but also the mechanics.

I usually recommend setting up automated transfers from retirees’ investment accounts to their bank accounts. That helps recreate the feeling of a paycheck, making it easier to budget. Maybe more important, it can alleviate some of the anxiety associated with making withdrawals. To be sure, you’ll want to revisit the amount of your retirement withdrawals periodically. Still, I think it’s best to automate as much as possible. That can help you avoid deliberating and equivocating each time you need to make a withdrawal.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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DrLefty
DrLefty
23 days ago

The “where to live” question is one we revisit regularly. We’re 61 and still working. We’ve lived in the same college town (where I’m a professor) for 30 years now. We downsized two years ago from our aging single-family home to a brand-new condo. We have friends and connections and know our way around after all these years of living here. For a number of reasons, it could be a great place for us to retire.

So what’s the problem? I hate the summers here, which are brutally hot. This year we rented a house at the beach for two weeks in July and then went to Hawaii for two weeks in August. That could be the ongoing plan—targeted escapes from the heat, which, while they cost money, are surely cheaper and less hassle than a second home. But we still ponder the idea of moving to a more moderate climate when we retire. We also wonder if our condo will hold, increase, or lose value as it ages—financially, it might be smart to be open-minded about one more move later. I suspect we’ll stay put…maybe…

Handy Randy
Handy Randy
24 days ago

I looked up TV watching habits of retirees, found NY Post article: average was 49 hrs weekly. One coworker said he nearly had that much now, so as retiree, it wouldn’t surprise him. And the article was done before smartphones became so common (and useful). I promised myself I would never make the 49 hrs.

Elizabeth Adams
Elizabeth Adams
25 days ago

This article is spot on Adam. I’m five years into retirement and this summarizes advice I give to future retirees.

I would expand the time allocation discussion – too many people retire from something but fail to figure out what they will be retiring to. How you are going to spend your time is important not only for the impact on your finances but on your life. How will you stay active, engaged, valuable and vibrant when you’re no longer working? That’s often the most difficult question for a retiree to answer.

Rick Connor
Rick Connor
26 days ago

Terrific article Adam. Really great summary of the big issues as you transition into retirement. For the automated transfers – I assume you do that from a cash position previously created? Do you set up your clients with monthly transfers, yearly, something else? I’m thinking monthly, similar to a pension and SS. Yearly would drop a large amount into a spending account and might tempt me to over spend.

One other question I’m starting to ponder is how do retired couples set up their withdrawal strategy? If you have couple who each have retirement accounts, do you divide up the withdrawals equally? Do you prorate them based on total value? Do couples micro each other’s asset allocation, or use one for stocks, one for bonds, … Are there any estate advantages of one way or another. If you knew which spouse was likely to pre-decease the other, would that lead to any specific action. Any thoughts?

Ginger Williams
Ginger Williams
1 month ago

Good article. I’ve been paying attention to time, taxes, and mechanics as I approach retirement. I feel fairly comfortable with my income and expense modeling for the first few years, so I plan to set up automatic cash transfers based on my modeling, with the expectation of adjusting my plan annually. I recently shifted from mainly pre-tax retirement contributions to more Roth contributions, because my tax bracket is likely to increase after retirement.

Adam Grossman
Adam Grossman
1 month ago

Sounds good. Automated transfers are a great way to go. Just be sure to check your cash level periodically!

On account contributions, I think the key is always to be comparing your tax rate in the current year to your potential tax rate later in retirement – after Social Security and RMDs kick in. Sounds like you’re on the right track.

parkslope
parkslope
1 month ago

Another terrific article! I’m sure Jonathan won’t mind that I’ve come to look forward to your articles as much as I do his.

Adam Grossman
Adam Grossman
1 month ago
Reply to  parkslope

Thanks – sincerely appreciated!

Jonathan Clements
Admin
Jonathan Clements
1 month ago
Reply to  parkslope

A few more weeks and I suspect you’ll prefer them!

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