Tips & Advice

Why retirees should have a long-term spending plan

Presented by the Financial Advisors at Apple Financial Services LLC, through CFS*

Every day, articles appear urging people to save for retirement. These articles are so prevalent that it may seem like retirement planning is entirely about getting people to save.

Actually, retirement planning concerns much more than that. It has another aspect well worth discussing: the eventual spending of all of that money that has been accumulated.

Too few Americans coordinate their retirement spending. In retirement, inattention to household spending can have serious consequences.

A newly retired couple can travel too much, eat out too frequently, and live it up to such a degree that savings can be drawn down abruptly. That danger is heightened if a couple's investments start to perform poorly. A plan for drawing down retirement savings in moderation when retirement starts might help such a couple maintain its quality of life longer.

There is no standardized retirement drawdown strategy. Each retired household (and its retirement planner) must arrive at one specific to its savings, investment mix, income requirements and age.

There are some basic principles, however, that may help in configuring the spending plan. It makes sense for many retirees to tap their taxable brokerage accounts as a first step in a drawdown strategy. This allows assets held within tax-advantaged retirement accounts (such as IRAs) more time to grow and compound. By doing this, a retiree can effectively realize a tax break – money coming out of a traditional IRA is taxed as regular income, whereas long-term capital gains are taxed between zero and 20%.¹ ²

Of course, Roth IRA withdrawals are never taxed, provided you have followed IRS rules. That brings up another factor in planning retirement spending – what can be done with regard to asset location and tax efficiency before retirement.²

A retiree with a larger traditional IRA may want to consider a Roth conversion of some or all of those IRA assets before age 70. In the fifties or sixties, an IRA owner may be at or near peak earnings, so handling the tax bite that comes with such a conversion may be comparatively easier than it would be during retirement.

Another tactic is to take earlier, voluntary withdrawals from accounts that would demand Required Minimum Withdrawals (RMDs) beginning at age 70½. These voluntary withdrawals, which would occur before the start of RMDs, would leave an IRA owner with lower RMDs (and less taxable income) in the future.

Retirement spending should never be treated casually. A spending strategy may play a crucial role in preserving a retired household's quality of life.


*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer, (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Apple FCU has contracted with CFS to make non-deposit investment products and services available to credit union members. Apple Financial Services LLC is a subsidiary of Apple FCU and is not directly affiliated with CFS.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 - cnbc.com/2016/03/02/spending-in-retirement-is-a-balancing-act.html [3/2/16]
2 - investopedia.com/ask/answers/102714/how-are-ira-withdrawals-taxed.asp [10/17/16]