Think of withdrawing your money during retirement as equivalent to devouring a delicious meal you have made.
What’s more difficult, making the meal or eating it?
Making it, of course. We do our prep work, cook everything in the right order, monitor everything closely to make sure nothing goes wrong, and finally present it on the table. And as fun as it may seem to cram everything into your mouth, part of the fun of having a nice meal is enjoying the product of your hard work one bite at a time.
The same principle applies to your retirement plan. Just as you systematically put away your savings and systematically invest them, your plan for withdrawing must be just as careful. With the guidance of a financial professional, it is important to create a Systematic Withdrawal Plan (SWP). This lets an investor withdraw a fixed or variable amount from his or her mutual fund portfolio on a certain date every month, quarterly, semiannually or annually (based on his or her needs).
What Most People Do
When you retire, it might feel like a party. Withdrawing your money during retirement without a second thought may not seem like a big deal. You are probably having celebrations left and right with co-workers and loved ones. You and your spouse or partner might take a trip. You may feel at ease offering to pay for everyone when you eat out with family. All of these and any number of other expenses and little indulgences pile up as you relax into your first year of retirement. It comes as no surprise that most retirees experience a steady increase in spending over the first five, ten, or fifteen years after they retire. During this time, most retirees tend to view the sum in their account as something they have earned that will always be there. Or, perhaps more accurately, they see it as investments that will continue to grow and take care of them forever. Still others probably pay no attention to the account at all—they just figure they have money, and therefore they can keep spending it.
In short, most people fail to plan out their spending in relation to the amount they possess in their accounts. Unwisely, they spend according to their personal needs and desires.
What To Do Instead
When considering withdrawing your money during retirement, the most important element of your withdrawal plan is that it reflects the growth potential of the account. If done properly and your withdrawal rates match your growth rates, then your principal amount will remain intact and can be saved for an emergency or passed down to your beneficiaries.
Interestingly, there is a school of thought that for most people’s accounts, the number is going to be about the same. The rate of withdrawal should be around 3-5%. These numbers are arrived at through complex models that are easy to calculate thanks to computers. However, you and your investment professional need only to go over your details to arrive at an appropriate withdrawal plan for you.
We congratulate every single client as they near retirement for the diligence, sacrifice, and creativity they’ve shown in crafting their retirement accounts. For most, if you are able to retire with a decent portfolio, it is simply a matter of staying diligent and staying aware to ensure you don’t outlive your funds.
With a standard to go by throughout your retirement, you will understand exactly what you are able to spend and when to cut back. Then, and only then, you will feel totally comfortable enjoying the delicious meal you have prepared.
Schedule an in office or over the phone consultation to discuss how Miramontes Capital can help you with your new beginning through retirement and estate planning.