Personal finance pundits love to debate about “safe withdrawal rates”—the amount a retiree can safely 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,” and 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.
Time allocation – How will you spend your time after you retire? On the surface, this might not seem like a financial question. But the way you allocate your time will have implications for both the income and expense sides of your budget. Below are key questions to consider:
On the income side, do you envision a traditional retirement—that is, stopping work entirely—or would you prefer to taper down to part-time, maybe take on a new job or start 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’s not 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 here.
On the expense side, housing is usually the biggest variable. In retirement, do you think you’ll remain in your current home, downsize or maybe buy or rent a vacation home? And 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 twenty 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 into one home.
Strategies like the 4% rule assume that a retiree’s portfolio withdrawals will be consistent every single 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 income and expenses go through different phases throughout retirement. Can you predict in your 50s where you’ll be in your 80s? No—but as you build your plan, it’s nonetheless worth considering a range of options.
Income taxes – In retirement, you’ll generally have much more control over your tax bill than in your working years. In the past, I’ve discussed Roth conversions and other strategies to engineer your tax bill in retirement. These particular 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, for example, 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? All of these questions should be an important part of your planning process so your tax bill isn’t left up to chance.
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. Of course, there’s the peace-of-mind benefit. Also, the cash flow flexibility gained from being debt-free will make it easier to manage your taxes in the ways noted above. One exception, however: 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 be approved while you still have income.
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 may be difficult, but again, it’s worth thinking through the range of possibilities and how each might affect your finances.
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 will require long-term care. Probably because it’s not 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.
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 on those assets. That’s why it’s worth thinking about 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. And maybe more importantly, it can help alleviate some of the anxiety associated with making withdrawals. To be sure, retirement planning involves a number of variables. And you’ll of course want to update your plan periodically. But then, I think it’s best to automate it as much as possible. That can help you avoid deliberating and perseverating each time you need to make a withdrawal.