Retirees Must Make (At Least) Five Key Financial Decisions

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When you’re working, you have a financial strategy that is largely based on one goal: saving money for a comfortable retirement. You’ll likely have to make many adjustments over several decades to ensure that you stay on track saving and investing. But once you retire, a new goal arises — investing so you can remain retired. To help yourself achieve this goal, you will need to make a number of investment decisions.

Which of these decisions are most important? Here are five to consider:

• How much will you spend each year? Before you can pursue an appropriate investment strategy, you’ll need to know about how much you’ll spend each year. Estimate your costs for housing, food, travel, entertainment, insurance, gifts — everything. Keep in mind that your expenses will likely change annually, especially for items such as health care. Don’t forget about inflation, which will likely cause your expenses to increase over the years.

• How should you balance your investment portfolio to provide sufficient income and growth opportunities? Clearly, you’ll need your investments to provide a source of income during your retirement years. At the same time, you will need some growth potential to overcome the effects of inflation, which can erode your purchasing power. Consequently, you will need a mix of income- and growth-oriented investments, with the proportions depending on your risk tolerance and your lifestyle.

• How much should you withdraw each year from your investment portfolio? The answer depends on several factors, including your retirement lifestyle, the size and performance of your investment portfolio, inflation, your estimated life expectancy and the size of the estate you’d like to leave. This decision is important, because the amount you withdraw each year will directly affect how long your money lasts.

• From which accounts should you begin taking withdrawals? You may have built three different types of accounts: taxable, tax-deferred and tax-free. It may be a good idea to take withdrawals from your taxable accounts first, thereby allowing your tax-deferred accounts, such as your Traditional IRA and your 401(k), more time to compound and potentially increase in value. If you have a tax-free account, such as a Roth IRA, save it for last to maximize the compounding on money on which you will never pay taxes. (Roth IRA earnings grow tax-free if you’ve had your account at least five years and you don’t begin taking withdrawals until you’re at least 59-1/2.) That said, this is just a rule of thumb.

• When should you take Social Security? You can begin taking Social Security as early as age 62, but your monthly checks will be considerably larger if you wait until your “normal” retirement age, which is likely 65 or 66. But if you need the money, you may be better off by taking Social Security at 62 and giving your tax-deferred accounts more time to potentially grow.

As you can see, you’ll need a lot of expertise to successfully manage your financial and investment situations during retirement. If you don’t already work with a financial adviser and a tax professional, now would be a good time to start. Once you’ve got your financial strategy in place, you’ll be better prepared to enjoy an active, fulfilling retirement.

Scott Flake is a licensed financial adviser with the firm of Edward Jones. He hosts a weekly informal investment discussion on Tuesdays at 10 a.m. at Gerardo’s Italian Bistro. For more information, call him at (928) 468-1470.

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