Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account will change from 72 to 73 beginning January 1, 2023). For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. (0123-3U8P)
If you've already gone from saving for retirement to living off your savings—or you're still making this shift—it probably doesn't surprise you to hear that retirement doesn't mean an end to your financial responsibilities.
"In some ways, they become more important," says Rob Williams, CFP, CRPC, CPWA, and managing director of financial planning, retirement income, and wealth management at the Schwab Center for Financial Research.
"As your focus shifts from work to enjoying the fruits of your labor, your planning needs also shift," Rob says. "If the priority before was to save enough to retire, the main job now is to preserve your savings so you can enjoy the retirement you dreamed about."
Here are nine things you can do after you retire (or partially retire), to keep your goals on track.
#1: Review your spending and income plan at least once a year
After years of working and saving, you likely started retirement with a plan for how much you can spend each year and which income sources you'll rely on for living expenses. If so, you're off to a great start. But what if your expenses or income fluctuate from year to year?
"Most retirees find they need to spend more or less than they planned at various points in their retirement," says Rob. "Changes and unexpected events that require you to adjust your initial plan—like home repairs, uncovered medical costs, and market volatility—are inevitable. But knowing this and planning for it can help."
Rob recommends continuing to review your plan and portfolio annually, and any time you have a major life event, to ensure you're on track and adjust as needed. It may also help to talk with a financial planner, who can help you anticipate your long-term spending patterns, identify potential surprises, and put proactive strategies in place.
#2: Make sure your portfolio reflects your current risk capacity—not just risk tolerance
It's important to know your risk tolerance—how much risk you can stomach—and adjust your investments so you can sleep at night. But once you retire, you also need to know how much of your portfolio you can afford to lose without derailing your finances. That's where risk capacity comes in.
"Risk capacity is a function of how much cash you're likely to need over the next one to four years, based on your personal goals and situation," says Rob. "This is money you'll want to preserve, since you'll need it soon and won't have much time to try to make up for losses."
To get an idea of your risk capacity, try calculating how much cash you'll need in the coming year beyond what you can pull from predictable income sources like Social Security, a pension, income from a job, or an annuity. Then do the same exercise for the next two to four years.
This is the amount you'll need your portfolio to provide in the short- or intermediate-term. In general, it's a good idea to hold this portion in cash or cash equivalents (for example, high-yield checking or savings, a money market fund, short-term bonds, or CDs), to help ensure it's there when you need it.
- Money you'll need in the next 12 months
- Money you'll need 2 to 4 years from now
Money you'll need in the next 12 monthsConsider high-yield checking or savings accounts, money market funds, or certificates of deposit (CDs) with maturity dates of 12 months or less.>Money you'll need 2 to 4 years from nowConsider high-quality short-term bonds, bond funds, and CDs with maturity dates ranging from two to four years.>
#3: Understand how large withdrawals affect your savings
Another big benefit of keeping a short-term cash reserve on hand is that you're less likely to need to take a large, unexpected withdrawal from your portfolio when the market is down.
"A market drop in the early years of retirement can cost you years of potential growth and income, if you're forced to cash out to cover expenses," says Rob. "Later in retirement, market drops aren't usually as costly, because by then, you may not need your portfolio to grow as much."
Experts call this potential scenario sequence-of-returns risk. It refers to the importance of timing, when it comes to investment withdrawals. If you're forced to tap your portfolio as it's losing value, you'll have to sell more assets to raise the cash you need. That not only drains your savings more quickly, but it also leaves you with fewer assets for future growth.
Rob recommends giving yourself an ample cushion, including a year's worth of cash for spending and two to four years of cash in relatively liquid, conservative investments. This can help you keep more of your money invested, regardless of market conditions—and give your portfolio more time to likely recover from market dips.
#4: Have a tax-smart withdrawal strategy
If you don't already have a tax-efficient plan for when and in what order you'll liquidate various assets during retirement, putting one in place could help your savings last longer.
"Not all investments are taxed the same way," says Hayden Adams, CPA, CFP, and director of tax planning at the Schwab Center for Financial Research. "A tax-efficient withdrawal strategy can help you take advantage of different tax treatments across your income sources, and may result in significant tax savings."
Hayden recommends a step-by-step approach and working with a financial planner or tax professional, if you need to.
- Take your RMDs. Make required minimum distributions on tax-deferred accounts, like a traditional IRA or 401(k), your top priority since not taking the full withdrawal by the deadline can trigger a 50% tax penalty. RMDs start the year you turn 72.
- Tap interest and dividends. Next, turn to interest and dividends from your taxable accounts. But leave the original investment alone for potential growth and income.
- Collect principal from maturing bonds and CDs. Reinvesting principal on mature bonds and CDs is ideal. But if you still need cash after RMDs, interest, and dividends, it may make sense to liquidate them next, since the original principal isn't generally taxed.
- Sell other assets as needed. Taxable and tax-deferred accounts are your next stop for more cash. But first, ask yourself if RMDs are likely to push you into a higher tax bracket. If so, drawing down taxable and tax-deferred accounts at the same time may help keep your taxable income lower. If not, selling brokerage assets that have lost value, followed by those you've held a year or more may make more sense.
When should you tap your Roth IRA?
Consider saving your Roth IRAs for last, since they're not subject to RMDs and withdrawals are tax-free starting at age 59½, as long as you've held the account for five or more years.
"Keeping tax-free Roth accounts untouched and potentially growing as long as possible is generally in your best interest," says Hayden. "If you don't end up using the money in retirement, current laws allow you to pass the Roth IRA's tax-free status on to your heirs."
#5: Create a long-term care plan
About 60% of people over 65 will need long-term care at some point in their lives, and it can be an expensive proposition. The current median cost for assisted living is $54,000 a year ($4,500 a month), for example, and a private room in a nursing home costs more than double that.
"If you don't already have a strategy for long-term care in your overall plan, it's important to consider the possibility of these costs and how you would cover them if you need to," says Rob. "A financial planner can help you look at a range of options that align with your specific needs and preferences, including long-term care insurance, if it makes sense."
In addition to insurance, options for covering long-term care costs include caregiving from family members and paying costs out of pocket with retirement assets, such as money withdrawn from a traditional or Roth IRA, 401(k), or a health savings account (HSA).
As with other parts of your plan, the goal is to put a long-term care plan in place that will work for you whether you need it or not—so you can focus on other things.
#6: Update your titling, beneficiaries, and will
Did you know titling and beneficiary designations can override instructions in a will or trust? For example, if you title a home as "joint tenants with rights of survivorship"—let's say, for you and your spouse—it will usually pass directly (without probate) to the surviving owner.
"Check titling and beneficiaries on your bank, brokerage, and retirement accounts, as well as on insurance policies at least every two years," says Rob. "Keeping them up-to-date will help ensure your assets are distributed according to your wishes." It may also make things easier for loved ones by minimizing probate, the legal process used to settle your estate.
- Account titling applies to assets, such as stocks, bonds, real estate, annuities, and life insurance. It allows you to specify details of ownership—for example, in your name, owned jointly with another person, or in a trust.
- Beneficiary designations on accounts, such as your IRA, 401(k), bank, and brokerage accounts, allow you to name people or entities who will inherit your assets. In most cases, you can name multiple beneficiaries and specify the percentage you want each one to receive.
Lastly, make sure your will is up-to-date—and consider reviewing all estate documents with an attorney who knows the laws in your area. Even if you don't have direct heirs, you can lay out a clear plan for your legacy, rather than let the court or state decide.
#7: Find out if you need a trust
While everyone needs a will, there may be times when you want more control over how your assets are managed (for example, to oversee funds for a minor or keep a property in the family).
Enter trusts. Trusts differ from wills in a few ways. They bypass probate court and can take effect before or after death, while a will takes effect only upon death. Importantly, trusts come in all shapes and sizes—depending on your needs.
"Having a will is critical," says Rob. "But if you're trying to achieve a more specific goal, such as charitable giving, providing for an heir with a disability, or ensuring assets are managed according to specific instructions, you may also want to consider a trust."
He recommends talking to a financial planner or estate attorney to start the conversation about whether a trust is right for you—and if so, which kind of trust you'll need.
#8: Consider the benefits of giving in retirement
Depending on your goals, passing assets on during your lifetime may make more sense than leaving inheritances. For starters, giving today allows loved ones to enjoy gifts sooner. It also allows you to see them doing it—and there may be tax benefits.
"Assets you give now can potentially gain value in the hands of loved ones or charities—and not in your hands, which can help reduce your taxable estate," says Hayden.
Currently, the annual gift tax exclusion lets you give any number of people up to $16,000 each ($32,000 for spouses "splitting" gifts) in a single year without incurring a taxable gift. That typically means no tax implication for you or the recipient, unless the gift comes from a foreign source. You can also make unlimited payments directly to medical providers or educational institutions for others without incurring a taxable gift or reducing your $16,000 gift exclusion.
In addition, the "lifetime gift and estate tax exemption" lets you give up to $12.06 million over your lifetime ($24.12 million for married couples), with no gift or estate tax for you or your heirs. This amount is separate from your annual gift tax exclusion. But it's set to go down to around $5.49 million after 2025, unless Congress extends the higher amount.
#9: Choose a trusted person to be your backup
Just like a business, a family needs a plan for the unexpected. One of the most important parts of that plan is to choose a trusted person who's ready to take the reins at a moment's notice.
"Without good planning, the incapacity or loss of one of the family's 'chief officers' can leave a spouse, adult children, or trusted friends to grapple with a lot of unknowns, such as how to pay bills, access financial accounts, and where to find the will and estate plan," says Rob. "But planning ahead can make it all go much smoother."
If you haven't already, name a trusted person to be your backup, and be as transparent as possible with them. Provide them with a comprehensive list of assets and expenses, as well as a roster of all the people who help manage financial matters, including accountants, attorneys, and financial advisors.
"In the absence of a spouse, singles of all ages should take special care to designate someone to manage their affairs in case they become unable to," says Rob. "If needed, consider naming a close friend or trusted professional to be your backup."
Rinse and repeat
Starting retirement with a good plan is key, but don't stop there. "Revisit your plan and portfolio regularly to account for life changes," says Rob. "Staying on top of your goals—and getting expert help when you need it—can help you continue to enjoy retirement on your own terms."
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for their own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.
Investing involves risk including loss of principal.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.
Traditional IRA withdrawals are subject to ordinary income tax and prior to age 59½ may be subject to a 10% federal tax penalty.
If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and a 10% federal tax penalty.0822-2G46