Today 5:01 AM ET (MarketWatch)
By Andrea Coombes
Among retirees who are withdrawing money from their retirement accounts, about half of them are doing it without a strategy in place, according to a new survey. That doesn't bode well for their long-term retirement success.
Fifty-two percent of retirees surveyed said they're pulling money out of their retirement accounts simply "as the need arises," according to the telephone survey of 1,206 adults aged 35 to 75, conducted for PNC, a financial-services firm.
"It's an unfortunate fact that a lot of people don't prepare for retirement and they find themselves in a situation without this plan in place," said Joe Jennings, investment director for PNC Wealth Management in Baltimore, Md.
The danger is running out of money later, when you're much older and least able to rectify the situation. Perhaps unsurprisingly, about half of the retirees surveyed said they're worried about exactly that -- running out of money -- and 63% are concerned that Social Security or pensions won't cover their retirement expenses.
Also unsurprising: Those who are concerned about outliving their savings have less money. The survey found that their investable assets total $225,000 on average, compared with the $411,000 possessed by the more optimistic retirees.
Spend less, plan more
There is one straightforward way to improve your outlook, no matter what your age: Cut expenses. Among the 53% of retirees who said running out of money is a fear, 59% said they are spending less and 41% said they're budgeting more carefully.
While 35% of retirees said they're spending about what they expected to spend in retirement, another 31% had no specific expectations -- another sign that people are entering retirement with no clear sense of their finances.
Note that this is a small survey and, while the margin of error for the overall sample is +/- 3 percentage points, it rises to +/- 6 percentage points for the subgroup of retirees. Still, the findings point to the fact that some retirees entered retirement without a plan, and are trying to adjust on the go.
People should start thinking about retirement long before they retire, Jennings said.
"Ideally, what we would recommend is if you know that retirement is coming down the road in the not-too-distant future, let's work on a plan to project what your income is going to be, what your expenses are going to be, and then start following that model today, even though you're not retired yet, just so you know how it feels and whether it's going to work for you," Jennings said.
In other words, while you're still working, figure out what your retirement income is likely to be, and then try living on that, while you're still working.
"It's a test run," he said. "If there are going to be adjustments to be made we want to make them before retirement occurs rather than after retirement occurs and you may have less flexibility."
How to create retirement income
So, what are your options for creating income from your retirement savings? There's no one right way for everybody. The best strategy for you will depend on your specific financial situation, including the tax implications of where your savings are sitting (e.g. a pre-tax IRA or an after-tax Roth IRA), how long you expect to live, whether you're hoping to leave money to heirs, and other considerations.
A central question you'll need to answer is asset allocation: what mix of stocks and bonds is going to generate enough money to live on for the rest of your life?
If you're confused, take some comfort from the fact that even the experts debate the ground rules. While a common rule of thumb has been to invest your age in bonds and 100-minus-your-age in stocks, that rule may be upended by long-term trends, including the prospect of higher interest rates slamming bonds, as well as longer life spans. Now that retirement may last 25 or 30 years, you may want to retain a higher portion in stocks, some advisers say.
One recent study found that pre-retirees should shift towards bonds as retirement approaches -- and then add more to stocks as they progress through retirement. That initial shift to bonds reduces "sequence of returns" risk -- the risk that you'll never be able to recover from a big hit to your investments early in retirement, when your portfolio is at its largest.
For more on this "U-shaped" allocation towards stocks, read this: How much stock should you own in retirement?
Also, check out one MarketWatch columnist's response to this idea: What if retirement advice is completely backwards?
Don't forget that there is a simple way to reduce the risk that you run out of money in retirement: visit the spending side of your ledger. Slashing your expenses can open up a lot of retirement freedom. Read more: 8 secrets of success from early retirees.
Social Security
Social Security benefits are a key piece of income for most retirees, and whether or not to delay benefits is a matter of some debate. Delaying benefits up to age 70 provides a permanently higher monthly benefit -- benefits rise about 8% a year up to age 70. (If you're married, note that there are numerous strategies to consider, and many entail one spouse claiming early.)
Most financial advisers with whom I speak suggest that delaying makes sense for anyone who has a reasonable chance of living a long life. Some experts take it one step further: They say that, in some cases, early in retirement retirees should focus solely on other income sources -- for example, tapping their investment accounts, even up to the point of depleting them -- if it will allow them to delay Social Security.
This strategy provides a form of insurance against a longer life, and may also reduce your total tax bill in retirement. Read more about this strategy in my story: Best ways to tap retirement investment accounts
No matter what retirement-income strategy you end up employing, revisit it regularly. "It's not something you can put into place when you enter into retirement and then never revisit it again. You do have to review it at least annually," Jennings said.
Also, read this: 5 strategies to build your retirement income
-Andrea Coombes; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
May 06, 2014 05:01 ET (09:01 GMT)
Copyright (c) 2014 Dow Jones & Company, Inc.
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