Reaching retirement

Now what?

You've worked hard your whole life, anticipating the day you can finally retire. Well, that day has arrived! But with it comes the realization that you'll need to carefully manage your assets so that your retirement assets will last...

Review your portfolio regularly

Traditional wisdom holds that retirees should value the safety of their principal investment amount above all else. For this reason, some people shift their investment portfolios to fixed-income investments, such as bonds and money market accounts, as they approach retirement.

The problem with this approach is that you may lose purchasing power if the return on your investments doesn't keep up with inflation.

While it generally makes sense for your portfolio to become progressively more conservative as you grow older, it may be wise to consider maintaining at least a portion of your portfolio in growth investments.

Spend wisely

Don't assume that you'll be able to live on the earnings generated by your investment portfolio and retirement accounts for the rest of your life. At some point, you'll probably have to start drawing on the principal. However, you'll want to be careful not to spend too much too soon. This can be a great temptation, particularly early in retirement.

A general guideline is to make sure your annual withdrawal isn't greater than 4-6% of your portfolio. The appropriate percentage for you will depend on a number of factors, including the length of your payout period and your portfolio's asset allocation. Remember that if you whittle away your principal too quickly, you may not be able to earn enough on the remaining principal to carry you through the later years.

Understand your retirement plan distribution options

Most pension plans pay benefits in the form of an annuity. If you´re married, you usually have the option to elect a higher retirement benefit paid over your lifetime, or a smaller benefit that transfers to your spouse after your death.

Other employer retirement plans, like 401(k)s, typically don't pay benefits as annuities; the distribution (and investment) options available may be limited. This may be important because if you´re trying to stretch your assets, you'll want to withdraw money from your retirement accounts as slowly as possible. Doing so will preserve the principal balance, and will also give those funds the chance to continue growing tax-deferred during your retirement years.

Plan for required distributions

Keep in mind that you typically are required to begin taking minimum distributions from employer-sponsored retirement plans and Traditional IRAs when you reach age 70½, whether you need them or not. Plan to spend these dollars first in retirement.

If you own a Roth IRA, you aren't required to take any distributions during your lifetime. Your funds can continue to grow tax-deferred, and qualified distributions will be tax-free. Because of these unique tax benefits, it generally makes sense to withdraw funds from a Roth IRA last.

Know your Social Security options

You'll need to decide when to start receiving your Social Security retirement benefits. When you reach your full retirement age, or FRA (which varies from 65 to 67, depending on the year you were born), you can receive your full Social Security benefit.

You can elect to receive your Social Security retirement benefit as early as age 62, but if you begin receiving your benefit before your FRA, your benefit will be reduced. Conversely, if you delay retirement, you can increase your Social Security retirement benefit.

Consider phasing

For many workers, the sudden change from employee to retiree can be a difficult one. Some employers, especially those in the public sector, have begun offering "phased retirement" plans to address this issue.

Phased retirement generally allows you to continue working on a part-time basis. You benefit by having a smoother transition from full-time employment to retirement, and your employer can benefit from retaining the services of a talented employee. Some phased retirement plans even allow you to access all or part of your pension benefits while you work part-time.

Of course, to the extent that you´re able to support yourself with a salary, the less you'll need to dip into your retirement assets. Another advantage of delaying a total retirement is that you can continue to build tax-deferred funds in your IRA or employer-sponsored retirement plan.

Keep in mind, though, that you may be required to start taking minimum distributions from your qualified retirement plan or traditional IRA once you reach age 70, if you want to avoid steep penalties.

If you continue to work, make sure you understand the consequences. Some pension plans base your retirement benefit on your final average pay. If you work part-time, your pension benefit may be reduced because your pay has gone down during your most recent years of employment.

Remember, too, that income from a job may affect the amount of Social Security retirement benefit you receive if you are under normal retirement age. However, once you reach normal retirement age, you can earn as much as you want without affecting your Social Security retirement benefit.

Facing a shortfall

What if you´re nearing retirement and you determine that your projected retirement income may not be enough to meet your expenses? If retirement is just around the corner, you may need to drastically change your spending and investing habits.

Contributing even a little more money to your retirement account can really add up if you do it consistently and earn a reasonable rate of return. Also, by making permanent changes to your spending habits, you may find that your assets will last even longer. By planning carefully, investing wisely and spending thoughtfully, you can increase the likelihood that your retirement will be a financially secure one.