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How to Feel Confident Living Off Your Assets Rather Than a Monthly Paycheck in Retirement Thumbnail

How to Feel Confident Living Off Your Assets Rather Than a Monthly Paycheck in Retirement

Most soon-to-be retirees have a broad understanding of the differences between living off their assets and living off a monthly paycheck. But making that switch and adjusting to new spending habits can be more complicated than you might think, especially if you aren't prepared for the rules around withdrawing from your retirement accounts and how your relationship to your money might change.

In his most recent webinar, Matt Wilson, CFP® Chief Investment Officer and President at Keen Wealth explained the importance of making a plan for your retirement spending before you actually retire. Today's episode touches on some of the topics that Matt's webinar covered in depth, as well as important follow-up questions we received about budgeting, required minimum distributions, and managing the psychological and emotional challenges of retirement.

1. "What can we do to feel confident spending money early in our retirement when we know that this money has to last the rest of our lives?"

Shifting from a savings mindset to a spending mindset can be a real struggle for new retirees. After diligently saving and investing for decades, many seniors just don't feel comfortable spending their money, especially on things like vacations or home comfort upgrades that maybe aren't essential but are definitely well-earned.

Having a comprehensive financial plan that’s personalized and regularly reviewed can take some of the worry out of retirement spending -- not just because of what that plan projects into the future but because of the challenges it has solved in the past. I've had some very powerful conversations with new retirees where we've looked back on all the things that their plans have weathered: market volatility, COVID, job losses, health care issues, housing problems. Seeing how far you've come can give you real reassurance about where you want to go and how you're planning to get there.

2. "Is The 4% Rule relative, or can we spend more money early in retirement and then catch up with less spending in later years?"

The 4% Rule is a simple calculation that can give you a very general idea of what you can "safely" withdraw from your retirement accounts every year without emptying them prematurely. For example, if you have $1 million in your IRA, the 4% Rule says you can withdraw $40,000 every year.

Reading between the lines here, it sounds like the person asking this question has already spotted the limitations of this type of calculation. For most seniors, spending levels will indeed change at various stages of retirement, sometimes by design, sometimes out of necessity. For those who have the means, spending more earlier in retirement -- when you're healthy and able to travel more, play sports, etc. -- is also very common. Most retirees then see a dip in spending in the middle of retirement as they begin to slow down.

However, spending typically rises again at the end of retirement as your health care needs increase. This U-shaped "retirement spending smile" doesn't really work with a fixed calculation like the 4% Rule.

On the other hand, your retirement spending might not end up looking U-shaped at all! Your spending might rise and fall several times, or it might stay pretty steady. Inflation, taxes, market fluctuations, and changes to the law will also affect how much money you have to work with.

Spending "rules" are a good way to start the retirement planning conversation. However, a comprehensive financial plan could help your spending keep pace with your goals and your needs at every stage of retirement.

3. "How much do I need to withdraw from my IRA every month?

Under the most recent rule changes, seniors must start taking required minimum distributions (RMDs) from their retirement accounts in the year that they turn 73. However, RMDs are made annually, not monthly, using a calculation based on your total account balances and your life expectancy. Since your balances and your life expectancy will change year to year, you have to make a new calculation annually.

Or ... you could work with an advisor who will take care of the calculations for you! An advisor might also utilize strategies around charitable distributions that could help you satisfy your RMD requirements and save money on taxes in the long run.

4.  "Do you have any tips on how to prepare someone who will be retiring in the next one to two years?"

If a comprehensive financial plan can help with confidence, then reflection and practice can help with execution.

The happiest retirees whom we work with at Keen Wealth usually aren't just looking forward to retiring "from" work; they're excited about retiring "to" new things: spending more time with their grandkids or on sports, hobbies, volunteering, traveling, or maybe even starting their own businesses.

To start adding more detail to that retirement blueprint, I often encourage folks to take a blank calendar or a sheet of paper, divide each day of the week into Morning, Afternoon, and Night, and fill in the blocks. This exercise can really help you realize not just how much your life is going to change in retirement but also how much control you're now going to have over how you spend your time.

For folks who are really struggling to flip the switch to "spending mode," we might go a step further and create an estimated budget for this new retirement schedule and compare it to pre-retirement take-home pay. You could then take that new budget for a test drive before retirement to see if it works with your current lifestyle and make adjustments with your advisor as you get closer to retiring.

As always, we really appreciate everyone who took the time to attend our retirement spending webinar and the folks who submitted questions for today's show. If you'd like to be notified when Matt schedules his next quarterly Market Outlook Webinar, click here to join our mailing list. And if you have any other questions about your retirement spending plan, call Keen Wealth and let's have a conversation.

About Bill

Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

KWMG, LLC’s dba Keen Wealth Advisors (“company”) is an SEC Registered Investment Advisor located in Overland Park, KS. The company and its representatives may only conduct business in those states where registered or where excluded/exempt or from licensure. For registration information please contact the SEC or the state securities regulators for the states where the company is notice filed. A copy of the company ADV is available upon request. Advisory services are only offered to clients or prospective clients where the company and its representatives are properly licensed or exempt from licensure. No advice may be rendered by the company unless a client service agreement is in place. This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy and is for illustrative purposes only. Clients and prospective clients must consider all relevant risk factors involved with each strategy, including costs or fees, and their own personal financial situations before trading.

The views outlined in the book, Keen on Retirement Engineering the Second Half of Your Life, are those of the author and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.

The Amazon Best Seller ranking listed on marketing materials is specifically referring to Best Seller rankings for the Kindle Top 100 Paid Lists under the subcategories of: Budgeting and Financial Risk Management, based on data as of September 5, 2019 and the second edition under Financial Risk Management on October 26, 2022. Amazon rankings although relevant on how a product is selling overall doesn’t necessarily indicate how well an item is selling among other similar items or similar item categories. Amazon may choose the most popular categories or subcategories within which an item has a high ranking to determine its best seller rankings. These rankings are updated hourly and as a result, should be expected to fluctuate as such. Keen Wealth Advisors and Amazon are not affiliated entities. 

The Steve Sanduski Advisor Network, Belay Advisor, LLC and other third-party contributors to our blogs and podcasts are not affiliated with Keen Wealth Advisors.

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