Living Columns & Blogs

Switching gears: Transition from accumulating to spending in retirement

Ash Toumayants
Ash Toumayants Centre Daily Times, file

When you first started saving for retirement, the notion seemed to be a distant plan — your focus was primarily on work, family or other immediate financial needs. As the years passed, saving became more reflexive, and you became accustomed to a significant part of every paycheck being slotted into a retirement account. At least that’s the goal. Now that you might be closer to retirement, there are a few factors to keep in mind.

Retirement is a radical departure from that saving habit, and one that often comes with many unknown factors. The transition from saving to spending requires forethought and steady execution. Many find that the best approach to this transition is similar to that of a chef — gathering and preparing ingredients, then taking stock of the pantry before cracking the (nest) egg. Like a chef, you too should gather and prepare your metaphorical “ingredients,” laying all of your options out on the table prior to going into spending mode.

Save and invest until you must spend

A study from Bankrate in 2015 revealed stunning information about most Americans’ saving habits, with more than half saving five percent or less of their earnings. A quarter of Americans save more than 10 percent, while 18 percent save nothing at all.

It is recommended to have at least 15 percent of one’s income go into savings, according to Bankrate. Even though a small percentage save more than this amount, financial advisers agree this is a reasonable amount of money to save for emergencies and retirement. If, on the other hand, your employer offers a generous match toward your 401(k) plan, you might be able to reduce that amount down by a couple of percentage points.

If you have consistently saved an appropriate portion of your income, make certain you are investing those savings right up until retirement, instead of spending it right away. Spending funds that ought to be saved is one of the biggest obstacles for pre-retirees and retirees who wish to acquire their desired retirement income, as well as one of the hardest habits to break. Having funds directly deposited into savings and retirement accounts helps ensure they will not be spent prematurely.

Another factor many people tend to neglect is increased life expectancy. Your savings, in theory, need to last well beyond retirement. Social Security only provides about 38 percent of what one needs in retirement. Work with your financial adviser to ensure you are saving an adequate amount for each year of retirement, and that you have made a safe estimation as to how many years you will be in retirement.

Calculate health care spending in retirement

Although considering health care costs for retirement can seem like a burden in terms of paperwork and research, these costs ultimately need to be part of your retirement spending plan. Even a brief stay in a nursing home or hospital can take a significant chunk out of your nest egg.

The statistics concerning long-term care paint a realistic picture for those unconvinced regarding saving: 42 percent of people older than 65 have a functional limitation. Moreover, people in this age group have a 68 percent lifetime chance of cognitive disability or physical disability in at least two areas, requiring planning for these costs.

Lifetime health care costs are higher than many anticipate and are increasing rapidly, making these costs important to consider in the years before retirement. Examples of these costs include:

▪ $463,849 average lifetime health related costs for 55-year-old couples planning on retiring at 65

▪ Lifetime costs of $266,589 for couples at 65 who have Medicare B, D and a supplemental policy

▪ Dental, vision and out-of-pocket costs for a 65-year-old couple could average $128,365

Final considerations

There are a few possible benefits to delaying retirement for Social Security recipients. Those who wait until either their full retirement age or delay to 70 will see significant increases in their benefits. Continuing to work for another two to five years past 65 might give some seniors the additional earnings they need for a better retirement, keep them from spending their retirement savings for that length of time and allow them to get ahead on paying for expenses in the long-term.

Retirement will change how you go about managing your money. However, it never has to be a complicated nor frustrating process. Careful, prudent and calculated planning will make a significant difference in the quality of your retirement.

Ash Toumayants is the founder of Strong Tower Associates, a retirement planning firm dedicated to helping clients in all stages of life prepare for retirement. For more than a decade, he has helped hard-working people across central Pennsylvania prepare for retirement.