The financially savvy retiree
Women today have far more financial options and tools available to them in retirement – unlike their mothers before them. For many, accessing and using these tools can be the difference between realizing your dreams and running out of money during your retirement. Try these tips to help ensure that your savings last for the long haul.
Pay attention to your withdrawal rate.
It’s especially important to keep a close eye on the rate at which you withdraw from your accounts during your early retirement years. In fact, the safe withdrawal rate may be less than you think. For example, if you’re facing a 20-/25-year retirement, your initial rate might be in the 4%/5% per year range, but if you’re looking to spend more than 30 years in retirement, you’ll likely have to cut back to 3%/4%. And if your assets take a nose dive, you may want to consider cutting back even more.
Manage your asset allocation.
Research shows that women tend to invest too conservatively1, which can result in lower returns and running out of money during retirement. That’s why your asset allocation – the way you divide your portfolio among stocks, bonds and cash – still matters after you retire. It must match both your tolerance for risk and how much you need to continue living in retirement. Each investment type comes with different risk and growth characteristics. For example, if you have a large amount invested in stocks, you may have greater potential return – but also greater exposure to risk. A good asset mix will help you ensure long-term returns.
Don’t forget about inflation.
Because of inflation, prices – and your expenses – don’t stay the same over the years. Even a low inflation rate can severely impact a retirement budget if it’s not accounted for. To accurately estimate what your expenses will be throughout your retirement, you’ll need to predict how inflation will impact your current retirement account. Many financial planners use a 3.24% inflation rate – the long-term average since the government began tracking them in 1913 – when making calculations.2
Make the most of your IRAs.
While Traditional IRAs come with many benefits – including the ability to defer taxes on your investment earnings while you work – they require that you begin receiving distributions at age 70½, after which you can no longer make contributions. Then you’ll owe income tax on the full amount of each withdrawal moving forward. Additionally, withdrawals of earnings are subject to ordinary income tax and a Federal 10% penalty may apply prior to age 59½.
With a Roth IRA, you don’t get the tax deduction upfront. But when you reach retirement – a time when people generally have less income – distributions are tax free as long as you’re over age 59½ and you’ve had the account for at least five years. Furthermore, you can leave the money in the account, taking distributions only when you need them.
So, should you convert your Traditional IRA to a Roth IRA to save on taxes? It depends on your tax bracket in retirement and when you’ll need to start receiving funds. If you think you’ll be in a lower tax bracket, it might make sense to keep a Traditional IRA. But if you want to start drawing on them early and save on taxes, the Roth might be a good choice.
Find out if an annuity would work for you.
An annuity is best thought of as a contract between an individual and a financial services firm (such as an insurance company or an asset manager). Under this contract, you commit funds to a firm that manages the annuity, and it invests your funds as well as those of other investors. When you decide you want to start receiving the accumulated gains from the invested capital (typically when you are 59½ or older, in order to avoid tax penalties), the firm is obligated to make payments to you.
Many annuities offer a broad range of investment options, serving people of different ages, incomes and financial situations. Annuities also offer a flexibility not found in many other investment products. You typically have the freedom to reallocate your assets if there is a change in your financial status or in market conditions. You typically have the freedom to reallocate your assets if there is a change in your financial status or in market conditions. For example, as you grow older, you might decide you’d like a steadier income stream. You can take some of the annuity income you are receiving from more volatile investments such as stock (equity) accounts and transfer it to more conservative investment choices such as fixed-income accounts. And annuities differ from individual retirement accounts in that individuals are not required to begin making withdrawals at the age of 70½.
There are two kinds of annuities: fixed or variable. With fixed annuities, you receive a certain amount no matter what happens in the market. A variable annuity enables you to potentially earn higher income, but you’re exposed to more market risk.
Work with a financial advisor who knows you.
Managing retirement accounts can be daunting. After all, the decisions you make may affect how you live the rest of your life. A professional financial advisor can assist you in wading through the many investment options and help you feel confident about the choices you make.
It’s important to work with an advisor who understands your needs and priorities. Take your time evaluating the planners available to you. And remember: If you share finances with another person, such as a spouse or partner, be sure he or she is involved in the process of choosing and then working with an advisor.
Now is the time to take pleasure in what life has to offer, and to take a breather. With a little financial savvy – and a vigilant eye on your retirement accounts – you can enjoy the fruits of your labor.
Need more information?
Visit tiaa-cref.org for broader Financial Education, including a variety of resources to help you improve your financial well-being.
Annuity account options are available through contracts issued by TIAA or CREF. These contracts are designed for retirement or other long-term goals, and offer a variety of income options, including lifetime income. Payments from the variable annuity accounts [and mutual funds] are not guaranteed and may rise or fall based on investment performance. All annuity guarantees are subject to the claims- paying ability of the issuing insurance company.
1 Msmoney.com, “Retirement Accounts: Start Saving Early” (Nov. 8, 2006) http://www.msmoney.com/mm/planning/retirement/retirement_accounts.htm
2 “Average Annual Inflation Rates by Decade,” (June 2011), www.inflationdata.com/Inflation/Inflation/DecadeInflation.asp
The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., distribute securities products.