You’ve gotten to the point where you’re getting ready to retire. You know that the income from your employment is going to stop, and you have a decision to make: how are you going to approach income so that you can do the things that you want to do in retirement?
The first thing to realize is that this is not an easy task, and it shouldn’t be approached lightly. You’ve worked hard to save up a certain amount of money – what you don’t want to have happen is to miscalculate or make a mistake and run out of money way quicker than you anticipated. There’s a lot of things to unpack and to understand when it comes to a retirement withdrawal strategy. Let’s start with the basics.
The Relationship Between Time & Risk
As you begin to create a retirement withdrawal strategy, the first thing to understand is the relationship between time and risk. A lot of times you’ll hear that as you get closer to retirement, or more importantly, closer to withdrawing your money, you want to have less risk. Why is that? It has something to do with a risk called sequence of returns risk.
In other words, the order in which your returns happen, matters. Essentially the concept is this. If you were to retire and the market was to drop really low and then you were to take a withdrawal out on top of that, it’d be like digging a hole with two shovels rather than just one. Now you’ve dug a hole so deep that it becomes very difficult to get yourself back out of that hole. You might run out of money quicker than you had anticipated.
Choosing Tools Based on Your Goals
Another way to consider the relationship between risk and time is to picture lining up four or five buckets in front of you and earmarking those buckets for a specific period of time. The first bucket is five years, then the next bucket is 10 years, and then the next is 15 years, and so on. In those buckets, the tools that you use are going to become potentially increasingly more aggressive as time goes.
Money that you need in the next 20 years might be able to ride the ups and downs of the market, but you want to limit the amount of risk, volatility, and movement in investments with the money you need in the next five years.
Income Sources and Timing
Once you retire your annuity is paid monthly starting the second month after retirement, but it’s entirely up to you when you begin to withdraw from your TSP and when to begin Social Security Benefits. Understanding the importance of timing TSP withdrawals and how social security benefits work should also be a part of your retirement withdrawal strategy. There are reasons to possibly withdraw early from your TSP and reasons to possibly take social security early. But there’s no one-size-fits-all approach.
Building Your Emergency Fund
As a general rule, build a reserve that is kept in a low-risk money market or savings account that holds four to six months of expenses. Even if you have what you think is the ideal retirement withdrawal strategy, you never know when you’ll have an emergency. If you don’t have cash to pay for it, you’ll have to pull out your credit card and begin a cycle of debt build-up – which is not recommended in retirement (or ever!).
A retirement withdrawal strategy is a complex issue with a lot of variables to consider. It’s crucial to take your time to study and understand and make sure that you get it right for your specific situation.
If you’d like help planning your next steps, contact a certified financial planner at Medallion Financial Group today, and let’s have a conversation! Click here to schedule a free consultation.
At Medallion Financial Group, we believe financial planning is about Family. We have been helping families invest in the future since 1987 through a holistic planning approach. We recognize there are a variety of needs when it comes to retirement planning, plan rollovers, annuities, college planning, life insurance options, and investment management. It is easy to get lost in a sea of choices. Our financial advisors help with the basics and beyond to enable our clients to get the education, advice and management they need to retire with confidence.
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