Should you use, if you have such options, the in-plan decumulation/retirement-income products or should you use out-of-plan products? But let’s say your plan does offer in-plan decumulation/retirement income products? “Or the decumulation products offered within the 401(k) might not generate enough income given the 401(k) account balance, so the employee must use outside products anyway,” she said. For employees it may be easier to meet their decumulation needs using investment products outside the plan. “The cautionary note is that because of the somewhat looser environment outside alternatives may present more alternatives – but with lots of important details,” Park said. “That said, advisers connected to the plan many times constrain solutions to those associated with the company they work for, limiting alternatives,” he said. He noted, for instance, three popular strategies used by retirees and their advisers to better manage sequence of returns risk: The bucket strategy in which bucket one is supposed to provide income for one to five years; bucket two is for assets that will fund retirement in the next five to 10 years; and bucket three is for assets that will be needed in 10-plus years. “I would suggest they consider engaging a fiduciary, fee adviser — by the hour cost — as an initial sounding board,” said Park. Acknowledging the conflict, Park said working with a certified financial planner would be best. “Insist on paying them by the hour, so as to eliminate conflicts,” he said.
Retirement may be a well-deserved, extended period of leisure for some seniors, but for others, it can be a time riddled with financial stress. Steering clear of these key mistakes, however, can help keep that stress to a minimum.
1. Forgetting to shift to conservative investments
Your working years are a great time to sport a stock-heavy portfolio, since stocks have historically offered higher returns than bonds. The downside, however, is that stocks are also more volatile, and while they’re a good choice for younger workers with time to ride out the market’s swings, they’re a far riskier prospect for retirees, who often require instant liquidity. While it’s a smart idea to hold onto some stocks as a senior, make sure your portfolio has a reasonably balanced mix of stocks and bonds.
2. Cashing out strong investments
Some seniors are quick to dump their stocks for fear that the market will take a dip and they won’t have time to recover. But liquidating all of your stock investments isn’t wise, especially if you have dividend-paying stocks in your portfolio. While the value of these stocks might drop during periods of market upheaval, it often pays to retain them as a source of income nonetheless — especially if you’re talking about established companies with strong histories of consistent dividend payments and earnings.
3. Claiming Social Security sooner than you need to
Some seniors rush to claim Social Security at age 62 because it’s the earliest possible age to get benefits. Others opt to wait until reaching full retirement age, which, for today’s older workers, is 66, 67, or somewhere in between. But if you’re still working part-time in retirement, or have enough income from savings to pay your living expenses, it pays to hold off on Social Security until 70. By doing so, you’ll get an automatic 8% boost in benefits per year. And while a strong enough investment portfolio might deliver an 8% return, as well, delaying Social Security is a good way to achieve risk-free 8% growth on your benefit payments.
4. Spending too much money early on
Those first few years of retirement are the perfect time to travel, pursue hobbies, and do the things you’ve always wanted to do while you’re still relatively young and healthy. But if you’re not careful about how much you spend, you could end up in a precarious financial situation down the line.
The Employee Benefit Research Institute reports that 46% of households spend more money during their first two years of retirement than they do at the tail end of their working years, and for 33% of households, this trend lasts for six years into retirement. If you have the money, then by all means, treat yourself, but if your savings are limited, be careful not to blow through them too quickly.
5. Forgetting about taxes
Many seniors assume they won’t have to pay much in the way of taxes once they stop working. But unless you have a Roth IRA or 401(k), your retirement plan withdrawals will be taxed as ordinary income in retirement.
Similarly, if you have income outside of Social Security, your monthly benefit payments may be taxed, as well. Not only that, but there are…