Whether you picture your life’s Second Act as sippin’ iced tea on a porch all day or kicking off a new business venture, you need a plan. That’s because being “retirement ready” comes down to the numbers - not the feelings! As soon as you hand in that notice, you’re going to have to de-tangle a web of financial accounts and income sources.

But don’t worry, we’re here to help you!

In this article, we’re going to go over the paradigm shift you experience when you enter retirement. You’ll be exposed to the new ways cash now reaches your bank account in the absence of a work paycheck, how you’ll need to think differently about income, the so-called “sequence of returns” risk (and how you can protect yourself), and other key considerations that come into play in this exciting chapter of your life. 

Changing How You Think About Income

The way you “pay yourself” will switch away from depositing a paycheck, collecting a distribution from your business, or receiving your bonus or RSUs. You’ll now have to rely on Social Security, pensions, investment yields, distributions from your accounts, and maybe some income from rental properties. It’s important to understand how these semi-passive income sources will work together to sustain your financial needs during retirement. 

This switch will feel uncomfortable…

But embracing “income planning” as a project is essential to ensure that you can maintain your desired lifestyle while protecting your financial well-being. In our experience, we’ve noticed retirees can sometimes suffer from the fear that stems from this paradigm shift. The switch to spending your nest egg can feel like you're poking a hole in the fuel line of your private jet. 

This discomfort often causes stress, panic, and disorientation. The key to handling these volatile emotions is to find the right balance between enjoying the retirement you've always dreamed of and preserving the wealth you’ve worked so hard to build. And with the right preparations in place, this balance is achievable!

What Are Some Ways to Prepare for Income in Retirement?

There are significant changes when it comes to the topic of income in retirement. Below, are some ways to help prepare yourself for the way you “get paid” in your life’s Second Act:

Do A Retirement Dress Rehearsal

Quantify things! Figure out how much they cost. Ask yourself, “What are the BIG things I need money for? What about the everyday expenses I’ll be looking at? Put it all down on paper or a spreadsheet. It’s time for your retirement dress rehearsal.

You can then bring those (reliable and accurate) numbers to us (your financial planner), and we can throw it all into your retirement projections. We’ll then be able to give your Second Act two thumbs up if the numbers work or provide direction for change if they don’t. Because at the end of the day, the retirement show must go on! 

Wisen Up On Withdrawals

There are two kinds of income you receive when you retire. One is guaranteed income, and it’s the closest thing to a paycheck you’ll experience. The other is supplemental withdrawals, and they’re the shifting of your money from one account to your checking account. 

Common guaranteed income sources include Social Security, pensions, and lifetime or period-certain annuity payments. Guaranteed income doesn’t always start exactly when you quit working. One of the starting points of retirement is figuring out which accounts to withdraw from to ensure you have enough money in your checking account for spending. 


Creating a pathway from investments to your checking account, which maximizes the return on your nest egg in the most tax-efficient manner, is the goal. We all understand there are a lot of years left in your life - and so the vast majority of your nest egg must continue to grow to keep pace or beat inflation. That means most of your money will stay put in the account-type it is already in (e.g. IRA, 401(k), Roth IRA, etc.) 

So when and how do you withdraw from the account types? An analogy could be a conveyor belt transporting income for you to gather and spend on your life, gradually as time goes by. The chart above can serve as a guide to help with deciding which accounts to withdraw from first.The others maintain their on deck status - years down the line. For your conveyor belt to start working, you’ll need to set up regular withdrawals (e.g. monthly, quarterly, annually) to your checking account from the appropriate account.


Generally,  you’ll want withdrawals from your Non-Retirement (cash and taxable accounts) category coming off the belt first. This is because the tax cost of withdrawals from Pre-tax retirement accounts is expensive, making them less efficient cogs in your retirement income machine. Also, it is typically recommended to delay withdrawals from Post-tax retirement accounts, invest them more aggressively, and benefit from the compounding of tax-free returns. 


If you are delaying claiming social security or your pension income, your withdrawals will be higher in your early years of retirement. Once guaranteed income sources (like Social Security) start flowing to your checking account, your withdrawals may decrease. This reduction in withdrawals may also afford you the ability to change the risk profile of your investments. (i.e. try to achieve more growth). 


Understand Rules And Tax Implications 

The IRS loves to get involved when it comes to taking money out of those retirement accounts you’ve built up for so long. Make sure you understand when you must take required minimum distributions (RMDs), how much they’ll be, and how any withdrawals from your various investment accounts may be taxed (or penalized). You also have to strategize to minimize capital gains taxes in your non-retirement accounts. 


You’re not alone in figuring this out! Schedule a call for support. 


Prepare For Spending Temptations

You didn’t win the lottery folks! When you quit working, your brain starts to look at your account balance like it’s a cheeseburger after a long fast. We get it… you’ve built up a BIG appetite after all those years of saying NO. 


But if you gobble up all your savings, there won’t be time to prepare another meal.


A very common trait we see in new retirees is an inability to say NO. There’s a loonnnggg list of want-to-dos bouncing around in your brain. Things like:

  • Major home improvement projects
  • Moving into a nicer place
  • Traveling
  • The latest vehicles and toys

Yes… you will spend more in the earliest years of your retirement than the final ones. But if you spread out your enjoyment over those first five to ten years, it’ll ease your stress to know you’ve sustained your wealth, and you’ll be able to continue savoring your Second Act.


Determine When To Claim Social Security

Every person’s claiming strategy can be different. Fortunately (or unfortunately), there are options. You can jump on the Social Security bandwagon as soon as your life’s clock hits 62. However, if you hit the pause button on claiming your benefits, your monthly cut of the Social Security pie gets bigger. And if you can hold out until age 70, you’ll get the biggest cut possible! 


Keep in mind though, Social Security isn’t a one-size-fits-all situation. Factors like your marital status, health, desired retirement lifestyle, and alternative income streams, all come into play when deciding when to take your slice of Social Security. 


If you’ve got a sizable nest egg, a thriving pension, or plans to keep on working, you might want to keep your Social Security in the oven longer. This will let your benefits keep on cooking. However, if retirement income is looking a bit thin, or health issues are more on the radar, it might be worth digging in sooner rather than later. Either way, we’ll be able to help you incorporate Social Security income into your Second Act’s financial plan. 

Understanding Sequence of Returns Risk

Sequence of returns risk is a financial concept that can have a significant impact on your retirement savings. In simple terms, it refers to the risk of experiencing a series of poor investment returns early in your retirement, which can significantly reduce the value of your nest egg.


Imagine you have saved a substantial amount for your retirement and are now ready to withdraw money to cover your living expenses. The timing of when you start to withdraw money and the performance of your investments during those initial years can greatly affect how long your retirement savings will last.


How Sequence of Returns Risk Can Hurt Your Retirement

Here's why sequence of returns risk is important to consider especially as your income shifts to more passive forms in retirement:


Depleting Savings Faster: If the market performs poorly during the early years of your retirement, and you're continuously withdrawing money to cover your expenses, your savings can deplete much faster than expected.


Lower Future Growth Potential: When your investments lose value and you withdraw money at the same time, you have less money remaining in your portfolio to grow when the market eventually recovers. This means that even if the market bounces back, you may not fully benefit from the rebound.


Reduced Flexibility: A poor sequence of returns early in retirement can limit your ability to adapt your spending or investment strategy later in retirement, potentially forcing you to cut back on your expenses or find alternative sources of income.


Increased Emotional Stress: Experiencing a series of poor returns early in retirement can lead to increased financial stress and anxiety, potentially causing you to make hasty or impulsive decisions that could harm your long-term financial well-being.


Higher Chance of Outliving Savings: Sequence of returns risk can significantly reduce the longevity of your retirement savings, increasing the chances that you might outlive your savings and face financial difficulties in your later years.


Weakened Legacy: If your retirement savings are depleted faster than expected due to sequence of returns risk, you may have fewer assets to pass on to your loved ones or the causes you care about. 

How to Combat Sequence of Returns Risk

There are several strategies to help combat the sequence of returns risk as you enter retirement. Some of the major ways include:


Diversification: A well-diversified portfolio with a mix of different asset classes, such as stocks, bonds, and cash, can help reduce the impact of poor market performance on your retirement savings. This can provide a cushion during market downturns and mitigate the effects of sequence of returns risk.


Asset Allocation: As you approach retirement, gradually adjusting your asset allocation to hold a higher percentage of lower-risk investments (like bonds and cash) can help protect your savings from sudden market drops. Regularly revisiting and adjusting your asset allocation can also help maintain the right balance throughout retirement.


Withdrawal Strategy: Adopt a flexible withdrawal strategy, such as the "4% rule" or "dynamic withdrawal strategy," that allows for adjustments based on market conditions and your financial needs. By being flexible with your withdrawals, you can minimize the negative impact of poor investment returns on your savings.


Spend Conservatively: During periods of poor market performance, consider reducing your spending to preserve your savings. By cutting back on non-essential expenses, you can decrease the amount you need to withdraw from your investments, allowing them more time to recover.


Delay Retirement: If possible, consider delaying your retirement to give your investments more time to grow and recover from market downturns. Working longer can also increase your Social Security benefits and provide additional income to supplement your savings.


Part-Time Work: Consider working part-time or finding alternative sources of actively-earned income during retirement, especially during market downturns. This can help reduce the amount you need to withdraw from your investments and provide additional financial security. Furthermore, when work feels more like a choice, it can feel far more rewarding and help keep you engaged socially while in retirement. 


Increasing Your Emergency Fund: Having an emergency fund with 6-12 months' worth of living expenses can help you avoid tapping into your retirement savings during market downturns. This can protect your investments and give them time to recover.

Anything Else I Should Know? 

Based on our experience with clients, here are some other things we encourage those looking to enter retirement (or who are already in retirement) to consider:


Opting For Physical Bank Statements: While online banking has become the norm, receiving physical bank statements through the mail can be beneficial for retirees. Having tangible statements can help you keep track of your expenses and monitor your account balances more effectively. It also provides a visual reminder to review your finances regularly, ensuring you stay on top of your budget and maintain control over your passive income.


Consider Downsizing Your Home: As you enter retirement, it may be worth evaluating your current living situation and considering downsizing to a smaller, more manageable home. Downsizing can offer several benefits, including, but not limited to lower expenses, a more simplified lifestyle, and increased mobility. 


Establish a Strong Support Network: It's essential to have a strong support network in place during retirement. This can include friends, family, and professionals equipped to provide emotional support, practical advice, and financial guidance. A strong support network can help you navigate challenges and make the most of your retirement years.


Stay Engaged and Active: Maintaining an active lifestyle and staying engaged in hobbies, social activities, and volunteer work can help improve your physical and mental well-being during retirement. Staying active and engaged can also provide a sense of purpose, helping you enjoy a more fulfilling retirement.


Develop a Comprehensive Healthcare Plan: Healthcare expenses can be a huge burden during retirement. Be proactive in creating a comprehensive healthcare plan that considers potential costs, insurance coverage, and long-term care needs. By planning ahead, you can be better prepared for healthcare expenses and minimize financial surprises.


Revisit Your Estate Plan: Retirement presents a key time to review and update your estate plan. Make sure your will, trusts, and beneficiary designations are up to date and reflect your current wishes. Also, consider discussing your plans with your family and your professional advisors to ensure a smooth transition of your assets.

How Crafted Finance Can Help You Transition Into Retirement

At Crafted Finance, we understand that transitioning into retirement requires a new approach to your financial life. We're here to help guide you through this exciting chapter, providing valuable insights and personalized financial strategies to ensure you can enjoy this next act you've worked so hard to achieve. 


By being proactive and adopting a comprehensive financial plan, you can handle challenges such as sequence of returns risk, and create a more secure and fulfilling retirement chapter. Together, we’ll work to construct a reliable retirement plan, providing you the assurance and stability you need to properly step into this next chapter of your life. To get started, reach out to us at (650) 336-0598 or schedule a free support call


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