Preparing for Spending in Retirement

Retirement plan advisers can assist people after retirement with rollovers and sensible spending strategies, a Vanguard paper said.

Education is needed to help prepare participants for spending once they retire, said the authors of  “A More Dynamic Approach to Spending for Investors in Retirement,” from the investment and retirement services provider.

The paper, by Colleen Jaconetti, Francis M. Kinniry Jr. and Michael A. DiJoseph, examines two common postretirement spending strategies and recommends a third.

Once a participant is retired, retirement plan advisers can help him with the logistics of rolling over his retirement plan balance and actually setting up a post-plan portfolio from which he can draw retirement income, Jaconetti said.

“Advisers can work with the new retirees to establish spending rules and figure out a schedule for reviewing and updating their portfolio, perhaps every six months or a year,” Jaconetti said. One approach to consider is creating a money market account for the retiree and directing his Social Security, required minimum distribution and portfolio gains there.

The first strategy is termed “dollar amount grown by inflation,” where the retiree chooses an amount of spending in the initial year of retirement and the amount is increased annually to account for inflation.

The second strategy, called “percentage of portfolio,” bases the retiree’s annual spending on a stated proportion of his portfolio’s value at the end of the prior year. The third approach, “percentage of portfolio with ceiling and floor,” advocates relatively consistent postretirement spending, while remaining responsive to the financial markets’ performance to help sustain a retiree’s portfolio.

The paper recommends flexibility as a prudent spending strategy. Periodically evaluating their income strategies, assessing their portfolios and considering whether alterations are needed can help people with their long-term financial planning.

Postretirement Strategies

Both retirement plan sponsors and plan advisers can assist people in carrying out strategies related to their postretirement spending.

“One way that plan sponsors can help out participants is to talk to them about how much they can spend once they retire,” Jaconetti, senior investment analyst for Vanguard Investment Strategy Group, told PLANADVISER. “Help them to create a paycheck for life.” In addition to helping participants determine how much they can spend annually once they retire, plan sponsors can also help educate them about how to set up a portfolio and the asset allocation of that portfolio.

 “If participants can accept fluctuations in spending due to the changing performance of the markets, they can figure out how to adapt their spending, cutting back in certain areas, for example, if the markets don’t do well that year,” said Jaconetti. She added that, by putting guardrails around annual postretirement spending, in order to factor in the aforementioned fluctuations, participants will have a cushion that will hopefully maintain adequate retirement income over the long term.

There are several things for participants to consider when it comes to both preparing for retirement and then for postretirement spending, said Jaconetti. Maintaining a broad diversification of investments is helpful, as is taking a realistic look at life expectancy and working. “While life expectancy is something that people can’t control, they can look into working longer, which gives them time to save more and ultimately results in a higher amount that can be spent during retirement,” she said.

A copy of the paper can be found here.