When it comes to generating enough income in retirement, many investors think of what they need to do to ensure the best outcomes. That’s the right way to look at things, but investors should also remember what should be avoided.
Think of it as addition by subtraction. While many retirees are constantly thinking about what they need to do to stretch income and keep a high quality of life, there are examples of things to avoid, and by skirting these pitfalls, the end result is essentially the same as making additive portfolio adjustments.
A prime example is not being shaken by a single market downturn and rushing to liquidate assets simply because stocks turn lower.
“If your first few years of retirement coincide with a market decline, you’ll probably need to sell more of your assets to fund the same withdrawal—leaving you with fewer shares and limiting your portfolio’s ability to recover during a potential market rally,” said Charles Schwab’s Rob Williams. “If the decline is particularly steep or lasts for an extended period, it’s even harder to bounce back.”
In other words, retirees that get too jittery during weak markets and sell assets are left with fewer resources with which to capitalize on the inevitable bull market that follows downturns.
The Conundrum Of Social Security
Another retirement pitfall to avoid is what investors hear about throughout their working lives: The conundrum regarding when to take Social Security. Obviously, each person’s circumstances are different, conventional wisdom holds it’s better to be tardy in taking Social Security than it is to be early.
“Individuals who collect Social Security beginning at age 62 receive 25% less in monthly benefits than if they had waited until full retirement age (FRA)—and roughly 43% less than if they had waited until age 70,” notes Williams. “Waiting to collect can also help extend the life of your portfolio. True, you’ll have to rely on your savings alone if you retire several years before you start collecting Social Security, but the increased income that comes with deferral—which is guaranteed for as long as you live—can help preserve your portfolio later.”
Another priority for retirees and advisors can easily help them ensure distribution strategies are efficient. Remember that required minimum distributions (RMDs) can increase your taxable income.
“For example, some retirees might choose to take withdrawals from tax-deferred accounts like traditional IRAs prior to age 72—when they have more flexibility to decide how and when to take distributions—to help reduce the size of their portfolios and thus the size of their RMDs, as well as manage their overall tax bill,” adds Williams.
For more on income strategies, visit our Retirement Income Channel.