Managing Your Retirement Finances

Retirement planning doesn't stop when you retire. Even if you've followed a plan to save for retirement, it's equally important to have a plan that is designed to help meet your needs throughout your retirement.

Your in-retirement plan should include your income plan – how you pay yourself in retirement – and your estate plan.

Generate income while making your money last

This can become a balancing act between drawing down your savings too quickly and being left with little to live on in your 80s or 90s, or the opposite scenario of spending your income too slowly and needlessly crimping your standard of living.

How do you ensure you're not taking on too much risk in the market versus too little risk to still grow your assets?

One approach is to hold income-producing securities. You periodically withdraw the interest and dividends to live on. Immediate annuities, bond or CD ladders, and preferred stocks are typical income-oriented investments. Another approach involves maintaining a primarily growth-oriented posture while periodically selling a portion of your appreciated stocks to generate cash. (Selling stocks could trigger taxes, so you should discuss this strategy with your tax advisor first.) Of course, you must be comfortable with the risk of each investment.

It is important to have a plan that reflects both realistic expectations and your own comfort level. For an overview of what to withdraw, from where to withdraw it, and when to withdraw it, see Creating Your Retirement Paycheck.

Withdrawal rates: Several factors can play an important role when calculating how much of your retirement money you will spend each year, referred to as your withdrawal rate.

• First, consider your longevity. You must factor in the possibility of funding 30 or more years in retirement
• Second, consider market conditions. Investment portfolios don't return a pre-planned figure every year. They can go down as well as up – as recent years have clearly shown. If you experience a market downturn shortly after retirement, you'll be left with a reduced portfolio. If you then take money out at a rate that is too high, it seriously reduces your portfolio's power to recover when times improve.
• Finally, don't overlook inflation. Not many of today's investment portfolios generate 7 percent on a consistent basis. But what if your portfolio did grow 7 percent every year, and you took that 7 percent to live on? The number of dollars in your investment portfolio would remain flat over time, but your purchasing power would be eroded by inflation.

While you have little control over market volatility and inflation, you can help protect your retirement security by wisely managing one fact that you can control: your withdrawal rate. By withdrawing your income at a conservative rate early in your retirement, you may dramatically prolong the life of your retirement savings – and you may even be able to raise your withdrawal rate later in retirement.

Consider your Required Minimum Distributions: When you turn 70½, by April 1 of the following year, you must begin to take what are called required minimum distributions (RMDs) from your traditional IRAs and, unless you are still working, your employer's retirement plan. This requirement needs to be factored into your income plan.

Simplify: Properly managing your asset allocation and withdrawal strategy can get complicated. If you haven't already, consider consolidating your retirement accounts to ensure your investment strategy is coordinated and to help simplify the management of your portfolio and calculation of your required minimum distributions.

Reconcile your budget and cash flow: Creating and following a realistic budget can be essential when you're retired. It helps ensure your money lasts as long as you'll need it.

• Understand your basic needs – the essentials – and consider providing for these needs with predictable sources of income – such as Social Security, pensions and annuities.
• Plan for discretionary expenses and how you will fund them.
• Consider further building your emergency reserve fund to cover possible new expenses, particularly in the areas of healthcare and long-term care.
• Compare your spending strategy to your income strategy – are they consistent with each other, or does your spending strategy need to be adjusted to align with your retirement paycheck?

Estate Planning

• Ensuring that your assets pass to your beneficiaries in the simplest, most tax-effective way possible
• Ensuring that your assets will be well managed when you pass away or are permanently disabled
• Preserving your assets for future generations

If estate taxes are likely to cut significantly into the amount you're able to leave heirs, now might be the time to maximize tax-reducing gift strategies if you haven't already.

Some helpful tax-reducing strategies:

• Think about charitable organizations that interest you, as well as gifting strategies for your heirs, such as contributing to a grandchild's educational savings account.
• Consider naming younger beneficiaries on tax-advantaged retirement accounts you plan to pass on versus taxable accounts or life insurance policies. Younger beneficiaries, like grand children, have the ability to extend the ongoing benefit of tax-deferred accumulation over their longer life expectancy by stretching out the inherited assets through an IRA.
• Converting pre-tax retirement investments to a Roth IRA (and paying the taxes at the conversion) is another strategy to consider to pass assets tax-free to your heirs.

Mapping your route through retirement

Any tax or legal information in this website is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. Wells Fargo Funds Management, LLC, Wells Fargo Funds Distributor, LLC, nor any of their representatives may give legal or tax advice.