Current Thinking

How to Keep Your Retirement Fund Working for You

A blog by Rich Rausser, CPC, QPA, QKA, Senior Vice President, Pentegra Retirement Services – October 14, 2015

Regular readers of my blogs are well aware that I often address strategies for amassing the funds during one’s active working years that are needed for a comfortable retirement. However, what happens when you actually enter your retirement and need to start drawing upon the funds? Is it simply a matter of making withdrawals from your 401(k) and other retirement savings accounts and hoping you do, in fact, have enough money to maintain the standard of living you want?

The answer, of course, is “No.” Making sure that your retirement funds continue to work for you can be crucial in helping to ensure that you maintain a steady income during your golden years. In contrast to the accumulation phase, you are now entering a “decumulation” phase, where your income stream must cover basic expenses for shelter, food, utilities and other routine bills, as well as “pleasure” expenses, such as travel, hobbies and other fulfilling activities.

While planning your decumulation strategy with a qualified retirement services provider is always prudent, the good news is that, when done properly, you can capitalize on the fact that no one knows your current and future needs as well as you do.

Retirement plan distributions need careful planning. Considering the enormous impact compounding has on one’s retirement savings, large distributions may have an adverse effect on future income—because large amounts that are distributed from your savings no longer have earnings potential—which will ultimately limit your account value.

A critical alternative to consider is to keep your 401(k) assets in a tax-deferred vehicle, thereby avoiding taxes and, depending on circumstances, a penalty. By rolling over your 401(k) account into a traditional IRA, you can continue to benefit from earnings potential without paying taxes until you take a distribution. (One can also explore Roth IRA Rollovers, but please note that there are different tax rules involved for traditional IRAs and Roth IRAs.)

Cost-effective investments are potentially of even greater importance post-retirement considering that you are probably no longer drawing a regular paycheck … and even if you are, it is probably for a lesser amount than you were accustomed to receiving. Low investment costs and their impact on a fund’s returns result in cost savings that compound substantially over time — allowing your money to work harder for you.

There are also a number of personal factors to consider. If you are taking early retirement, what reductions and/or penalties may be involved? Will there be a gap before you are eligible for Medicare benefits and, if so, how will you bridge that gap? Are you married and, if so, is your spouse retired or still working? What are all of your sources of retirement income? How is your overall health and what is your anticipated life expectancy?

You will also need to develop a decumulation strategy. One approach is what we call the “4 percent rule,” which involves withdrawing 4 percent of your portfolio in the first year of your retirement, and then 4 percent in each subsequent year, adjusting for inflation. Alternatively, based on life expectancy assumptions, you may elect to divide your account balance by the number of years you expect to live based on your current age in order to determine your withdrawal amount. This approach is more difficult to calculate with accuracy, considering that average life expectancy — as with any average – is rarely in perfect alignment across individuals.

Another alternative approach is to purchase a life annuity that provides retirement income for life with a “period certain,” or a guaranteed benefit for a certain period of time. For example, a life annuity with 10 years certain means that the benefit would be paid over the life of the participant, with a minimum of 10 annual payments guaranteed. If the participant were to die after four years, his or her beneficiary would receive the remainder of the payments, or the actuarial equivalent value of six years worth of payments, because the annuity guarantees that the payments will be made for 10 years. The guaranteed portion of the benefit under this option is also referred to as a death benefit, or death benefit protection.

There are more details involved with each of these approaches. Nevertheless, the big takeaway here is that you need not consider your retirement an endpoint for your retirement savings.