Outside the Box: Saving for retirement is hard. Spending it can be even harder

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If you thought it was hard to save enough for retirement (and it was) wait until you see how daunting a task it is to parse out retirement assets to create retirement income.

After all, accumulation planning boils down to saving early; saving as much as you can; investing wisely; using a planner, software, or if need be, a rule of thumb to see if you hit your target; and staying on the job (if possible) if you haven’t acquired the requisite amount of assets.

That certainly doesn’t sound easy, but on the other hand “decumulation planning” (creating a stream of income from a pool of assets) requires identifying a viable drawdown strategy, investing wisely, and coping with a variety of uncontrollable issues including:

• Will you be able to keep working and accumulate assets, or will health, career prospects, or job dissatisfaction force you into an earlier than planned for retirement? Planning to retire at age 65 may not work if the employer decides to downsize, your health takes a turn for the worse, or you have to leave the job to care for a loved one.

•How many years will your money need to last? While the life expectancy at 65 is over 20 years for females and over 18 years for males, you can’t plan on consuming your financial resources by the time you reach your mid-80’s…you have to plan that you or your spouse (or both) could live well into your 90s or even longer.

Read: How to hang on during a wild stock market ride

• Will you need to pay large uninsured medical bills, long term care, or both? The frequency and severity of medical needs is a wildcard that can wreak havoc at any time during retirement. The need for long term care is yet another unknowable medical variable.

• Will you incur large unexpected expenses that throw the budget out of whack? You experienced large and unexpected bills when you were working; will retirement be any different?

• Will your retirement budget be different than you expect? It’s unlikely you will be able to gauge your activities and expenses 10 years from now.

• Will inflation eat away at your money’s ability to buy what you need? Remember it was only 30 years ago that a stamp cost 25 cents and a gallon of gas cost a little over a dollar.

• Will government changes trip you up? Tax rates could rise, Social Security benefits might decline, Medicare costs may go up or Medicare coverage could become more restricted.

• Will you have enough time to recover from a market downturn? Sequence of return risk can side track even the best planned retirement.

Read: How do you keep busy in retirement? Here’s a to-do list for your first day

Another way of looking at it is: accumulation is problematic; but decumulation can be downright frightening because it is a time in your life when there is little room for error and no time to make up for challenges that arise beyond your control.

Other reasons decumulation is tough

It might seem counterintuitive, but it will probably be more difficult to spend money than to save money. The reason is twofold. First, from a behavioral psychology perspective it isn’t easy to give up something you have (remember walking your daughter down the aisle?). Second, retirement assets are finite — spend any assets and in most instances, they are not recoverable. When you were employed you could earn your way out of debt. That probably won’t be the case in retirement. So, if you are comfortably retired and see that you may live longer than planned, or your investments tank, or large health care bills are in the offing, or inflation is eroding your buying power, what can you do?

Read: I tested two free Social Security calculators, here’s what I found

What can be done?

Buy insurance and walk the tight rope between saving and spending. Your decumulation plan needs to be sound enough to shield you from the variety of retirement shocks described above. There is a twofold way to approach this. First, consider insuring your risks when possible (e.g., buy an annuity to offset longevity risk or buy long term care or Medigap insurance to compensate for the great medical unknown). Second, hold back sufficient resources to pay for problems (e.g., have a rainy-day portfolio of assets reserved for contingencies), but not so much that you end up underspending each year and denying yourself a satisfying retirement. It’s a balancing act.

Practice retirement while still earning a salary. A dress rehearsal might be the best way to prepare. Try to spend assets in your last few years of employment as if you were retired. Simulating retirement won’t be easy because you will still have the organizing principal of the daily job. So, try and estimate budget items that might switch (think more green fees and travel expenses and less commuting costs). Also, as you try to accurately gauge the retirement budget, keep in mind that retirement is not a single event, but a series of stages, each with its own aspirations and requirements.

Reframe retirement from an all or nothing proposition . Maybe the time is right to start a phased retirement by cutting back on hours or limiting yourself to finite and manageable work projects. What if retirement meant pursuing your passion to be an entrepreneur?

Delay retirement as long as possible. More work years and less retirement years may not sound like desired retirement planning advice, but continued work does mitigate inflation risk (your salary increases typically reflect inflation), assuage longevity risk (all things being equal you will have fewer years without a paycheck and more years in the workforce), and even better, you will continue to grow your nest egg with employer matching contributions and increased savings from your salary.

Have a written plan. Investors are used to an investment policy statement which helps direct them in good times and bad. Why not have a retirement policy statement to direct your spending and other actions during “normal years” and during times when retirement shocks occur? A plan for how to handle your retirement ship in good weather and bad will be useful to quell your anxiety about the unknown.

Consider time, product, and tax diversification to be part of your retirement plan. Time diversification may mean setting aside the next two or three years of assets in a no-risk investment to avoid having to draw down investments in a volatile market while keeping the bulk of your assets in a position to appreciate in value. Product diversification will combine financial products that complement each other to protect your income stream (e.g., a portfolio targeted to achieve growth and a measured purchase of a single premium immediate annuity). Tax diversification would mean having multiple assets with different tax treatments (e.g., traditional IRAs, Roth IRAs, and investments subject to capital-gains rates). The use of tax diversification will give you the flexibility to diminish your annual tax liability by judiciously withdrawing funds.

The challenge of creating a retirement cash flow that meets normal needs and protects against retirement shocks is difficult. However, proper planning can help overcome the daunting nature of your task.