As you get closer to retirement, you may start to wonder what you should be doing with the assets you’ve saved up. You’ve probably accumulated a significant sum for retirement, but how do you put that sum to work so you can maintain your lifestyle throughout your retirement? Do you leave your funds where they are, or are there other options you should consider?
There is no one-size-fits-all answer. Managing this transition requires balancing regular income needs, access to cash if you need it, market volatility, and overall risk/reward tradeoffs. Let’s take a look at the pros and cons of your two primary paths.
Path A: Leaving Assets in Your Retirement Accounts
For many pre-retirees, keeping their nest egg entirely within traditional retirement accounts is the default choice.
The Pros:
- Tax-Deferred Growth: Your assets can continue to compound without having to pay annual taxes on your accumulated funds until you start making withdrawals.
- Inflation Protection: By keeping a healthy amount of equity in market-based funds, your portfolio may be able to outpace inflation over a multi-decade retirement.
- Simplicity: Your accounts are already established, making them easy to track and monitor.
The Cons:
- Market Volatility Exposure: Leaving your assets in the market means you remain exposed to downturns. If the market dips just as you retire, drawing income from a shrinking balance could alter your portfolio’s longevity.
- The Risk/Reward Dilemma: Traditional accounts don’t inherently generate monthly paychecks. You must manage the trade-off between growing your money and spending it.
- Potential Tax Surprises: If the government changes tax brackets in the future, or if you haven’t made a plan that includes Required Minimum Distributions (RMDs) from your traditional 401(k), you may be pushed into a higher tax bracket, which could affect your taxes on Social Security or Medicare premiums.
Path B: Exploring Other Options to Fill Specific Needs
Instead of leaving everything in one place, you might consider alternative tools that help address specific needs or concerns.
The Pros:
- Customized Cash Flow: Instead of trying to manage your own withdrawals, you could consider annuities or life insurance products for income or access to cash. For example, Fixed Indexed Annuities (FIAs) can function a bit like a personal pension and can be customized with riders for lifetime payments, while some types of life insurance policies may provide the benefits of life insurance while allowing you to access their cash value if you need it.
- Volatility Insulation: Modern annuity and insurance products can also be used for principal protection, allowing you to benefit from interest accumulation while providing a premium protection feature so you don’t lose your original investment if the market crashes.
- Inflation Pacing: Standard taxable brokerage accounts can help give you the flexibility to invest in dividend-paying stocks or growth equities, allowing your assets to continue to grow, and you may be able to add inflation riders to certain annuity products. Both of these options can help your funds to keep up with inflation.
The Cons:
- Complexity: Managing multiple financial vehicles requires more strategic oversight and planning. It’s important to talk with a financial advisor about how to utilize these products in the most effective way for your financial goals and concerns.
- Liquidity Tradeoffs: Some options, like annuities, may mean you don’t have immediate, total access to your funds.
So, What’s Next?
Transitioning into retirement isn’t an all-or-nothing decision. It is about shifting your focus from seeking to increase your total savings to using those savings to maintain your lifestyle throughout retirement. Whether you leave your assets where they are or branch into other vehicles, speaking with a financial professional about your goals and the retirement risks that concern you most is the best way to help ensure you have a well-positioned plan tailored to you and your retirement lifestyle.
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