, Newburyport, MA

August 14, 2012

The triathlon approach to retirement planning

Money Matters
Donald E. Askey

---- — Managing retirement income is a triathlon. After successfully completing the budgeting event, you will be tested on choosing your initial withdrawal rate. For the final event, which recurs every year, you have to recalibrate spending and withdrawals based on your life expectancy, the markets, taxes and inflation.

The risk of slacking off on or failing to complete one of these events is running out of money in retirement — the greatest financial fear of retirees. With proper coaching and training, the risk of outliving your savings, however, can be avoided.

Financial peace of mind in retirement comes with planning and perseverance. Setting goals and staying focused on the goals are necessary and essential.

The first event in the retirement-income triathlon is budgeting. What a yawn! If you’re not used to budgeting before retirement, then budgeting going into retirement may require special training.

To make retirement work for you, you want to establish a clear and specific monthly spending target, say $4,000 or $5,632 or some number to cover both your basic expenses plus the fun discretionary stuff. This number should be after income taxes are taken care of.

Some retirees cover their basic essential expenses with Social Security, pensions or annuities. These are streams of income you cannot outlive. It makes sense to make sure you will never run out of money to meet the expenses for shelter, food, insurance, transportation and health care. Incidentally, Fidelity research indicates that a 65-year-old couple today will face $240,000 or more in out-of-pocket health-care expenses in retirement.

What isn’t covered by the fixed-income streams above is covered by your discretionary savings, which may be in the bank or in an investment account. Some of these savings may be in IRAs or other tax-deferred vehicles or they may be in accounts taxable annually due to interest, dividends or capital gains.

If you are in your 60s, as all of the oldest boomers are, and you are healthy, you want those tax-deferred and taxable accounts to last for at least 30 years, if not longer. Therefore, you have to calibrate your withdrawal rate from these accounts to take your life expectancy and health, market performance or account growth, income-tax rates and inflation into consideration.

You need to realize enough in growth to cover inflation and taxes. If the performance of your accounts surpasses the effect of inflation and taxes, you are ahead in the game and may be entitled to a “raise” over your initial withdrawal rate.

The initial withdrawal rate is the percentage you withdraw for spending in your first year of retirement divided by the total value of your retirement accounts. Experts argue over the ideal initial withdrawal rate ranging from 3 percent to almost 6 percent. Picking that initial rate is the second event in this triathlon. If experts can’t agree on the ideal rate, you should consider engaging a qualified retirement income-planning coach to assist you.

The third event, which repeats itself every year for the rest of your life, is tweaking or recalibrating that withdrawal amount based on your age, health and the performance of your accounts, in addition to the impact of income taxes and inflation. The third event in a triathlon is always the toughest. You are exhausted and stretched. But sitting out this event could be a decision that’ll cost you a winning retirement.


Donald E. Askey, a fee-only financial adviser and planner with offices in Newburyport and Boston, can be reached at