Managing Retirement Money in an Uncertain Economy

In the current economic climate, everyone is facing strong headwinds in the form of market volatility and increased living expenses due to inflation and rising interest rates. These challenges can be even more difficult if you're nearing or already in retirement because you're likely moving from the stage of building assets to the stages of either protecting them or turning them into retirement income.

If you're in or nearing retirement, it's critical to understand the impact of these economic challenges on your ability to have income through 25, 30 or more years. First Citizens Bank Investment Advisor Craig Shively and Wealth Planning Strategist Will Creech discuss methods of managing money in retirement that can help you navigate through the current economic storm.

Find your balance

"Understanding what your balance sheet looks like is the first step," says Creech. A clear overview of your assets, liabilities and net worth will allow you to start breaking your finances out into individual buckets. With a more detailed understanding of each aspect, you can begin applying strategies to each that allow you to adapt to the current economy.

Before you begin crafting strategies to address individual retirement categories, two top-line issues from your balance sheet will need to be addressed.

"When you're about to move to a fixed income, factoring in potential long-term health costs and your level of debt is critical to projecting spending in retirement—especially in this economy," says Shively. Ideally, you'd eliminate all debt prior to retirement to help ensure your retirement income is just being used to cover current expenses. And when you're putting together a budget, you can't just assume that you'll spend less as you get older.

"At 55 you're likely to spend more on activities than you would at 86, but then healthcare expenses tend to rise as time goes on," Shively notes. "While everyone is different, a conservative approach is to budget your retirement income to be the same at 65 as it will be at 90." He emphasizes that this is always good advice, but in the current economy keeping things as even as you can over time is critical.

Inflation's impact

Inflation's impact on long-term healthcare costs could be particularly important. Just 2 more years of current high inflation rates could increase the projected lifetime cost of healthcare for couples significantly, according to HealthView Services 2022 Retirement Healthcare Costs Data Report. For a 65-year-old couple, if healthcare costs increase 1.5 times faster than an assumed 7.9% rate for the Consumer Price Index, the estimated lifetime healthcare cost for a 65-year-old couple would increase from $587,670 to $673,587—an increase of $85,917. For a 55-year-old couple, the same conditions would raise estimated lifetime healthcare costs from $913,005 to more than $1.073 million—a rise of $160,712.

Find the right asset allocation

Although people are understandably cautious about the market right now, Creech and Shively stress that it's critical for retirees to regularly review their asset allocations with their advisor and ensure that their investments match their risk tolerance.

An overall rise in life expectancy only underscores the point. "With people living longer, traditional advice like holding a percentage of stocks and bonds equivalent to 100 years of life expectancy minus your current age is a bit out of step," says Creech. In other words, the old way of thinking was that if you were age 60, about 40% of your portfolio should be in equities. Now, Creech advises clients a more likely rule of thumb is to think about 120 minus your age when determining your equity exposure, although it may vary from person to person.

"Your risk tolerance is going to dictate your risk exposure and the types of investments you make," he adds.

Ruling out stocks and bonds might be your first impulse, but if the market picks back up, returns on equities have been historically higher in the long term over other investment types. Plus, some types of equity investments—such as dividend-paying stocks—create income that may be taxed at a lower rate than money you remove from a retirement plan as ordinary income. "In any market, qualified dividends are actually going to be taxed at a more favorable rate than other types of income," says Creech.

If equities prove too risky for your budget, the current rise in APY on certificates of deposit, or CDs, money market accounts and high-yield savings accounts make deposit accounts a potential alternative. Another option is annuities. "Recent volatility has led more insurance companies to offer more flexibility in their annuity offerings," says Shively. "You lock in for a fixed amount of time, and after that, you can either pull out the money or reinvest in another annuity with the added benefit of deferring gains until a later date when you're not in such a high tax bracket."

Set a distribution strategy with an eye on tax planning

One expense that you have some control over in retirement is taxes. Regardless of what sort of qualified retirement plans you're taking distributions from to support you in retirement, managing tax rates on those plans will be crucial. The first step is to abide by the set minimum age withdrawal. "Avoid withdrawing from your 401(k) or IRA early," says Shively. "In most cases, waiting at least until the threshold of 59½ is crucial because that's the point where a lot of tax penalties go away."

A 10% penalty is assessed on most withdrawals before age 59½ from tax-deferred retirement plans except where special circumstances exist.

Carefully controlling the timing and size of withdrawals once you've reached the age where required minimum distributions, or RMDs, are necessary can also help manage your tax burden. Structuring your withdrawals appropriately depends on your plan type. While contributions to 401(k)s and traditional, SIMPLE and SEP IRAs and any earnings they make are tax-deferred, withdrawals are subject to income tax.

"With the new SECURE 2.0 legislation, the RMD age is rising to 73, and penalties for failure to withdraw have dropped from 50% to 25%," says Creech. "While that helps, you'll still need a strategy to ensure your RMDs are getting taken appropriately."

Most people in retirement experience relatively even incomes from year to year, Creech notes. If that's true in your case, it may make the most sense to withdraw from each of your accounts based on its percentage of your overall portfolio—a practice known as proportionate withdrawals. That tends to result in a more stable tax bill through retirement and potentially lower lifetime tax bills.

Your tax reduction strategy could also include switching your residency. "Eight states in the union don't have an income tax," says Creech. "Relocating somewhere friendlier to your budget is definitely worth considering—especially if you're already planning to move."

It's further worth noting that some states don't tax Social Security income, although they do tax other forms of income.

Assess your home and family setup

Creech and Shively point out that some of the most crucial steps to managing money in retirement are ones that can be made close to home—particularly if you haven't yet retired but are set to do so in the near future.

• Property: If you're not yet retired, take advantage of your active employment status to get your mortgage reviewed. The rates on refinancing or a home equity line of credit, or HELOC, before moving to a fixed income are likely to be much better than after retirement, with the same going for insurance rates on automobiles.
• Family: Having a spouse who's still drawing income from a job and putting money into a retirement plan is a much different scenario than both of you being retired. In the case of couples approaching retirement age, decisions about one or both partners pushing back or staggering dates to boost income and help you for the long term should be factored into your decisions about managing money in retirement.
• Social Security: As you determine how much retirement income you need on a monthly and annual basis, consider the impact of how you claim Social Security. While you can begin as early as 62, pushing back payments until 70 maximizes those payments and can help with day-to-day expenses—plus you get paid for life, which helps with longevity concerns.

Consider the value of a team

Smart adjustments to your retirement plans and to the way you manage your money can help you feel more confident. You'll be well-prepared to handle any economic challenges that arise with the right planning strategy. Given inflation, interest rates, a slowing market and the possibility of a recession, Creech and Shively recommend considering a team of advisors who can help you understand what strategies may work best.

Interested in finding more ways to protect your assets and counter stock market volatility?