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I am retiring. How to use saving in retirement.

When you retire, deciding what to do with your savings will largely depend on your age at retirement. You need to balance the need for current income with the need for future growth.

  • Savings as reserve
  • Savings used for reserve and income
  • Savings used only for income

Savings only held as reserves

Your savings have two competing uses: they can be held as reserves or used for income.

Need to be safe and maintain their value as prices rise

As reserves, savings need to be safe and maintain their value as prices rise. Savings are mainly needed for medical and long-term care expenses.

Decide where to put your reserves. For savings to be safe and maintain their value, you have two main options:

  1. Bank savings accounts. Such accounts are typically insured and over the long-term the interest paid should be a bit above inflation.
  2. Money Market Funds. While not insured, these funds are required by law to hold only low-risk securities and the interest paid is usually similar to that on bank savings accounts. Your bank might offer a money market fund. So do local brokers. To find a fund on-line, enter “money market fund” in a search engine. Key considerations in picking a money market fund are:
    • Security. All money market funds have very little risk of loss. But most secure are reputable funds holding mainly government securities.
    • Fees. The interest paid by the securities in money market funds is low. So even modest fees can affect how well your reserves maintain their value.
How to open a reserve account
  • To open an account with a local bank or broker, schedule an appointment and bring any documents they request.
  • To open an account with an on-line bank or money market fund, go on-line and follow their directions.
How to manage your reserve account

The interest paid by savings accounts and money market funds over the past 85 years has averaged 0.75% above inflation. So the value of your reserves – what your reserves can buy – should generally:

  • Rise slowly if you leave the interest in the account.
  • Remain about the same if you draw out about 1% a year.

Savings used for both reserves and income

Decide where to put savings used for reserves and income

Experts generally recommend a conservative or moderate mutual fund that holds a widely diversified mix of stocks, bonds or mutual funds. You’ll get a higher expected return than from bank savings accounts or money market funds, but you’ll also have more risk. To invest your savings this way, your main options are on-line brokers or mutual fund firms or local brokers or financial advisers. Key considerations are:

  1. Security. Secure systems and insurance that protect your securities ownership.
  2. Services. Different providers offer different services. So know what you need:
    • Diversification. To reduce risk without reducing expected returns.
    • Professional Investment Management. To avoid costly mistakes.
    • Advice. To help you select suitable investments or develop a broader financial plan.
    • Money Management. To move money easily and efficiently.
  3. Fees. Fees vary widely and can take a large share of what you earn and can draw out as income. Most important are:
    • Investment management fees. Generally a percent of your savings, the main fee typically charged by mutual funds and financial advisers.
    • Brokerage fees. For buying and selling securities, the main fee typically charged by brokers.
    • Fees might seem small, but their effect is a big. For example, if you believe you can safely draw out 4% of your savings each year including fees:
      • If you pay 1.0% in fees you can use 3.0% as income.
      • If you pay 0.2% in fees you can use 3.8% – 25% more.
How to manage an account used for reserves and income
  • Pick Your Investments based on how much risk you can take: the less risk you can take, the less in stocks and the more in bonds.
  • Set Up Automatic Transfers to the checking account you use for everyday spending. (Using one account helps you keep track of your spending and know if you’re living within your means.
  • Review Your Plan Each Year. Your financial needs and the value of your savings change in ways you cannot predict.

Savings used only for income

Should you buy an annuity with some of your savings?

Annuities provide a monthly income for life, similar to the income you get from Social Security. You will usually get you more income from an annuity than from savings invested in stocks and bonds and avoid the risk of outliving those savings. But once you buy an annuity those savings are gone and can no longer be used for anything else.

There are different types of annuities, so know what you want. Key considerations are:
  • Security. Assurance that the income will be paid for life is the primary requirement. Insurance companies that sell annuities are regulated, so you should at least get most of the income promised. But be safe and check the company’s rating, call your state Insurance Department, or consult a financial adviser.
  • Inflation protection. Do you want an income that a) rises in line with prices; b) rises each year by a set percentage, such as 3%; or c) that remains the same in terms of dollars?
  • Survivor benefits. Should you die before your spouse, do you want an income that will continue, either fully or in part (say 50%) as long as your spouse is alive?
  • Guaranteed payouts. Do you want an income that either you or your heirs will get for a minimum number of years (say 10)?
  • Investments in Stocks. Do you want an income that rises and falls – possibly a lot  – based on the performance of the stock market, but will never fall to zero?
  • Longevity Insurance. Do you want an annuity that starts at a much older age, say age 85, to ensure you don’t outliving your savings?

If you’re not sure, it makes sense to contact a financial planner to help you decide.

Find the best deal

Prices for similar annuities vary quite a bit. So once you know what you want, check many different on-line and in-person providers.

The best deal is often Social Security:

To “buy” an annuity from Social Security, use your savings to delay claiming and claim a higher benefit when you’re a few years older. Think of the savings you use as the price and the increase in your monthly benefit as the annuity you buy.

 

Our goal is to change how we think about saving.

I founded NARPP as a non-profit, because I believe that retirement savings should be about people— and making their lives better. Not about assets under management, sales goals and commissions. The process of saving for retirement has become so complex and confusing it is not surprising that people have a hard time figuring out what’s in their best interest.  It doesn’t need to be this way. At NARPP we are committed to simplifying the complex, delivering fair and transparent investment information, and giving people ownership and control of their retirement savings. Our singular mission is to help you succeed.

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