From Saver to Spender: Embracing the Distribution Phase of Retirement

As you approach the end of your career and working years, transitioning from being a diligent saver to strategically spending your retirement savings can be a source of both freedom and stress. 

Freedom because you no longer depend on a paycheck to fund your cost of living. On the other hand, it is stressful because your retirement savings must produce income for the next 30 years (if you or your spouse live into your 90s). 

Moving into retirement often requires various financial and psychological shifts, such as moving from the ‘accumulation phase’ of life to the ‘distribution phase’ during retirement years. 

These emotions are understandable, especially when considering the number of non-controllables that impact your savings: Inflation, market volatility, timing of distributions, recessions, interest rates, wars, and government policies, to name just a few.

The bottom line: A lot can happen in 30 years – just look backward to see what we mean. You will have to deal with several uncertainties that impact your financial well-being. 

Today’s blog will look at how to plan your retirement transition from savings to spending and how to protect your retirement nest egg. 

Read our latest Quick Guide: Ready to Retire? Preparing for Your Life’s Next Chapter 

The Psychological Transition: From Accumulating to Distributing

You’ve likely focused on building and growing your retirement savings throughout your career. This period, known as the asset accumulation phase, is characterized by a ‘saver’ mentality—consistently setting aside a portion of your income in 401ks, IRAs, and personal savings accounts. 

When you enter retirement, you must pivot your thinking from saving to spending, which can be tough. You hope to offset spending with your investment results so you don’t spend down the principal. 

Think about this: for decades, your financial activities were geared towards increasing your wealth, and now you’re expected to spend the wealth and offset it with the performance of your assets. That takes a major change on your part to make that transition.

This is more complex than it sounds. You must offset distributions, inflation, and investment expenses with performance. This is a major challenge if you have a low tolerance for risk. 

The Buffalo Grove CFP® professionals at SGL Financial understand this transition and are equipped to guide you through the most complex financial process of your life. You only have one chance to get it right, and you cannot go back and fix it. 

We created the Four Pillar Retirement Plan™, a proprietary retirement planning process focusing on retirement income, investments, tax planning, and legacy planning. Without a proper retirement plan, you risk having to adjust your living standards, which no one wants to do, especially late in life when medical expenses are peaking. 

Practice Steps to Transition into Retirement Spending Mode

These steps can help you enjoy a financially secure retirement, allowing you to focus on what matters most – family and leisure activities. 

1. Create a Detailed Budget: List your expected expenses in retirement, including everyday costs and occasional big-ticket items. Make sure you account for everything from utilities to travel.
2. Review Your Income Sources: Identify all your income streams, such as Social Security, 401k accounts, IRAs, and your anticipated investment returns. Know when and how much you should receive from each account.
3. Adjust Your Investment Strategy As Needed: When you retire, consider shifting a portion of your portfolio to more conservative investments to reduce risk. However, keep some growth investments to combat the impact of distributions and inflation.
4. Set up a Withdrawal Plan: Decide on a sustainable withdrawal rate from your savings and stick to it. A common rule of thumb is the 4% rule, but only as long as it fits your situation which is not the case for everyone. A $1 million nest egg would produce $40,000 of retirement income. 
5. Minimize Debt: Pay off all higher-interest debt before retiring. This reduces your monthly expenses and stretches your retirement funds further.
6. Consider Healthcare Costs: Factor in potential medical expenses and long-term care. Look into Medicare and supplemental insurance plans that suit your needs.
7. Stay Flexible: Your spending needs may change over time. Be ready to adjust your budget and withdrawal strategy as necessary.
8. Seek Professional Advice: Consult with a Buffalo Grove financial advisor who can provide personalized guidance and help you navigate the complexities of retirement planning.

Stress Testing Your Retirement Plan and Risk Tolerance

One critical aspect differentiating retirement from saving to spending is the sequence of returns risk. This risk refers to the timing of investment returns, especially when you start taking withdrawals.

Negative returns early in retirement can deplete your savings more quickly than expected, potentially impacting your long-term financial well-being. This may require a part-time job or a reduced standard of living.

Stress testing your retirement plan against various market conditions is crucial. This can help ensure that your withdrawal strategies and risk exposure can withstand economic downturns without jeopardizing your financial security. 

This process also allows you to adjust your spending in real time, ensuring that your retirement funds last for the rest of your lives.

Balancing Enjoyment and Financial Security in Retirement

Finding a balance between enjoying retirement and managing your finances can be challenging. On the one hand, you want to make the most of your retirement years by exploring new hobbies, traveling, or simply enjoying more free time. 

On the other hand, there’s a nagging worry about outliving your savings.

Comprehensive wealth management services, including retirement income planning and tax planning in retirement, can help alleviate these concerns. By creating a tailored retirement budget and effective withdrawal strategies, your financial advisor helps you manage your resources so you can enjoy your retirement without constant worry about your financial well-being.

Retirement is a time to enjoy the fruits of your decades of commuting and working. If you are lucky, you enjoyed your work. But, now it is time to move on. With careful planning and a trusted advisor, you can shift from savings to spending with peace of mind, ensuring that your retirement is as fulfilling and secure as the years you spent earning it.

Watch our co-founder, Steve Lewit, on WG9. 

As Buffalo Grove CFP® professionals, we created a “Four Pillar Retirement Plan™” to help you handle these uncertainties and pursue the secure retirement you’ve worked hard to attain. We believe there are four key components to building a solid retirement plan: 

• Income
• Investments
• Taxes
• Legacy

Whether you’re looking for tax-efficient investment strategies or a comprehensive financial roadmap, the four pillars can make a huge difference in planning your future.

Ready to learn more about our retirement planning services? Let’s connect.