Transitioning to Retirement

Sound Advice: A Personal Advisor video series

Vanguard Personal Advisor sat down with our advisors and other experts to discuss your most pressing questions on topics such as taxes, health care costs, and retirement transition. This ongoing series will provide guidance to help you navigate challenges, make informed decisions, and meet your financial goals.

In these 3 videos, we'll share how we can help you prepare for a smooth transition to retirement, make tax-efficient withdrawals, and approach spending in a way that works for your lifestyle now and in the future as your circumstances change.

Mary Ryan

CFP®

Your retirement lifestyle

Tips to become financially and emotionally prepared.

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Being financially ready for retirement and being emotionally ready are two very different things. You might wonder if you're really prepared to take this important step in your life. The right support can help make the transition as smooth as possible. Transitioning into retirement can bring up all kinds of feelings and questions for people.

Financial advisors like me are here to help you find answers and make a plan. In my work, I see that a lot of people are financially ready to retire, but they may not be emotionally ready to shift from going to work every day to having days that might be a lot quieter and more unstructured. It's a big adjustment.

I encourage my clients to start thinking about what hobbies or activities they'll pursue, where they want to live, do they want to travel or do charity work? You can start to replace the old structure of your professional life with a new one for this stage in your life. We're here to build a financial plan around your plans. There are a lot of details people don't always think about when they're getting ready to retire.

The things we do every day cost money, whether we're talking about the little things like your favorite coffee and bagel combo or bigger things like traveling or paying bills. When you don't have that regular paycheck coming in from a job anymore, your portfolio is your income. So coming up with a budget and spending plan is really important, and that's where your advisor can help.

Lifestyle changes can mean changes in your spending. You're leaving some expenses behind in retirement like gas for commuting, work clothes, and payroll taxes just to name a few, but you might be picking up some new ones as you find your new routine. On average, you should plan to spend 75% to 85% of your current income once in retirement, but your advisor will work with you to find the right number for your situation.

We'll also break down how your current and future health care needs can factor into your spending plan. Our exclusive tools like Medicare Match and our health care estimator can help bring these things into focus. There's a lot to think about it as you're navigating this big life change. Your financial advisor is here to help you before, during, and after your retirement.

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Your income strategy

How rules and taxes impact retirement account withdrawals.

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You've spent your whole career putting money aside for retirement and now you're finally here and your savings are set to become your income for this amazing new chapter of your life. It is so important to have a strategy for handling these assets because they'll need to support your lifestyle for years and decades to come. Your financial advisor can offer insight and hopefully, peace of mind as you work together to make a plan.

I help my clients get a clear picture of their portfolios so they can understand what kinds of accounts they own and how to time withdrawals without triggering penalties. I'm going to walk you through a few of the high level account rules you might run into. If you're retiring on the early side, you may be able to start penalty-free 401(k) withdrawals as early as age 55, which will leave you with just regular income tax to pay.

But if you rolled those funds over to an IRA, you'll need to wait until you are 59 and 1/2 to avoid the 10% early withdrawal penalty. After age 59 and 1/2, restrictions relax and you can withdraw from a Roth or traditional IRA penalty-free for the most part.

Once you turn 72, a mandatory yearly withdrawal kicks in if you have a traditional IRA. You'll need to make your first withdrawal by April 1 of the following year. And by December 31 every year after that. But if you own a Roth IRA, there's no mandatory withdrawal at any age.

And lastly, don't forget about other workplace benefits like stock options or deferred compensation. Having a plan for these ahead of retirement can save on taxes and save you headaches. These are just a small fraction of the rules that govern retirement account withdrawals.

It's a lot to keep track of, but one of the best things about having a financial advisor is that we're here to stay on top of these things so you don't have to. We can also help you make sure you're withdrawing from your accounts in a tax efficient order. My clients tell me they feel a lot of things as they're heading into retirement. There's usually some nerves and uncertainty, but there's also plenty of joy and excitement. You've reached this milestone after a lifetime of hard work and planning. Your advisor can help you transition into retirement as smoothly as possible with an income and withdrawal plan that's right for your life.

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Your spending strategy

3 strategies to help manage spending.

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When you've had years and years of steady income, retirement can be a big adjustment. It can be a reality check when that regular paycheck from your job stops coming in. You're living off your portfolio now.

It can be a little scary to feel like your ability to support yourself depends on what the markets are doing. This is a real fear that I hear all the time from my clients, and I take it very seriously.

My goal is to help them make a spending plan that fits their lives and goals. Having that plan makes a world of difference in helping people feel ready for this next stage of their lives.

One of your advisor's most important jobs is to help you figure out how much money to withdraw from your portfolio in your first year of retirement and beyond. So how do we do that?

First, we look at your replacement ratio. This is a rule of thumb that helps us decide what percentage of your pre-retirement income you'll need to maintain your lifestyle. Once you have a better idea of what your day to day life will look like in retirement, we can adjust this number as we go.

Then we look at your spending strategy. People tend to start out thinking they'll spend the same amount of money year to year. But studies have shown that this number actually ends up changing as we go through life. The average person ends up cutting their spending by about 2.5% their first year of retirement and by an additional 1% every year after that.

I'm going to walk you through three strategies that clients often choose to help them manage their spending. Dollar plus inflation calls for you to spend a certain percentage of your portfolio, usually 4%, in your first year of retirement. Then you can make adjustments to that dollar amount in future years based on inflation.

This path ignores market conditions, but it may be good for someone who wants to maintain a steady level of spending year to year. Then there's percentage of portfolio strategy, which means spending a fixed percentage of your portfolio every year.

You can be more confident that you won't run out of money this way, but your yearly spending amounts are market driven and run the risk of coming in below what you'd actually be able to live on. This option may be better for someone with an adaptable budget, whose main goal is to avoid depleting their portfolio.

And finally, you can go for a dynamic spending strategy, which combines dollar plus inflation and percentage of portfolio. It brings in the best of both worlds. This strategy builds on people's natural tendency to spend more when markets are up and less when markets are down, but moderates the wild swings you get when you give market performance free rein over your spending.

Your withdrawal order is just as important as the spending strategy you choose, and your advisor can help you work that out, too. Everyone approaches retirement spending differently because everyone has different needs and goals. You are a whole person, not just a portfolio.

A conversation with your advisor is a great way to land on a spending strategy that reflects what's important to you.

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