Ralph Bovitz, CPA, PFS

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Making the Money Last in Retirement

By Ralph Bovitz, CPA, PFS

     Attorneys give considerable attention, time and thought, hopefully, to accumulating money for retirement.  But, once attorneys enter retirement, how should they go about spending without running out of money, after giving up work?

     As life expectancy lengthens through medical advances, it is necessary to link spending with the ability to live comfortably in retirement.  For good or bad, you may possess the genetic characteristics of your parents and that should influence your spending habits in retirement, too.

      Let’s first identify the spending stages of retirement and then consider a spending philosophy to help make the money last in retirement.

      An attorney fresh into retirement, let’s say at the traditional retirement age of 65, is still likely to have the energy for working but would like to redirect that energy towards more enjoyment, without deadlines or other stresses of practicing. In other words, a retired attorney may want to play more golf, to travel more, to spend more time on a hobby, or even to go back to school for another career path.  Let’s call the immediate period after retirement the active stage.   

     Although retirement age is traditionally viewed as 65, there is no way to know how long your energy level will remain high, after 65, enabling you and your spouse to be active retirees.  For the sake of discussion, let’s say this active stage of retirement lasts until about age 75.   

     Let’s call the period after age 75 the not-so-active stage.  This period may be characterized by a little (or a lot!) less travel, either because you have visited nearly every place you wanted to or the hassle of traveling is becoming a bit much.  You also may decide a change in a hobby or a cutback in working in a new career is desirable.  Here again, there is no way to know how long the not-so-active retirement stage should last. Your health and that of your spouse and your energy level will govern that.  For the sake of discussion, let’s say the not-so-active stage lasts until you are about 85. 

     At 85, you may not be running around too much.  Naps start to sound good! Hopefully, you are still reasonably healthy, without too many problems that accompany aging – vision, hearing, and mobility.  I recently attended the birthday party of a 99 year-old client who still plays a little golf, does a little travel and only gave up driving a few years ago, deferring to his wife.  So, let’s call the retirement period after age 85 the less-active stage. 

     By embracing the 3 stages of retirement, active, not-so-active, and less active, you have the opportunity, the “permission” to spend more initially, when you are the most energetic (active) and gradually less, as you become not-so-active and, ultimately, less active. Spending then takes on a rather natural evolution and relationship with your retirement years and activities. 

     But, how much you spend has to be related to how much you have after you give up working.  As a rule of thumb, an annual withdrawal rate of 3 % to 4 % from the total retirement nest egg is deemed in the financial literature to be a reasonable rate, to make the money last.  Of course, if you have too little accumulated then those rates may not be enough to sustain you in retirement.  

     And, if you have a “lot” or just the “right” amount accumulated, then you have the opportunity to go beyond the reasonable rates in the active years, to really enjoy that period, knowing that the successive stages will “naturally” lead to reasonable or even smaller withdrawal rates, and you’ll still be comfortable.  To maintain a comfortable annual withdrawal rate in successive years, remember to tweak the annual withdrawal rate upwards by the annual inflation rate. 

     What should attorneys do if their retirement nest egg declines, due to portfolio performance?  Do what you would do if your practice stumbled when you were working.  Withdraw less, spend less. 

     Finally, how should Social Security benefits be handled in your retirement plans?  Social Security benefits are available as early as age 62.  A larger benefit is paid by waiting until full retirement age, 65, for those born in 1937 or earlier and age 67, for those born 1960 or later.  At 62, if your full retirement age is 65, you will receive about 80% of the benefit available at age 65.  An application at 62, where the full retirement age is 67 will reduce the benefit by 30%.  In general, taking an early Social Security benefit, although lower per month than a full benefit, potentially results in more money received over a longer period, if you live your life expectancy. 

     The decision to take an early Social Security benefit revolves around your health and cash requirements.  If you are healthy and have the right genes, you might want to wait until full retirement age before receiving benefits.  If your health is poor or your accumulated retirement funds are inadequate, you may have to start early Social Security withdrawals, out of necessity.  Attorneys may also want to start early withdrawals to allow their portfolio to grow more, until mandatory distributions from their deferred compensation plans, such as Individual Retirement Accounts, is required, at age 70 ½.  Or, given today’s market conditions, attorneys may want to let their portfolio, retirement and non-retirement plan investments, recover from the recent market declines. Since Social Security benefits may be taxed, some tax planning may be useful before early benefits are claimed.















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