The most daunting retirement planning challenge -- more intimidating than anticipating the need to sock away vast sums of money -- is figuring out how to turn that savings into a regular retirement check.
You have a pot of money in a 401(k) or an IRA or both, and it's invested in stocks and bonds and other places that make it hard to get your hands on it. And somehow you have to figure out how to liquidate just enough so you can pay the bills and not run out before you die -- and who knows when that will be? It's a heart-palpitating challenge.
As you begin the process of figuring out how to spend what you have, Eleanor Blayney, consumer advocate for the Certified Financial Planner Board of Standards, advises that you take these six initial steps.
Retire in a bull market. Liquidating investments when their value is at a low ebb means you lock in your losses -- and once you're retired, you probably won't be able to recover. "The combined effect of withdrawals from investments that are losing money could be fatal," Blayney says. When the return on your money is lousy and you're looking at losses, keep working.
Accept the fact that risk is necessary. For most retirees, today's yields on fixed-income investments are insufficient to maintain even a frugal lifestyle. Blayney suggests putting what you'll need to withdraw annually for five years in safe investments or cash and investing the rest in stocks and other things that are likely to provide a much better yield.
Spend less when you can. The standard advice is to limit annual withdrawals to 4 percent, but don't look at that as written in stone. If you don't need the money, don't spend it. That way in the inevitable years when you need or want to spend more than 4 percent, you'll have a cushion.
Don't be terrified of spending principal. The parents of boomers lived on the interest and saved the principal. Boomers are unlikely to be so lucky because returns are too low. Plus, tax-advantaged retirement plans such as 401(k)s and IRAs are structured, under the tax laws, to be depleted over our lifetimes. If you don't take the money out when Uncle Sam tells you to, you'll face stiff penalties. "We have to get used to the fact that we're not going to flat plane with the values staying the same. We are going to build assets and then go down the other side," Blayney says.
Get a grip on tax obligations. Understanding how to choose which assets to spend first to minimize your taxes can make a big difference, even if you are not a big earner or a big spender. For many people, this is an area where you absolutely need expert help because it's complicated.
Make a budget and plan to stick to it. It's timeless wisdom -- whether you are working or retired.