When we talk about retirement, the conversation usually focuses largely on building a nest egg.
With employers moving away from offering pensions and average life expectancies increasing, saving for retirement has fallen on the employee.
As a result, industry professionals consistently encourage workers to maximize contributions to their IRAs or 401(k)s.
While asset accumulation is important, and fundamental to affording retirement, financial planning doesn't stop once you leave the workforce, because saving for retirement and living in retirement are different and require separate approaches.
New hurdles for retirees
When entering retirement, many retirees face new hurdles when it comes to tax planning, healthcare expenses, account withdrawals and making their savings last. When you're working, retirement planning is often centered around saving.
For example, financial professionals might help you identify your risk tolerance, guide you through long-term investments and many employers offer a retirement plan with a matching program as an incentive to contribute.
If savings fall behind while you're still working, it can be fixed by increasing contributions, delaying retirement or working a side gig, if your schedule allows.
In retirement, circumstances are different. Rather than actively earning income, which can come with raises and bonuses, retirees must rely largely on their savings, which are likely fixed.
This phase of life is also when federal programs, such as Social Security and Medicare, become prevalent, raising questions about when to claim benefits, what Medicare options to pick and how to withdraw money from those retirement accounts without triggering access taxes or becoming penalized.
Rather than focusing solely on growth, retirees must figure out how to turn their savings into a reliable source of income that lasts.
A big mistake
One of the biggest mistakes I see retirees make is assuming the investment strategy that helped them build their nest egg will work the same once it's time to live on it. When you're working, market volatility is easier to recover from because you're actively earning income, and you have the time to recover from downturns.
However, once your portfolio becomes your main source of income, you might need to make withdrawals regardless of where the market stands. For some, this could mean selling investments at a lower value to meet income needs.
Over time, this can strain your savings, potentially depleting your portfolio prematurely.
Generating income from your investments involves much more than taking out money when you need it. Traditional IRAs, Roth IRAs, brokerage accounts, Social Security benefits and pensions, if you have one, are all taxed differently.
Without a coordinated withdrawal strategy, you could unintentionally pay more in taxes or miss opportunities to make savings work more efficiently.
One coordinated strategy
Instead of viewing retirement accounts as separate buckets of money, a retirement income plan allows you to manage withdrawals, taxes and income needs under one coordinated strategy.
Unfortunately, many people wait until they're in retirement to start thinking about their retirement income strategy.
In addition to prioritizing growth, the time leading up to retirement can also be used to start planning for how those assets will be used.
Estimating future income needs, reviewing healthcare costs, coordinating retirement accounts and understanding how they'll work together in retirement will make the transition much easier when that time comes.
Saving for retirement is crucial, but the financial planning doesn't end once your golden years begin. The transition from earning income to living off retirement savings requires a different mindset and a new approach.
Developing a retirement income plan that addresses how income will be generated, how withdrawals will be taxed and how your savings will support future spending needs can help ensure the nest egg you've spent decades building serves you throughout retirement.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
