After years of saving, you’ve suddenly realized you’re inching closer and closer to retirement. You’ve checked all of the boxes, taken advantage of your company-sponsored 401(k), invested in educating yourself on good personal finance practices and have intentionally thought about the future. So, when do you begin the transition from retirement accumulation to distribution?
We have compiled some general guidelines and frameworks to consider as you navigate this next chapter in your financial journey.
How to Make the Mental Transition
After years of saving, sacrificing and strategizing, it can be difficult to suddenly make the switch from accumulating funds to distributing them. This phenomenon can be described as the decumulation paradox. A study by the Investment and Wealth Institute found that the wealthiest retirees spent 47% less than they could actually afford, indicating the difficulty related to disbursing funds.
To make the situation more complex, one of the biggest risks retirees face is the need for long-term care. This expense can exceed $100,000 a year. A resourceful mindset and looming health considerations pose mental hurdles to overcome before beginning retirement distributions. How do you move forward with these concerns in mind?
Follow the Guidelines
There are certain regulations set by the IRS that must be followed when considering drawing on retirement:
- Once you turn 59 ½, you are eligible to draw on retirement without penalty
- If you draw before 59 ½ you may be subject to a 10% early withdrawal penalty
- You must start drawing required minimum distributions by 72 (or 73 if you reach 72 after Dec. 31 2022).
Keep these in mind and abide by the regulations to help reduce penalty and tax implications.
Remind Yourself
The first step is reassuring yourself that your family is ready to transition from the accumulation phase to the decumulation phase of retirement is to remind yourself that this was the plan all along. Create a set of affirmations that support and reassure your decision to take that next step. Something like “I have created a financially secure environment for me and my family. I can embrace this phase of my financial journey. “
You have done all the hard work and you have created a safe financial environment for you and your family. Remind yourself, in times of doubt, that you have hit all of your financial targets and you are ready to start utilizing retirement funds.
Assign Fund Roles
If you find yourself struggling to spend or enjoy your retirement earnings, it may be helpful to zoom out on your financial picture a little bit. Assigning roles to your overall income can be useful. Designate and assign a small percentage of your income to “enjoyment”. Giving yourself permission to spend a previously-determined amount ensures you stay on track. You may be surprised that such a small percentage could have a big impact on your quality of life.
Consider Long-Term Care Insurance
If the risk of requiring long-term care is a major consideration in your retirement picture, take a look at long-term care insurance. Whether this is in an assisted living facility, nursing home or even hospice care, these policies are designed to help you pay care services through reimbursement.
Long-term care insurance could help ease the financial worries surrounding a long-term care solution for you and your family. Understanding premiums for long-term care insurance correlate with age, learn more about how and when to consider acquiring this coverage here.
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