3 To avoid leisure mistakes – and how to fix them if you can

Turning wealth into income is not the easiest task. And some people make mistakes with their money before and during retirement.

Something is wrong, unfortunately, unchangeable. But some, fortunately, don’t.

Don’t take too much risk

According to research published by JP Morgan Asset Management, all retirees change their asset distribution when they distribute their assets from 401 (k) to the IRA. And many, 75%, experts point out that is risky. It reduces how much they are investing in stocks.

According to Katherine Roy, co-author of research at JP Morgan Asset Management and chief retirement strategist, both rollover and de-risking at inappropriate times can have significant and adverse effects on retirement success.

For example, de-risking during a market downturn can lead to losses resulting in a nest egg that is not without risk. And that’s important, especially if the assets you’ve accumulated are the assets that will help you during your retirement, Roy said.

To be fair, it is not clear from research whether retirees were advised to reduce risk or whether it was the result of reduced risk appetite. According to Roy, some retirees, for example, have invested too much in equities in their 401 (k) before the rollover.

So how much should your stock be in retirement? Somewhere between 40% and 60% is “fairly prudent,” Roy said, “you want to protect (your nest egg) when resources are at their highest and most at risk.”

Don’t just rely on RMDs

According to JP Morgan Asset Management Research, most retirees do not deliver from their IRA before the RMD age (which is now 72) and those older than the RMD age prefer to receive only the RMD amount.

And according to the verdict, this method is ineffective because it does not generate income that supports the declining spending of retirees in today’s dollars. “In fact, the RMD method generates more income after retirement and can leave a large account balance even at the age of 100,” the study found.

According to Roy, the study highlights the importance of goal-oriented planning. “People do well when they manage their finances based on their goals, time horizons and risk tolerance,” Roy wrote in his report.

In principle, this means investing money that will be used to cover many years of expenses to retire in stocks instead of bonds. “If applicable, those goals should not be left to chance to be met, depending on what remains after RMD adoption,” he wrote. “Resources should be managed more actively.”

In terms of spending, the most effective way to raise wealth is, according to research, to support actual spending behavior, which shows that spending decreases in dollars today with age. In other words, withdraw early before you retire when you are likely to spend less, then save for your desired lifestyle instead of saving it later. This is a good use of your leisure funds. And, if you take more investment risk, you reduce the risk of running out of money.

On the other hand, there are some people who claim that the RMD method is a suitable way to generate retirement income in addition to delaying social security. Steve Vernon, author of How to “Pension” any IRA or 401 (k) plan, has several key advantages to his “spend safely in retirement” approach: it produces the average total retirement income expected at retirement compared to most solutions; It automatically adjusts the amount of RMD withdrawal to detect investment gain or loss; It provides a lifetime income, no matter how long the participant stays, and it automatically adjusts the RMD withdrawal for the rest of life expectancy.

Roy, however, said that the RMD method creates a discrepancy between retirement income and expenditure. “If you want to spend a certain amount of resources to use efficiently, (RMDs) are not optimized to do it,” Roy said.

Of course, many retirees are reluctant to withdraw money from their IRAs in the first years of retirement or 72 years after their RMD because they fear that spending long-term care may require their money later in life.

But this strategy does not mean that they will be able to bear the cost of long-term care in later life. Instead, Roy said you need to have a separate plan to pay for these costs and not just use one rule for everything.

Bottom line: “Once you retire, a more flexible, dynamic approach to lifting to meet regular costs – which supports actual spending behavior – may be more effective than simply adopting RMD,” Roy wrote.

Don’t just spend what comes

Financial planners will usually instruct you to determine your desired standard of living in retirement and then align your sources of income to achieve that income goal, Roy said.

But according to research by JPMorgan Asset Management, retirees are spending whatever it takes to get just enough to support their desired lifestyle. Retirement income and expenditure are highly correlated, the study found. As Social Security and RMD begin, incomes increase, expenses increase. “People are just spending what they have on their accounts,” Roy said.

In some ways, that makes it completely understandable. It’s the kind of behavior that people were saving when they retired. “I think people are used to using their accounts to figure out how much I can save, or how much I can spend this month before I get my next salary,” Roy said. “And it’s behavior that we believe we’re retiring from.”

The effects of this behavior are twofold: not having the mechanical means to earn to support your desired lifestyle can be stressful and if you have a system that generates income ineffectively, you may end up making money soon.

In addition, research has shown that households spend more even if they have observable retirement assets like other retirees with a regular income from annual and / or pensions. “This notion of permanent income in your account gives you the confidence to spend,” Roy said.

A recent study by David Blanchett of QMA and Michael Fink of the American College of Financial Services confirmed this finding. In their study, Guaranteed Income: A License to Spend, the authors found that retirees who put a high percentage of their assets into guaranteed income spend more than retirees whose assets are essentially non-annual assets.

What’s more, Finke and Blanchett found that “retirees will spend twice as much on retirement each year if they transfer investment assets to guaranteed income assets.”

According to Blanchett and Finke, non-annual savings have an explanation for low cost. This is probably a reasonable response to a behavioral and longevity risk – the risk of running out of money.

So, what is some acceptance from JP Morgan Asset Management research? What can help you turn wealth into income and avoid mistakes (or right)?

A, goal-oriented planning.

Two, don’t spend what comes.

And three, consider part of the annuity of your assets.

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