One-third of Americans who are five years away from retirement haven't even calculated how much income they will need in retirement, according to a new survey by Charles Schwab. Nearly half of those surveyed had no idea how to invest their money to maximize retirement income.
The survey of more than 1,000 Americans age 55 to 70 found that while the vast majority of pre-retirees expressed feelings of optimism about their retirement readiness, one-third (33 percent) said they had not yet determined what their essential living expenses in retirement would be and almost two-thirds (64 percent) said they have less than one year of cash savings at any one time for retirement living expenses.
In response to the survey results, Schwab released nine key principles to provide investors with ideas on how to fund their own retirement.
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"Saving for retirement is something most Americans know they have to do, but many people are confused, scared, and literally frozen when it comes to flipping the switch from saving to withdrawing," said Carrie Schwab-Pomerantz, Charles Schwab senior vice president. "Our data shows that people even just a year or two away from retirement don't know how to tap their savings effectively once they transition to retirement, so we designed our new Retirement Income Fundamentals to help give people clear and actionable guidance on how to make that transition happen successfully."
Schwab recommends:
- Review your situation. Know how much money you've earmarked for retirement, where you keep it, and how much, if anything, you want to leave to heirs.
- Maintain a year of cash. Set aside an amount equivalent to what you'll need from your portfolio for at least a year. This is the money you'll use—along with your regular sources of income—to cover all expenses throughout the year.
- Consolidate income in a single account. When possible, you may want to deposit your regular sources of income into the account where you keep your year of cash. Or, you might choose a similar type of account where funds can be easily transferred.
- Match your investments to your goals and needs. As you begin to rely on your investments for income, you may feel most comfortable investing heavily in income-generating bonds and CDs. But to counteract the long-term effects of inflation, you may need to keep a portion of your savings in growth-oriented stocks as well.
- Cover essentials with predictable income. Divide your expenses into essential and discretionary categories and cover the essentials with predictable income sources.
- Don't be afraid to tap into your principal. Chances are you'll need to supplement interest and dividend income with measured withdrawals from principal. And while it's natural to be concerned about spending your savings too quickly, there are ways to help tap your portfolio with a high degree of confidence that your money can last.
- Follow a smart portfolio drawdown strategy. To supplement your predictable income sources, such as dividend and interest income, Social Security, pension payments and rental income, consider drawing money from your retirement portfolio in this order: Start by drawing principal from maturing bonds and CDs; Take your required minimum IRA distribution if you are 70 ½ or older; Sell overweighted assets in your taxable accounts; Sell from your tax-advantaged accounts starting with Traditional IRAs, then Roth IRAs.
- Rebalance annually to stay aligned with your goals. Annual portfolio rebalancing is especially important when you're retired. There's less time to recover from the potential losses of lackluster returns caused by a portfolio that has strayed from your chosen asset allocation.
- Stay flexible and reevaluate as needed. Things change. Situations change. Markets change. Priorities change. It's important to periodically revisit your portfolio asset allocation to stay aligned with your broader investment goals.
The Schwab survey also found that 51 percent of respondents say they have four or more financial accounts but two-thirds are not planning to consolidate those into one account from which to withdraw their retirement income. Nearly half have not anticipated what effect taxes will have on their retirement income and one-quarter have not thought about tax expenses at all. Fifty-two percent said they have worked with a professional advisor to create a retirement income plan and a quarter of those surveyed said they would like professional advice to determine how much retirement income they need.
The Charles Schwab Corporation provides financial services, with more than 300 offices and 8.5 million active brokerage accounts, 1.5 million corporate retirement plan participants, 774,000 banking accounts and $1.68 trillion in client assets.
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