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5 Smart Strategies to Spend Down Your Nest Egg

These steps can help you replace your paycheck in retirement

By Marcy Keckler

Most people thinking about saving for retirement are probably very focused on accumulating assets. But there are two important questions you should ask yourself before your long-awaited retirement day arrives:
Question No. 1: Have you considered how you’ll withdraw from your nest egg? Shifting from accumulating assets to living from them means you must be strategic about how you choose to spend your money in retirement.
Many experts cite rules of thumb like planning to withdraw four percent of your retirement funds each year and making calculations based on average life expectancy. But we all know how life can deviate from the “average,” so relying on these basic calculations may not be the best route.

(MORE: Retirement Rules of Thumb That Work)
The way you choose to replace your paycheck is unique to your financial situation, how much you anticipate spending and the investments you hold. So working with a financial professional as you prepare for and begin retirement is going to help you prepare for what’s ahead.
Question No. 2: How will you pay yourself and from which accounts will you draw income first? It can help to think of your expenses in retirement as being in one of three buckets – essential expenses (like housing, food and auto insurance), lifestyle expenses (like vacations and hobbies) and unexpected expenses (like large out-of-pocket health care costs or storm damage to your home).
Plan to cover the essentials with sources of guaranteed income such as Social Security, annuities or certificates of deposit. Your lifestyle expenses might be generated from growth or income investments, like stocks and bonds. To help cover unexpected expenses that may arise, it’s generally advisable to keep several months’ worth of cash on hand. It’s also important to consider the tax implications of your drawdown strategy, which a financial or tax adviser can help you with.

(MORE: 11 Ways to Get More Money in Retirement)
Answering these questions may seem overwhelming, but there are five things you can do immediately to help replace your paycheck and feel confident in retirement:
1. Keep your emotions in check. One big mistake I see people make when they retire is spending too much, too fast. On the opposite end of the spectrum, I’ve seen new retirees who are too afraid to spend any of the assets they’ve accumulated.
It’s natural to approach your finances with some emotion, but striking a healthy balance between being prudent and living the retirement lifestyle you have been dreaming about may help you feel more in control of your money.
2. Create a budget and stick to it. In retirement, it’s more important than ever to create and adhere to a budget. Working with a financial professional is a great way to get organized. But, at minimum, you should sit down with all of your financial documents and determine how much you can comfortably spend in retirement; break it out for each month and year. Then, in retirement, carefully track your expenses and adjust as needed.
If you’re still actively employed but preparing for retirement, it’s important to understand what you will realistically spend on essential, lifestyle and unexpected expenses after you’ve left the workforce. Consider “practicing retirement” by carefully tracking all your expenses to help establish your post-workforce budget.

(MORE: 5 Retirement Investing Mistakes to Avoid)
3. Do your research and create a strategy. Withdrawing from your retirement accounts without a strategy can minimize your growth potential and be inefficient from a tax perspective. Make sure you’ve allocated your savings in an appropriate mix of investments, including some that are sheltered from the impact of market volatility losses.
4. Be flexible. You should always be thinking long-term, but sometimes circumstances require making more immediate decisions. For example, what if market volatility causes your portfolio to shrink considerably? You may then want to rein in your expenses and aim to spend less than what you have budgeted. Likewise, if you’ve locked in some healthy gains on your investments, this could be the time to take your dream vacation.
Ensuring you’re invested appropriately according to your risk tolerance and current financial circumstances will also help give you peace of mind as you begin to spend your nest egg.
Remember: in some investments, the average annual rate of return will be fairly steady (such as the guaranteed sources discussed earlier), while other accounts have variable returns (stocks, bonds and mutual funds). The order the returns occur matters to your withdrawal strategy. Experiencing a negative year right away after retiring can put your portfolio in danger —  this is called “sequence risk” — but positive-return years first and negative ones later on in retirement may have less effect.
5. Protect yourself. People want a relaxing and fun retirement, and fortunately this becomes a reality for many retirees. But things can still go wrong; life might still throw you some curveballs after you’ve left the workforce. It’s important to plan for the unexpected.
Consider taking steps like flagging some of your savings specifically for out-of-pocket health care expenses. Also, have pre-set guidelines and a financial plan to follow in case you have a family member in need during your retirement.
On the day you retire, you will likely have the most money you’ll have in your entire life, and it can be intimidating to think about living strictly from your savings. Having a plan in place and preparing for the unexpected events that life will continue to send your way can help you feel confident about making this important and exciting transition.
Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Ameriprise Financial, Inc., and its affiliates do not offer tax or legal advice. Consumers should consult with their tax adviser or attorney regarding their specific situation. Ameriprise Financial Services, Inc. Member FINRA and SIPC. © 2014 Ameriprise Financial, Inc. All rights reserved.

Marcy Keckler is the Vice President of Financial Advice Strategy at Ameriprise Financial, where she is responsible for the firm's Confident Retirement program. Based in Edina, Minn., Keckler is a certified financial planner and a chartered retirement planning counselor. Read More
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