One unexpected problem with retirement savings: knowing how to spend it

Not only do Americans need to save more for their retirement but they need to learn how to spend that money wisely when they get there.

Spending down retirement assets is one of the many challenges Americans face when it comes to retirement planning, according to the Government Accountability Office’s recent report on the state of American’s retirement savings — along with actively putting away money, which influences how much they can put towards other financial goals and lifestyle choices, and choosing the right accounts and funds to keep those assets. Not all retirees understand how to manage and comfortably spend down their assets in 401(k) or other employer-sponsored plans, while people with pensions might worry about the health and security of those plans.

See: Four ways to change 401(k) plans for the better

Other questions around spending in retirement include knowing when to take a lump-sum payment versus gradual payments, or when to claim Social Security. The GAO has suggested reform in improving options for the spend-down phase of retirement, along with promoting universal access to a retirement savings vehicle and reducing complexities and risks for plan participants and sponsors. (In other words, there’s a lot the country can do to improve the retirement system, according to the report.)

The spending down phase in particular isn’t something many near-retirees are thinking about, said David Hays, president and founder of advisory firm Comprehensive Financial Consultants in Bloomington, Ind., likely because current retirees are the first generations to really have to deal with it — 401(k) plans only started in 1978. Prior to that, retirees received a pension from a company they had spent most of their careers at, he said, whereas now retirees are mostly on their own.

How does the GAO suggest the country improve the spend-down phase of retirement?

The GAO has made various recommendations, a few of which have already been implemented (Congress enacted the Multiemployer Pension Reform Act of 2014 for pension plans nearing insolvencies after their recommendation, for example). Other suggestions include:

• For 401(k) plans (which are currently in the spotlight for potential reform as part of the president’s tax overhaul), the GAO recommended the Department of Labor look at other countries’ approaches to spending-down these assets while also taking into consideration plan participants’ risks and financial needs. In the GAO’s initial study on six countries from 2013, it found some countries offer three spend-down options: a lump-sum payment, a programmed withdrawal of participants’ savings or an annuity. Participants of 401(k) plans in the U.S. generally are only offered a lump-sum that they then have to figure out for themselves, it found.

• The GAO also recommended a stronger fiduciary role in 401(k) plans, such as requiring disclosure of performance and benchmarking information to plan sponsors and participants, and helping plan providers select proper products for managed accounts.

• The last recommendation was for the Department of Labor to improve oversight over plan sponsors and provide participants with better information about managing lump sums given out from private pensions. The agency suggested the Treasury Department also reassess interest rates and mortality tables to calculate these lump sums.

Also see: It’s harder than you think to spend down your 401(k) account in retirement

What else can retirees and their advisers do to promote a healthy way of spending down retirement assets?

Of course, retirees can’t wait for regulations to be implemented, so here are a few other suggestions for properly spending down retirement assets:

• De-risk the portfolio, at least to a degree, said Justin Halverson, a financial adviser and founding partner of Great Waters Financial in Minneapolis. A significant market downturn could demolish a retirement account, which would affect short-term financial needs. Some retirees may want to keep part of their assets invested more aggressively, especially if they are healthy and don’t need that money. Money earmarked for near-term spending should be invested conservatively, he said. “The further away we get from the financial crisis, the more those memories fade and the more confident people are,” he said. When it comes to the stock market and retirement savings, “you need to have a balanced approach to it,” he said.

• Don’t be afraid to use some of the money. People have a psychological attachment to their retirement funds, especially since they’ve spent decades building it up for this moment of their lives. Unfortunately, that means some people become a bit too stingy with their assets, and avoid doing things they want or need to do, such as taking a trip or going to the doctor for minor pain.

• Consider withdrawal strategies, such as the 4% rule, where you take an initial withdrawal of 4% and then adjust every year after for inflation, or the bucket strategy, where you set up separate pools of investments (low-risk for near-term, somewhat high-risk for the step after and highest risk for the longest-term bucket) and then income is drawn from one bucket at a time.

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