Just before or after retirement, many people are faced with the prospect of changed finances that may cause them to make wrong decisions. In football terms, this would be fumbling just as you are about to cross the goal line.
For example, pre-retirees and new retirees may be tempted to abruptly change their investment portfolio from stocks to bonds, bank accounts, money market funds, etc. They want to reduce risk and increase current income.
However, at age 60 or 65, your investment portfolio might have to last you for several decades. For married couples, chances are that at least one spouse will live another 30 years or more.
Over such extended time periods, stocks have outperformed bonds and that probably will be true in the future. Abandoning the stock market might sharply limit the amount you’ll have to spend as you grow older.
Instead, younger retirees should have a portfolio that includes some equities—exactly how much depends on a host of factors, including how much guaranteed income you have from federal retirement benefits and other sources. As you grow older, you can gradually shift towards income-yielding instruments to reduce the risk of incurring steep stock-market losses that you won’t be able to make up.
Another potential form of fumbling is to withdraw funds from their tax-favored accounts such as a TSP or an IRA as soon as they retire. Such withdrawals reduce the tax-deferred growth those accounts can generate and are taxable unless they are coming from a Roth balance. (In addition, if you are retiring relatively young, remember that withdrawals before age 59 1/2 normally are subject to a 10 percent penalty tax.)
Instead, if you have sufficient assets, leave your accounts intact and you rely upon your other income and taxable accounts for spending money. Towards year-end, if you need to replenish those accounts, calculate your taxable income for the year and if possible draw out only enough to remain in a lower tax bracket.
Such a strategy can be repeated each year, once you reach age 59 1/2 and the 10 percent penalty no longer applies.