Financial expert’s advice can ease retirement money fears

In taking the pulse of how people feel about retirement, a Wells Fargo/Gallup survey of investors found that nearly half fear they will outlive their savings.

This certainly was the sentiment of many readers who participated in one of my recent online discussions.

“Quite frankly, I am afraid to retire,” one woman wrote. “My running default answer to when will I retire is, ‘I will work until I am unable.’ I am 53. I’ve been divorced since 2004. My kids are adults. My parents are still around. I have been a Virginia state employee for 10 years and participate in the state’s retirement plan. I’ll get very little from Social Security since I haven’t been in the workforce long. How do I alleviate these fears? How do I really know how much I’ll need when I retire? Things are changing so fast.”

You can conquer the fear, says Carrie Schwab-Pomerantz, author of “The Charles Schwab Guide to Finances After Fifty.” She was my guest during the discussion on retirement. Offline, she addressed questions she couldn’t get to during the chat.

“Nearly half of Americans haven’t planned how much they will need,” said Schwab-Pomerantz, president of Charles Schwab Foundation and senior vice president at Charles Schwab &Co. “And it is scary to think about facing old age without enough money.”

Schwab-Pomerantz says that in preparing for retirement, you should create two documents: a net worth statement that lists your assets and liabilities and an annual cash flow statement (i.e., a budget) that shows exactly how much is coming in and out each month.

People often say they have no idea what they will spend in retirement. But that’s the worrier talking. Just like your pre-retirement days, you’ve got to pay for a roof over your head or at least the insurance and taxes if your roof is paid off. You’ll still have to factor in costs for transportation, food, utilities, health care, etc.

“Project what you’re likely going to spend each year in retirement,” she says. “Unless you’re anticipating a major change in lifestyle, I would plan to spend just about the same amount that you’re spending now.”

When you do this part of the math, Schwab-Pomerantz says first figure out how much predictable income you have from all sources aside from any investments. If you need more money to live on, the difference will have to come from your investment portfolio — taxable and tax-deferred.

Perhaps the reader didn’t know that with Social Security, divorced spouses may be able to collect benefits based on their ex’s work history, Schwab-Pomerantz pointed out. If your marriage lasted 10 years or longer, you’re at least 62 and haven’t remarried, you can receive benefits even if your former spouse has remarried. There are some other conditions, so for more information go to ssa.gov and search for “Retirement Planner: If You Are Divorced.”

Part of the fear some people have of outliving their retirement funds comes from not having a specific plan on withdrawing money they’ll need from their various retirement pots.

“My spouse is 59½ and I’m 56,” one reader wrote. “She has her money in a Roth IRA savings account and mine is in a 457 plan/stock/bond/cash combo. We don’t need the money right now. When we need the money, what’s the best way to start drawing from the accounts?”

A poll by T. Rowe Price found that just 48 percent of retirees have a withdrawal plan. Those who do are withdrawing close to 4 percent of their assets annually, which is about what most many financial planners recommend. However, nearly a quarter of those surveyed withdrew 8 percent or more.

“There is a real art and science to figuring out the most tax-efficient order for drawing down your funds from all of your accounts — both taxable and tax-deferred,” said Schwab-Pomerantz. “This is because taxable accounts are taxed at the lower capital-gains rate as opposed to the ordinary income rate.”

Here’s a priority system for withdrawing funds that Schwab-Pomerantz recommends:

First, draw down principal from maturing bonds and CDs.

Once you’re 70½ your required minimum distributions from your 457 plan, selling the lowest rated securities in your over-weighted asset classes first.

If you need more money, next turn to your taxable accounts, again selling over-weighted and lower-rated investments first.

Next sell from your tax-deferred accounts, again starting with the over-weighted and lower-rated investments.

Finally, depending on your situation, it may be wisest to withdraw your Roth IRA assets last. That’s because the money can continue to grow tax-free, and it can serve as a tax-free source of funds down the road, she said.

Fear can be a warning sign. But don’t let it cripple you into doing nothing but worrying.