I’m a Financial Advisor Who Knows What Retirees Actually Do With Their Savings
Written by
Gabrielle Olya
Edited by
Ashleigh Ray
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Once you’ve entered retirement, you’ll need to have a plan for your retirement savings account. Ideally, you’ll utilize these savings to ensure your nest egg lasts for years to come — but not everyone makes the most savvy moves upon retirement.
To find out what retirees do with their savings, Vanguard examined the behaviors of 504,400 retirees over 10 years. GOBankingRates spoke with Matt Fleming, CFP, a senior financial advisor at Vanguard Personal Advisor Services, about the research.
Here are his insights into what real retirees do with their savings.
70% of Retirees Preserve Their Money in Tax-Deferred Accounts
The research showed the majority of retirees keep their money in tax-deferred accounts (e.g., workplace retirement accounts or rollover IRAs).
“A characteristic of both means that investors don’t pay taxes annually on dividends, interest income or capital gain distributions from their investments,” Fleming said. “This allows investors to keep more money invested today, increasing the compounding impact of their investment returns.”
While this can be a smart financial move, there is a tradeoff with this strategy.
“The tradeoff is that when they withdraw from these accounts in the future, both their contributions and any growth, are most often taxed as ordinary income,” Fleming said. “For most investors, keeping the money tax-deferred is preferred.”
But this isn’t always the case, he added.
“Some investors have personal, estate and/or tax circumstances that can make it more advantageous to roll the assets to a taxable account or convert it to a tax-free Roth IRA.”
Most Retirees Leave Their Employer Retirement Plans Within 5 Years
Many retirees do not leave their retirement savings in their 401(k) plans for the long term; they often will roll these funds over into IRAs. This might be advantageous, but it’s important to do some comparison shopping before switching.
“Rolling over to an IRA preserves the tax-deferred character of the retirement dollars, and the IRA may have more investment, advice and distribution options,” Fleming said. “It’s important to evaluate the administrative costs of the employer plan versus the IRA in addition to the underlying investment costs. Often, employer plans have access to share classes of mutual funds that are not available to a retail client, which may have a lower associated cost.”
30% of Retirees Cashed Out From Employer Retirement Plans Over 5 Years
The research found that not all retirees kept their savings in their retirement accounts, with nearly a third cashing out their accounts over five years. In general, Fleming advises against this.
“Preserving hard-earned retirement money is very important, and anyone considering distributing all or a large portion should consult a financial or tax advisor,” he said. “Life emergencies occur and sometimes tapping into one’s retirement funds is unavoidable. Planning ensures you have adequate emergency funds to help limit this need.”
Cashing out your retirement savings typically should be a last resort.
“When considering using your retirement funds for other capital needs,” Fleming said, “it’s important to evaluate other viable options, as well as the impact of using those funds on your retirement nest egg. Some more complex tax/estate strategies might factor in weighing distribution decisions.”
How Can Retirees Determine the Best Plan for Their Money?
There is no one-size-fits-all strategy for what to do with your retirement savings.
“Retirees should adopt a strategy that allows for having enough money to support their desired lifestyle and ensuring there’s enough left for the future, including any money planned to leave to beneficiaries,” Fleming said. “Investors can use a dynamic spending strategy, helping investors spend from their portfolios based on market performance and taking fluctuations into account.”
“Additionally, it’s important to evaluate the tax attributes of all your assets,” he continued. “Some accounts are more tax-efficient for certain investments. These tax attributes should also factor into how retirees structure their retirement income stream from their investments.”
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