News
Public Interest
Jul. 19, 2002
Resting on Dollars
Dicta Column - By Ralph Bovitz - Attorneys give considerable attention to accumulating money for retirement. But once attorneys wrap up their practices and enter retirement, how should they go about spending their hard-earned money without running out?
Dicta Column
By Ralph Bovitz
Attorneys give considerable attention to accumulating money for retirement. But once attorneys wrap up their practices and enter retirement, how should they go about spending their hard-earned money without running out?
As life expectancy is lengthening through medical advances, it may become necessary to moderate your spending habits in order to live comfortably throughout your retirement. To do this, you must first identify the spending stages of retirement and then consider a spending philosophy to make the money last.
An attorney who has just retired, let's say at the traditional retirement age of 65, likely will have the energy to work but might want to redirect that energy more toward leisure activities without the deadlines and other stresses of practicing. A retired attorney may want to play more golf, travel more, spend more time on a hobby or go back to school. Let's call this first period after retirement the active stage. For the sake of discussion, let's say this active stage of retirement lasts until age 75.
The period after 75, the not-so-active stage, may be characterized by less travel, a change in a hobby or a cutback in work. Although there is no way to know how long the not-so-active retirement stage should last, for the sake of discussion, let's say the not-so-active stage lasts until you are 85.
After 85, you may not be running around too much. Hopefully, however, you will be reasonably healthy and without too many vision, hearing and mobility problems. Let's call the retirement period after 85 the less-active stage.
One financial ramification of these three stages of retirement is that they gives you the permission to spend more initially when you are the most energetic and gradually taper off spending as you become less and less active. Spending then takes on a rather natural evolution and relationship with your retirement years and activities.
But how much you may spend must be related to how much you have saved. As a rule of thumb, an annual withdrawal rate of three percent to four percent in the active stage from the total retirement nest egg is a reasonable rate.
If your retirement savings is not up to par, however, those rates may not be enough to sustain you in retirement and should be adjusted downward, and vice versa. To maintain a comfortable annual withdrawal rate in successive years, remember to adjust the annual withdrawal rate upward by the annual inflation rate.
What should attorneys do if their retirement nest egg declines because of a poor portfolio performance? Withdraw less and spend less.
Finally, how should Social Security benefits be handled in your retirement plans? Social Security benefits are available as early as age 62. A larger benefit is paid by waiting until 65 for those born in 1937 or earlier and age 67 for those born 1960 or later. Those in the former group who apply for benefits at 62 will receive 80 percent of the benefit available at 65.
Those in the latter group who apply for benefits at 62 will see a 30 percent reduction in benefits. Those who apply for Social Security benefits early, although they receive less money per month, could receive more money over a longer period of time.
The decision to apply for Social Security benefits early should be dictated by your health and cash requirements. If you are healthy, you might want to wait until full retirement age before receiving benefits to receive a higher monthly check. If your health is poor or your accumulated retirement funds are inadequate, however, you may have to start early Social Security withdrawals.
Attorneys also may want to start their Social Security payments early to allow their retirement portfolios to grow more, until mandatory distributions from their deferred compensation plans, such as their individual retirement accounts, is required at age 70.5.
Or, given today's market, attorneys may want to receive early Social Security checks to let their portfolio, retirement and nonretirement plan investments recover from recent market declines. Since Social Security benefits may be taxed, however, some tax planning may be useful before early benefits are claimed.
Ralph Bovitz, a certified public accountant in Woodland Hills, is chair of the Personal Financial Planning Committee of the California CPA Society's Los Angeles chapter.
By Ralph Bovitz
Attorneys give considerable attention to accumulating money for retirement. But once attorneys wrap up their practices and enter retirement, how should they go about spending their hard-earned money without running out?
As life expectancy is lengthening through medical advances, it may become necessary to moderate your spending habits in order to live comfortably throughout your retirement. To do this, you must first identify the spending stages of retirement and then consider a spending philosophy to make the money last.
An attorney who has just retired, let's say at the traditional retirement age of 65, likely will have the energy to work but might want to redirect that energy more toward leisure activities without the deadlines and other stresses of practicing. A retired attorney may want to play more golf, travel more, spend more time on a hobby or go back to school. Let's call this first period after retirement the active stage. For the sake of discussion, let's say this active stage of retirement lasts until age 75.
The period after 75, the not-so-active stage, may be characterized by less travel, a change in a hobby or a cutback in work. Although there is no way to know how long the not-so-active retirement stage should last, for the sake of discussion, let's say the not-so-active stage lasts until you are 85.
After 85, you may not be running around too much. Hopefully, however, you will be reasonably healthy and without too many vision, hearing and mobility problems. Let's call the retirement period after 85 the less-active stage.
One financial ramification of these three stages of retirement is that they gives you the permission to spend more initially when you are the most energetic and gradually taper off spending as you become less and less active. Spending then takes on a rather natural evolution and relationship with your retirement years and activities.
But how much you may spend must be related to how much you have saved. As a rule of thumb, an annual withdrawal rate of three percent to four percent in the active stage from the total retirement nest egg is a reasonable rate.
If your retirement savings is not up to par, however, those rates may not be enough to sustain you in retirement and should be adjusted downward, and vice versa. To maintain a comfortable annual withdrawal rate in successive years, remember to adjust the annual withdrawal rate upward by the annual inflation rate.
What should attorneys do if their retirement nest egg declines because of a poor portfolio performance? Withdraw less and spend less.
Finally, how should Social Security benefits be handled in your retirement plans? Social Security benefits are available as early as age 62. A larger benefit is paid by waiting until 65 for those born in 1937 or earlier and age 67 for those born 1960 or later. Those in the former group who apply for benefits at 62 will receive 80 percent of the benefit available at 65.
Those in the latter group who apply for benefits at 62 will see a 30 percent reduction in benefits. Those who apply for Social Security benefits early, although they receive less money per month, could receive more money over a longer period of time.
The decision to apply for Social Security benefits early should be dictated by your health and cash requirements. If you are healthy, you might want to wait until full retirement age before receiving benefits to receive a higher monthly check. If your health is poor or your accumulated retirement funds are inadequate, however, you may have to start early Social Security withdrawals.
Attorneys also may want to start their Social Security payments early to allow their retirement portfolios to grow more, until mandatory distributions from their deferred compensation plans, such as their individual retirement accounts, is required at age 70.5.
Or, given today's market, attorneys may want to receive early Social Security checks to let their portfolio, retirement and nonretirement plan investments recover from recent market declines. Since Social Security benefits may be taxed, however, some tax planning may be useful before early benefits are claimed.
Ralph Bovitz, a certified public accountant in Woodland Hills, is chair of the Personal Financial Planning Committee of the California CPA Society's Los Angeles chapter.
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