Transitioning to Retirement: From Saving to Spending

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December 21, 2013 by Jean

Most of the financial advice about retirement is about how to save for retirement; but the transition to retirement is also a transition from saving retirement funds to spending retirement funds. And information about how to make that transition is surprisingly difficult to find.

Right now, I’m still in saving mode, continuing to contribute to my 403(b), which is the non-profit equivalent of a 401(k), and to a Roth IRA while I am still earning income. I’m also continuing to put money away in short-term savings that will fund my first three years of retirement living while my retirement investments continue to grow.

My retirement funds are with TIAA-CREF, a financial services company that handles the retirement funds for many academic institutions. I’ve looked at TIAA-CREF’s publications about how to withdraw retirement savings, but I’ve found their wide range of options a bit intimidating. Because I won’t begin to draw on my retirement funds until 2017, I have some time to figure this out; but I have been feeling somewhat anxious about it. (See Transitioning to Retirement: Will I Have Enough Money?)

So recently I made an appointment to sit down with a TIAA-CREF consultant. Along with its retirement funds, TIAA-CREF provides quite a bit of free financial advice; the company’s consultants visit my campus several times a year for individual appointments.

My appointment with the retirement fund advisor did a lot to allay my anxieties. Since I have a good sense of how much it costs me to live and have already worked up a fairly detailed budget for retirement living, we used that budget as a starting point. Given all the complex financial language that usually surrounds this topic, it turned out that the financial consultant’s advice was remarkable straightforward. He first asked me when I planned to begin taking Social Security benefits (at age 70) and whether or not I had estimated how much those benefits would be (I had). He then suggested that I annuitize enough of my TIAA-CREF retirement funds so that, added to my Social Security benefits, it would equal my monthly budget. Since he had information about my TIAA-CREF retirement savings at hand, he was able to show me how much of those funds (slightly less than half) I would need to annuitize to meet that budget. This leaves the other half of my retirement savings to continue to grow and act as a hedge against inflation and special needs. TIAA-CREF’s options for withdrawing funds include three different annuity options. I plan to choose something called a “graduated” annuity. This is not a variable annuity; it has a guaranteed payout, but it is designed to pay out somewhat less in the early years and more in the later years (again, a way of planning for inflation).

I only spent about 30 minutes with the TIAA-CREF advisor, but it was a very fruitful 30 minutes and left me feeling more secure about my transition from retirement savings to retirement spending.

Monthly Social Security Benefit + Monthly annuity payout = Monthly budget for retirement living. Not so complicated, after all.

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12 thoughts on “Transitioning to Retirement: From Saving to Spending

  1. Well…when you put it like that ‘no.’ But, the reality of living in retirement is extremely different from working and receiving a wage plus having savings. There just is nothing coming in except earnings from investments which are dependent upon markets and everything seems to go out. Not trying to be negative at all, but after working as a professional for years and having spending money that didn’t need to be budgeted, retirement is definitely different. But, not having that alarm clock go off in the morning or being on call 24/7 sure is a plus. 🙂

    • Jean says:

      Judy, I think this may be a little bit easier for me because I’ve always been an obsessive budgeter; for my entire adult life, I’ve tracked every penny I spend. A few months ago, I redid my retirement budget to actually include short-term savings for unexpected expenses (or opportunities!) and budget categories for things like travel, house maintenance, and gardening. What I like about the annuity idea is that it puts a floor on my income that is not dependent on the vagaries of the markets.

  2. drdata921 says:

    I agree with Judy. The math is simple. Whatever you don’t bring in through Social Security, a pension, or a post-retirement job needs to be covered by your savings. The tricky part is estimating how long your savings will last to be able to cover that gap. The three big unknowns in the equation are how long will you live (i.e. how long will savings need to last), how much of a headwind you will get from inflation, and how much of a tailwind you will get from investment returns. There are tools that can help you estimate your savings longevity, but they all rely on assumptions (read this as guesses) about the big three. That said, you will probably need to adapt and adjust along the way no matter what the tools say. But, how is that different from any other time of your life? You just can’t let that bother you. I too am a professional getting close to walking out of the door – I can’t contain my excitement about what the next phase holds and finances will be managed as they need to be!

    • Jean says:

      Don, I really like your description of the three unknowns. Because I am single and have no children, it is particularly important that my money last as long as I do. What I like about the annuity idea is that it creates an income floor that is protected from the unknown of longevity. The graduated annuity also provides a little protection from the headwinds of inflation. The fact that the annuity will only take about half of my retirement savings makes me feel more secure about having some protection against the headwinds of inflation as it provides some opportunities to benefit from the tailwinds of growth.

  3. I am still working on the specifics of my 403B funds I have been putting away. I also get state retirement from public education…of course SS won’t start for me for about 9 years….so this will need to be planned and I am working on it again with my financial advisor….you are correct Jean when you say there is not a lot of info on spending for retirement which is my biggest fear…making smart decisions when spending.

    • Jean says:

      Donna, I think my biggest fear has always been just not having enough money in retirement. (Well, I’ve actually spent much of my adult life worrying about not having enough money. That worry is what has made me such a disciplined saver and budgeter.) That’s why I found this conversation so reassuring. To have someone actually sit with me and run the numbers and show that I can have enough to live at my current standard of living by annuitizing only half of my retirement fund. Some information I’ve read suggests that you can be pretty sure you won’t run out of money if you only draw 4% per year of your retirement funds in the early years. That calculation is also reassuring for me; 4% of my funds plus Social Security comes to about $2000 more per month than I currently need to live on.

  4. Jean says:

    I wish I had a good financial adviser. I was fine until I hit 71 1/2 when the government makes you take money out of PSA accounts every year and pay taxes on it. I’m still able to live off S.S. and my pension but I don’t know how to invest what they make me take out of the PSA that was set up back when my husband and I were both working. This is something I really need to tackle learning in 2014.

  5. It sounds like you’ve done all the right things here, so you should feel very good about that. We consulted with our investment guy about our retirement options as well as when we bought the house and when we’ve bought a new car (he’s incredibly honest, reliable, and a good friend). One thing that DID change for us was when we decided to start taking our Social Security benefits. Like you, we figured we’d wait longer and let the monthly amount get bigger. However, our guy did the math and explained the financial difference between starting to take it earlier (at 62) and accruing that money and waiting several years with no money coming in from Soc Sec and starting later with a higher monthly pay-out. I can’t remember what the exact number was, but the gist of it was that neither of us would even begin to come out ahead if we started later until our 80s or 90s (wish I could remember). So we both opted to start as soon as we could. Plus we could set some of it aside to earn interest. Just my take.

    • Jean says:

      Emily, I have heard about those calculators to figure out where the sweet spot is to start collecting Social Security. I think the calculus is a little different for me because I have no one else I can fall back on if I run out of money. So, for me, the peace of mind of having more coming in (more of a hedge against inflation) is worth the risk that I won’t get the maximum I could out of the system.

  6. Charles F. Emmons says:

    Jean, this is also a good catalyst for my thinking. Two things have scared me in recent years. One a NYT article saying you needed 20 times your yearly salary saved to retire (15 if you have paid-up housing). Second I saw a guy on PBS the other day saying that the 4% figure was too high, and it should be 2.8 (2 is bulletproof). By those standards I could never retire. The one comforting idea that you and the PBS guy both said is that you should add Social Security to the annuity amount to meet your regular budget. Concerns about annuity payouts being low these days because of interest rates have to be balanced against the security question. And the nice thing about annuities is that if you live forever, they have to keep paying you.

    • Jean says:

      Charlie, The figures from the NYT article seem insane to me. Many of these analyses seem to assume that you are spending every penny of your salary (and then some?) and not saving anything. But that has never been true for me; I was saving about half my salary by my highest salary years. I’ve run spreadsheet projections out to when I’m 91 at different rates of inflation; even at 5% annual inflation, my initial retirement budget of about $40,000 per year only balloons to 1.17% of my final year’s salary by the time I’m 91, and at 2%, 3% and 4% inflation rates, my budget never grows to my highest salary year.

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I am Jean Potuchek, a professional sociologist who has just stepped into the next phase of my life, retirement, after more than thirty years of college teaching. This blog is about my experience of that new phase of life.

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