Will You Be Afraid To Spend Your Retirement Savings?

A couple of interesting retirement planning items from my reading today. First are two articles about people's reluctance to start to spend down their retirement savings from Kitces and Morningstar, it is a difficult psychological pivot to go from accumulating to decumulating. Many years ago I recognized that I would have difficulty when the time came and as I write this today, having no idea when we will start draw from our savings, I know it will still be difficult for me to do. 

The reasoning might be as simple as having a pile of money that is still growing represents resiliency in the face of the unknown, it is also optionality and there is emotional value to that. It is also very true that making it to the end with a huge pile of unspent money is a sort of life not lived, the opportunity cost of forgone experiences that could have made life more interesting, fulfilling and fun. 

Another driver of sentiment here is the fear of making it to some old age and then needing care or treatment that is very expensive and if you have a pile of money at 90, you can cover that sort of medical circumstance. 

The Kitces article had a point that I'd never thought of before but that resonated. People are more comfortable spending income from guaranteed sources than from their own accounts. This makes sense to me. Does this shed a different light on annuities? Before anyone jumps down my throat, I am not licensed to sell annuities, I never have been and never will be. Vanguard offers annuities that supposedly don't have the insanely high commissions that most other annuities have (the surrender fee is the commission). Would putting $200,000 into an annuity kick out $16,000/yr? That might be close. If you have $1 million and you might struggle emotionally with decumulation, this might make sense. As longevity pools, they can pay out more than 4% because people in the pool will die, increasing the payout for the other annuitants. 

The Morningstar article on this was written by Christine Benz who relayed the personal experience of her parents gifting Benz and her husband money toward a down payment when they were just starting out. It was more impactful, Benz said, than the larger sum they inherited from her parents many years later. If part of the psychology is not want to selfishly spend retirement money (I don't know if that plays a role), then giving this sort of gift relatively early in retirement might solve the dilemma. 

Benz made another point that I feel gravitates to an idea I first started writing about ages ago, really a long time ago. She called it being flexible, taking more when markets are doing well but being able to take less when markets are doing poorly. I've written about that as no matter what you've got, no more than 4%, more specifically take no more than 1% per quarter. Portfolio growth will take care of the inflation adjustment but occasionally you'd have to get by taking less out. 

If that resonates with you, ok but I would set the expectation that over the course of a 30-whatever-year retirement there will be expensive things that come up and derail your discipline. Odds are those can be weathered unless the expenses are huge. One client had tree fall on their house and without going off on a long tangent, it wasn't covered by insurance and cost about $9000. Something like that probably won't be plan altering. Having to go out of pocket for a $100,000 medical issue kind of early on probably will be plan altering. It's ok, it happens. 

The other retirement planning item from today's reading was news that the standard deduction for 2024 will be going up to $14,600/$29,200. Also the tax brackets will be going up a little too. I'm not a huge fan of Roth conversions but there are scenarios where I as a skeptic think it makes sense. A lot of generalities coming but if there are years where you somehow make it to December with no earned income (maybe you were forced to retire earlier than you expected as an example) then it would be worth looking into converting some of an IRA to a Roth. Ask your accountant. But if the standard deduction is $29000 and you have no income then it would appear you could convert $29000 tax free. If you bumped that up $50,000, SmartAsset says you're effective tax rate would be 4.96% based on 2022 info so it would be a little less for 2024. 

Over the course of a few years then, quite a decent chunk of a rollover IRA could be converted for very little tax. My numbers probably are not precise and you should ask your accountant if you find yourself with very little or no earned income for whatever reason but I think I'm articulating the concept clearly enough to ask questions and see if this fits.