The Retirement Panic Attack You Never Saw Coming

At a party, my friend was asked how his recent retirement is going. He lamented, “I’ve had some rough nights and more than one panic attack.” I found his reply surprising since we had talked earlier about his financial situation, and he had more than adequate retirement savings. The problem? He was caught off guard by the emotion that goes with suddenly not making money.

Sure, he had sufficient retirement capital – but he was not used to the idea of decumulating instead of accumulating. Retirement planning expert Sally Hurme, JD, says, “it can be kind of scary shifting from earning a regular paycheck to living off of your hard-earned savings month after month.” Part of this emotion can be attributed to the work ethic of wanting to be a saver, not a spender. But part of the stress is simply the psychological disruption caused by the need to replace one’s paycheck with a retirement check. You suddenly need to arrange your own cash flow instead of having it provided by your employer. Can you blame a person for feeling some panic?

Retirement is challenging enough without the added emotion of terror due to not knowing where your next check is coming from. The trick is to arrange the conversion of your capital into a monthly income before leaving the workplace. There are some simple steps you can take to assure a steady stream of income the moment you leave your job, and arranging this in advance will help you avoid overspending, underspending … and panic attacks.

Sources of income

First, inventory your possible sources of retirement income. For example, you know that Social Security can only be paid as an income – there’s no lump sum benefit. Ask yourself if you have other possible benefits and assets that can be made into a monthly check.

- Pension Plan – If you’re lucky enough to have a defined benefit plan from your employer, think hard before cashing it in. A lot of stress can be minimized if you take a lifetime income instead of a lump sum.

- 401(k) – Defined contribution plans accumulate as a targeted pot of money at retirement. And while taking a lump sum distribution or rolling it to an IRA are the standard approaches, check out whether you can arrange to withdraw your 401(k) funds as either a systemized withdrawal or as an annuity. With this approach, it’s as though your employer is just paying you from one account rather than another once you retire.

- Deferred Compensation Plan – If you’re covered under a nonqualified deferred compensation plan, your employer may offer several options for how the funds are paid out, including as an ongoing income. Especially since you can’t roll it over to an IRA, this is an easy way to supplement your monthly income.

- Immediate Annuity – If you have an average or better life expectancy, use your good health to get a “mortality premium” by buying an immediate annuity. You lock in an income you can’t outlive, and if you live a long time, you benefit from the risk pooling of annuities. You might also consider a deferred income annuity, where the annuity begins at a pre-designated age in the future. When an annuity starts payments later in life, it’s a way to address the tail-end of your longevity risk, and you’ll cover the issue of living too long.

- Life Insurance – Do you have cash value in a life insurance policy? Before surrendering the contract and paying taxes, see if you can use the cash values to provide an income for a few years. You can also tap this equity by making a tax-free exchange of the policy to an immediate annuity.

- Reverse Mortgage – If you have significant equity in your home, you can select a tenure option in a reverse mortgage. This would provide an ongoing monthly income through accumulating loans against your home equity. And that income can continue until you sell, leave the house or die. There’s no recourse against your loan – the lender can only tap your home for payment – so it really can act as a stream of retirement income.

- Ladders – Using certificates of deposits (CDs) and bonds, you can structure some of your investment capital to create a monthly stream of income. By marrying bond maturities with income payouts, your investments will generate a cash flow that largely goes on autopilot and will pay you an income well into the future.

Structure your income plan in advance

Most of these income-generating ideas take some advanced handling in order for them to work – few are simply a matter of checking the box and watching the dollars flow in. Ideally, you want to arrange your retirement income plan so that everything is set to kick in when you check out from work and you have one less thing to stress about.

In some cases, the issue is notifying the employer in advance of your intentions. With pension plans and 401(k)s, the process doesn’t take long, but you’ll still want to get quotes on the payouts before making your decision. In contrast, the rules for nonqualified deferred compensation require that a payout decision be made well before your retirement date. Think about decumulating your account while you’re still accumulating your deferred compensation.

The income strategies that involve restructuring your investment portfolio will take some advanced planning. Creating bond ladders has some pre-work and requires moving around assets. If you’re purchasing an annuity, you’ll not only want to get quotes and complete an application, but you’ll also need to determine a liquidation strategy for the assets that will fund the annuity.

If you’re going to tap into the equity of your home with a reverse mortgage, it will take time to go through the appraisal and application process. Reverse mortgages can be a viable long-term strategy for retirement income, but they are comparatively expensive and take time to initiate.

Think through the financials

Yes , you want to avoid the panic attacks associated with having no income plan. No , you don’t want to do it in a way that costs you financially. There are issues you’ll want to factor into your income planning so that you maximize your cash flow and after-tax payouts.

- Social Security bridging – If you’re a retiree with significant retirement capital, this should be number one on your list. Social Security is rare in that it provides a lifetime income that increases to reflect changes in the cost of living. In most cases, the numbers work better to defer filing for Social Security as long as possible, even if it’s as far out as age 70. But that means you’ll need a source of income to bridge payments until Social Security starts paying. Several of the ideas mentioned above can be an excellent Social Security bridge. An immediate annuity can be structured so that it pays out an income between one’s retirement date and one’s filing for Social Security at age 70. In my own case, I’ve used my nonqualified deferred compensation payout as a stream of income scheduled to exhaust about the time my Social Security begins. Even a reverse mortgage can be used to provide an income between retirement and filing for your Social Security.

- Tax structuring – To save on income taxes, the issue is not only how much income you take out, but where you take the income from. The common thinking is to take your taxable investments (stocks, bonds, and savings accounts) first, and then wait as long as possible to tap into your fully-taxable 401(k) and IRAs. This is a decent rule of thumb, but there are some refined strategies that can generate a superior after-tax result. For example, convert chunks of your IRAs into Roth IRAs each year. This will build a bank of tax-free Roth funds that you can tap for income down the road when the government forces you to take required minimum distributions. A related idea is to access some of your IRA money each year, carefully structuring the taxable distributions to be just enough to reach the top of your current tax bracket. This approach levels out your taxable income and helps to avoid the extra taxes associated with an increase in your marginal tax bracket.

Simplify your process

Retirement is supposed to be that carefree time in life when your troubles are gone. While this may be a glamorized view, some of the worry of this life-stage can be lessened by simplifying your financial life. You can spend more time on the golf course when you’re not busy banking, and your traveling will be more enjoyable when your revenues and expenses take care of themselves.

There are numerous ways to simplify and automate the income process. For example, you can net out your government benefits by having Medicare premiums withdrawn from your monthly Social Security deposit. Set up estimated taxes with the IRS so that you don’t have to stress out about underpayments and penalties year-end. Arrange your monthly expenses to be automatically paid online, using a secure system to avoid identity theft. Going paperless can take some upfront effort, but you’ll bring down your stress level and likely save money in the process.

Get some help

Especially with the demographic shift in the number of Americans retiring, there’s no dearth of help. Most retirees can find assistance “for fee” or “for free”, and many will need both.

The “for fee” assistance is often in overall retirement planning advice. Engage a retirement planner who can help you sort through your overall financial picture. This kind of advice is particularly useful if you start five years or more before you actually retire. Additionally, you may want to consider using a cash flow coach who can help you drill down your finances and create a workable in-retirement budget.

There are numerous “for free” services as well. Most states have organizations staffed with volunteers who can help you sort through the maze of the Medicare system. The national and state councils on aging can also help you search for other services specific to your unique needs. And, while you want to be careful with self-help solutions, the more you know about retirement income strategies, the more you’ll be prepared. There are plenty of pre-retirement calculators and worksheets to try.

Why have a panic attack about retirement when some advanced planning can put you at ease? You’ve worked hard to earn the right to not fret about your next paycheck, and with enough pre-work, your transition from working to retirement can be done with minimal stress.

This article was written by Steve Parrish from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.