Five tips for your “safe” retirement spending

You’re on your own to make later-life financial decisions.

Road to retirement sign.

Road to retirement sign.

The responsibility for financial security in retirement has been transferred, for the most part, to individuals. It used to be that Americans were better taken care of by employers and the government. Today, YOYO (you’re on your own) to make later-life financial decisions. Social Security is not intended to be your sole source of income, but rather 35 to 40 percent of your retirement income. So what are some strategies to have enough income for the average 30 years of retirement?

The Retirement Paycheck workshop on Managing Savings and Investments from the National Endowment for Financial Education (NEFE) recommends the following five tactics:

Choose a “feel free” safe retirement spending plan. Using this strategy generally means you have little worry about using up all your savings. According to a recent Investment News article, by dividing a person’s age by 20, one can determine if they will outlive their savings. At age 60, this equals 3 percent of savings. At age 70, 3.5 percent of savings and, at age 80, 4 percent of savings. 

Live a healthy lifestyle. Your lifestyle does matter as it affects your financial needs during retirement. The spending patterns of older adults do not change significantly in many categories until a person reaches age 75, as reported in a U. S. Bureau of Labor Statistics Study in March 2016. After age 75, spending drops significantly for clothing, transportation and entertainment. However, health expenditures increase. 

Adjust for market changes. Economic hardships and market conditions impact retirement funds. Pay attention to market cycles, reserve cash and emergency funds in safe cash accounts, include a 3 percent inflation factor in calculating your investment returns, and diversify your investment assets.

Know your retirement plan. Up until age 70 ½, the account holder has control of how much or how little to withdraw from traditional accounts. Be aware that tax-deferred employer retirement savings plans and traditional IRA’s require paying ordinary income tax on the withdrawn amount. Consider the income tax consequences with your withdrawal decisions, as well as how long the funds will last. 

If you are over the age of 70 ½, the Internal Revenue Service requires that you take Required Minimum Distributions (RMD) at least once a year from most traditional IRA plans. The IRS sets the required amount based on age and the fund balance at the end of the previous year. Count on a 50 percent penalty if the amount taken out is less than the required minimum, unless you are still working for the company. For example, you would receive a $1,000 penalty if you do not make a $2,000 required withdrawal.  

Roth IRA’s are tax free after age 59 ½ if the fund has been owned at least five years. There are no required minimum distributions. In other words, the money can be left for beneficiaries.

Delay taking retirement plan assets. If you delay taking retirement plan assets until your full retirement age or even delay until age 70 ½, you have more time to let the assets grow and more money available for later to cover increased costs such as health care and long term care expenses.

Financial planning takes time, patience and discipline. Find more information about the reasons for and ways to save at MIMoneyHealth.org.

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