Retirement written on an envelope with dollars. Savings concept.
Retirement written on an envelope with dollars. Savings concept.

Running out of money is one of the biggest fears for retirees and people planning to retire. With the general population living longer and medical expenses rising each year, living within your retirement income is a major concern. According to the Centers for Disease Control, the life expectancy rates for both men and women have increased steadily since 1980.

By creating a financial plan for retirement and sticking to a disciplined withdrawal strategy, you are more likely to make your hard-earned dollars last throughout your lifetime. As you plan, keep the following considerations in mind.

Estimate how much money you’ll need in retirement

As a general rule, figure you’ll need about 70 percent of your current income to maintain your lifestyle when you retire. So if you earn $100,000 now, you’ll need $70,000 in annual retirement income. The total sum that you will need depends on what age you retire, your life expectancy, the age that you start collecting Social Security, and the rate of investment returns. Our Retirement Income Calculator can help you estimate how much you can afford to spend each year, based on how long you want your savings to last. However, how many years you live in retirement is also a major, and unknown, factor to take into consideration.

Be disciplined about withdrawals

When you retire, you have to be careful that you don’t withdraw too much money from your investment accounts. A 2011 report from the Government Accountability Office (GAO) recommends annual withdrawals of three to six percent of the value of your investments in the first year of retirement, with adjustments for inflation in later years, so that you don’t deplete your savings too quickly.

If you own a tax-deferred retirement account like a 401(k) or IRA, the tax rules allow you to withdraw money when you turn 59 ½ years of age. Generally speaking, if you take money out before that, you’ll be hit with an early withdrawal penalty of 10 percent.

In addition, in tax-deferred retirement accounts (excluding Roth-IRAs), you are subject to Required Minimum Distributions (RMD). RMD means that you must withdraw a certain amount of money, depending on your age and value of your investments, from your IRA or 401(k) no later than December 31st each year (your first RMD can be delayed until April 1st of the year following the year you turn 70 ½ years of age). If you don’t take the RMD on time, you’ll face a tax hit of 50 percent of the amount you’re required to withdraw. While this is based on current laws, it is always wise to consult a tax advisor as tax laws are subject to change with little or no notice.

Keep a stash of cash for emergencies

Financial advisors recommend setting aside some money for unexpected events such as medical emergencies or a car or home repair. Put this emergency cash in a savings or money market account so that it’s easy to access when you need it. When meeting with an investment advisor, make sure to discuss a reasonable cash amount to keep accessible and what account type would work best for you.

Delay receiving Social Security payments

Although you may become eligible to claim Social Security benefits at the age of 62, there are significant advantages to delaying claiming Social Security. Relative to the early claiming decisions that most retirees make, the gains in expected lifetime income from an optimal claiming decision can be dramatic. For individuals, our analysis indicates that the gains from delaying can exceed $100,000 in expected lifetime income, while for married couples the gains can exceed $200,000. Given the large benefit increases available by delaying the start date of Social Security, most retirees would benefit from waiting till full retirement age (between age 66 and 67 for those born after 1943) and a significant portion of them would gain from waiting until age 70. Exceptions to this may include needing funds for living expenses or shortened life expectancy for both members of the family.*

Contribute the maximum amount into tax-deferred retirement accounts

If your employer offers a 401(k) match, put as much as you can afford from your paycheck into that retirement plan. For instance, even if the company matches your contribution up to three percent of your salary, try to put in even more—say, six or seven percent. When you get a raise, try to put half of it away for retirement. If you have an IRA, the maximum that you can contribute, based on 2013 limits, is $5,400, or $6,400 if you’re age 50 or older. If you start contributing to a retirement account in your early 20s and keep setting aside up to 15 percent of your paycheck (and stay invested), you should be in good shape to have enough money for retirement.

Try to limit taxes

As mentioned above, you can avoid tax penalties that can accompany non-Roth-IRA accounts if you don’t withdraw money from your retirement accounts too early (before age 59 ½) or too late (after 70 ½ years of age). It’s possible you may also be subject to taxes on Social Security benefits if you receive wages from a job or self-employment, interest, dividends or other taxable income that pushes you into a higher income bracket. Make sure to familiarize yourself with both penalties and benefits. The tax rules can change, so it’s best to seek professional advice about taxes or check the IRS website.

What to do next

  • Create your investment plan with the above factors in mind.
  • Be disciplined about how much you contribute and withdraw from your plan.
  • Stay aware of potential tax benefits and penalties.
  • Meet regularly with an investment advisor to review you plan.

* Financial Engines, Social Security in the New Retirement, January 2016

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