Retirement Income

7 Simple Ways to Pay Yourself in Retirement

We all have our dreams of retirement. But whether you plan to travel the world or just enjoy the freedom of doing nothing, we all have one thing in common – figuring out how to pay for our life in retirement.

Perhaps the biggest challenge of transitioning from work to retirement is learning to live without a regular paycheck.

Instead of receiving a steady income from the employer you suddenly find yourself dependent on Social Security, a pension (if you are lucky), your investments and savings. But as Social Security dwindles and pensions become a rare commodity, it is more challenging to build a dependable and consistent retirement income that meets all your needs.

After decades of earning income and saving for retirement, you finally need to shift gears and learn how to spend what you have saved.

In this post, we look at Suze Orman, America’s most recognized financial guru, recommendations on how to pay yourself in retirement and not run out of money.

1. Know your living expenses.

This sounds so basic, but most people do not know what they really spend each month.

You might have a good idea of how much you spend on mortgage/ rent, utilities, cars, and groceries. But you forget to add occasional trips, gifts, gym membership, eating out, etc. All these expenses can drain your money fast.

In her book, The Ultimate Retirement Guide for 50+ Suze Orman recommends calculating everything from major costs such as mortgage payments, utilities, transportation and groceries to smaller purchases like clothes, accessories, and entertainment.

The best way to do it is to create a list of your living cost categories and calculate your monthly spending.

If you want to automate calculations and track your expenses use the technology. A good quality budgeting app will track your expenses for you and save you time.

Best Budgeting Apps from Forbes Advisor

2. Calculate your reliable retirement income.

This one is a very important calculation and is not always easy to figure out.

But you need to calculate all sources of your retirement income to get a clear picture of how much money you will have coming in.

There are three building blocks to your retirement income:

Social Security benefits
Pension income (if you are eligible)
Income from your investments

Social Security benefits and pensions are considered guaranteed income and it’s easy to calculate.

Go to the Social Security Estimator to find out your calculated benefits depending on the age you start collecting.

But to secure a dependable income from your investments can be tricky because you will be at the mercy of market fluctuations.

You can still create a retirement paycheck from bond and dividend payments investments. However, there are several drawbacks to interest and dividend investing. First, many retirees cannot live on interests and dividends alone. Second, dividends are never guaranteed. During difficult economic times, some companies choose to cut or eliminate their dividends.

3. Pay your fixed living expenses from guaranteed income.

Your retirement income plan should be built on the common sense of stability.

The stability you want should allow you to pay all your essential living costs no matter what. If the markets are going down, you want to know that you have enough income to cover your basic living expenses.

There are three types of retirement guaranteed income:

Social Security
A pension
An income annuity you purchase yourself.

Guaranteed income means that these income sources are set and will not go up or down with financial market changes.

Your goal should be to cover all your essential living expenses from these guaranteed income sources.

Here is a list of essential living expenses:

Mortgage/ rent
Utilities
Transportation
Groceries
Medical insurance

An income annuity (fixed income annuity) is a personal pension you create for yourself.

You can purchase an annuity from the insurance company in exchange for an agreement to send you a locked-in payment every month once your annuity starts.

Keep in mind that any type of annuity is an expensive insurance product. And if you buy an income annuity, the money you pay the insurer is no longer yours.

Here is the list of income annuities to consider:

Immediate income annuities. You pay your one-time premium to the insurance company, and payments start immediately.
Deferred income annuities. You buy the annuity today, but do not start the payouts until a set period of time, such as 5 years or 10 years.

But if you place a high value on having a guaranteed income, you should consider adding an income annuity to your other sources of guaranteed income such as Social Security and/or pension.

Retirement Annuities: Know the Pros and Cons

4. Keep at least two years of living expenses in cash.

Every household needs an emergency fund that can cover up to 6 months of their living expenses or even longer.

According to Suze Orman’s advice you need to have a separate bear-market emergency fund in retirement.

This fund should have at least 2 years of living expenses in it. If you expect that you will not cover all your living expenses from guaranteed income, then she recommends keeping 3 years of expenses in safe accounts. And this fund is in addition to your typical 6 to 8 months emergency fund.

Emergency cash fund gives the flexibility you need to handle financial markets downturn. This fund is also where you get the money to pay for out-of-pocket medical expenses if it is unexpected.

In her book, she recommends creating this bucket of cash from your bond portfolio.

For example, if you have $500,000 in investments, it should be split into $250,000 in stocks and $250,000 in bonds. Let’s assume your annual living costs are $35,000. You should move at least $70,000 (two years of living expenses) of your bond portfolio into savings accounts, CDs, or short-term bonds.

This fund is a helpful alternative to instead of selling stocks for a loss or taking a high-interest personal loan for an emergency.

5. Hatch an RMD plan.

RMD stands for required minimum distributions – the minimum amount of money retirees must withdraw from their retirement accounts when they reach a certain age.

If you have savings in tax-deferred retirement accounts such as 401 (k) and IRA, the federal government is going to force you to start taking money out each year.

Even though you do not need the financial needs to touch these accounts, you still must start making annual withdrawals. Neglecting to withdraw money on time can cost you thousands of dollars in penalty fees.

Just because you must take withdrawals from your retirement accounts, that does not mean you should spend all of it. After you pay the IRS their tax, do with your distribution what you want even consider reinvesting some of your RMDs in a regular taxable account.

And do not worry you do not need to do the RMD calculation yourself. The company where you have your IRAs and 401(k)s invested will calculate your RMD for you.

6. Plan to spend no more than 3% of your portfolio in your first year of retirement.

Most of us closer to retirement are familiar with a popular 4% rule for retirement spending.

The 4% rule says that you should be able to comfortably live off 4% of your retirement savings. For example, if you have $1 million you would withdraw no more than $40,000 in your first year of retirement based on the 4% rule.

Keep in mind that you should adjust that amount each year by the rate of inflation.

However, Suze Orman recommends spending no more than 3% of your portfolio in your first year of retirement.

For example, if you have $1 million you would withdraw no more than $30,000 in your first year of retirement. Even though your RMD will be higher than 3%, she recommends spending just 3%.

The most important factor to consider is whether you retire in a bull market or a bear market.

If you have the misfortune of retiring in a bear market, you should be spending as little as possible of your portfolio. Taking money out in a bear market leaves your accounts depleted. By scaling back your withdrawals you will give your money time to recover.

7. Stay Flexible.

The most important part of your retirement income plan is to stay flexible as your life situation changes and modify your plan with time.

You can still retire at 65 but you can delay retirement to increase your Social Security benefits. Also, think about picking up a side hustle or a light part-time job to supplement your guaranteed income and maintain your retirement lifestyle. Consider these options when working on your retirement income plan.

Also, you can always plan on spending less to make retirement more affordable.

Maybe you should postpone a luxury cruise vacation or trim your monthly dining-out habits. Maybe you should reduce cash gifts to your kids and grandkids or consider downsizing your home to save thousands of dollars on housing costs.

But whatever you do, keep your retirement plans realistic.

The final words of advice – it is never too late to start finalizing your retirement plans and calculations. The earlier you start, the better prepared you will be.

Here are a few related posts you might want to read:

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How Much of a Nest Egg Is Enough to Retire Comfortably?

by Maggie 2 Comments

a couple at the restaurant in Spain-to retire comfortably

Most people don’t have any idea how much they are going to need in retirement. It is an important question because your life changes the day you retire. You no longer have a salary that will pay your bills, and suddenly you are on your own.

At this point, you must know if what you have saved will be enough to live comfortably for the next 20 or 30 years. If the nest egg you have accumulated is too small, you might outlive your money.

When you calculate how much you need for retirement, you should match your retirement income to your expenses. For most people, it is easy to calculate retirement income especially for Social Security benefits. While it is harder to estimate your future expenses because expenses will vary depending on your lifestyle.

Until you have a good idea of what your retirement expenses will be and how they match to income, you cannot get a real number of how much nest egg you need for a comfortable retirement.

This article will help you get a better idea of how to calculate your nest egg so you can retire comfortably.

Step 1. Income

Do you know how much you have accumulated in savings and investments to quit your job and live a comfortable retirement?

Unfortunately, people tend to have a vague idea about their retirement income sources and overestimate how long their savings last.

The main sources of your retirement income will be:

Social Security. It is a proven fact that for many people Social Security is the main source of income in retirement. The average Social Security benefit in 2022 was only $1,550. Most people would find it tough to live on that paycheck alone.

If you do not know your number, just go to the Social Security Estimator to find out your number depending on the age you start collecting.

Pension. If you are lucky, a pension can be an enormous benefit because it produces predictable income from your employer.

Retirement accounts. Your 401(k), IRA, Roth IRAs, investments, and bank savings will generate income for you depending on how much you have saved.

Employment. If you choose to work in retirement, full or part-time, you can significantly increase your income number. A part-time job can make your retirement more comfortable if you did not save enough money.

Annuity. Many people are less worried about running out of money in retirement if they have a guaranteed lifetime income. You can turn some of your savings into lifetime income with an annuity. When you buy an annuity, you are exchanging a lump sum of money for a guaranteed lifetime income.

Should You Have an Annuity in Your Retirement Plan?

By the time you are 65, it will be hard to affect most of your income sources besides your job income. If your nest egg is small, you can keep working full-time, find a part-time job, or start a side hustle like Airbnb, blogging, etc.

Step 2. Expenses

Once you calculate your retirement income, you need to estimate your retirement expenses which will typically include fixed and variable expenses.

Look at how you spend your money today. Then take a piece of paper and divide every expense into categories (or buckets) which will allow you to see the big picture. At the end of the month, look at your categories and see how much you spend on each:

Housing (mortgage/rent, maintenance, property tax, property insurance, home improvement)
Utilities (gas, water, electricity)
Vehicle (insurance, maintenance, fuel, car loan)
Food (groceries, dining out)
Healthcare (out-of-pocket expenses, dental, eye exams, and glasses)
Insurance (health, life, liability)
Personal (clothes, education, personal debt, gym membership)
Entertainment (travel, cable, internet, books, memberships)

Keep in mind that your expenses will change in retirement. You have probably heard that you should plan to live on just 80% of your current spending after you stop working. But writing every expense now will help you have a better idea of what you will need in retirement and what you can cut out.

Once you know your sources of income and expenses, you can determine your nest egg number. The final number will be different for everyone. It depends on how old you are when you retire, how long you will live, and how well your investment portfolio will perform.

However, people tend to underestimate how long they live and what their medical costs will be. Also, people forget about unexpected expenses like car repairs, roof and furnace replacements, or financial help to family members.

Step 3. Compare your retirement income to expenses.

You have to have a good idea of what your retirement expenses will be and how they compare to your retirement income.

Consider yourself lucky if your retirement income sources are enough to cover your expenses when you stop working.

Unfortunately, most people’s income sources do not bring it enough to cover their retirement expenses.

Even though many expenses go down in retirement, inflation makes life more expensive for retirees. For most of us, the nest egg number has to be big enough to bring enough income otherwise we need to reduce our spending or adjust our retirement lifestyle.

If your current expenses are less than your income you have enough to retire. But if you do not, you need to figure out how to cover the gap.

For example, after calculating your Social Security, (pension if you are lucky) and a part-time job, your retirement income equals $35,000 a year. Your estimated retirement living expenses are $42,000 per year.

$42,000 – $35,000 = $7.000

The difference is a negative $7,000. This means that you need an additional $7,000 per year to maintain your retirement lifestyle.

How to cover this gap? The withdrawals from your nest egg should cover this shortfall. If you use the popular 4% withdrawal rule, you need to have at least $175,000 in retirement savings to cover the gap.

$175,000 x 0.04 = $7,000 a year

Step 4. How much is your nest egg?

How much of a nest egg you need in retirement depends on several factors.

The biggest factor is how much of your retirement income needs to come from that egg. If you have Social Security and a pension, your nest egg will be only used for additional income and big expenses.

But without a pension from your employer, Social Security will provide only a basic level of income. So, your nest egg (retirement savings) would be another source of income.

Ideally, Social Security and other guaranteed income sources should cover basic living expenses. And withdrawals from the nest egg should create enough cash flow to cover your other expenses.

A good starting point for many retirees and pre-retirees will be a well-known rule of thumb – the “4% rule”. According to experts, no matter how much you have saved, a 4% withdrawal rate will let you take money out of your nest egg for 30 years without fear of running out of money.

For example, if you want to get $20,000 per year from your nest egg, the account should be worth at least $500,000 when you retire.

$500,000 x 0.04 = $20,000 a year (1,666 per month)

Luckily, there are a lot of things you can do to fill that gap.

Step 5. Lifestyle

The lifestyle you plan to live will determine how much you need in retirement.

How expensive is your lifestyle? If you are planning to live in an expensive area, have a vacation home, drive nice cars and travel a lot – you will need more than $1 million saved.

But you can live comfortably with almost any budget if you match your expenses to your income. As I said before, it is hard to control income but there are many things you can do to lower your expenses.

Housing will be your biggest budget item. Housing costs as a percentage of spending will remain around 35% on average.

It is important to decide where you are going to live in retirement. If you plan to stay put and “age in place”, you should figure out how much it would cost to make your home senior-friendly. You should think about the costs of remodeling the kitchen, bathroom and stairs, and even maybe moving a master bedroom to the 1^st floor.

Aging Friendly Improvements for Every Home Remodeling Project

Also, if your housing expenses are too high you can downsize, sell your house, and rent, or move to a less expensive state.

If you are thinking of downsizing in the next few years, be realistic about what it will cost to buy something else and how much you will get for the sale of your house. Moving expenses and any kind of renovations big or small like new carpets at your new house will take money out of your nest egg.

Start watching real estate listings to get a sense of the market. If you are going to sell your home, start getting it ready for the market to avoid the last-minute rush.

Also, take time to think through what you really want your retirement to be. Do you want a small place where you can stay for up to 6 months and then travel for the rest of the year (my kind of dream scenario)? Would you rather have a bigger house for all of the family gatherings and for your kids and grandkids to visit?

You also need to plan for the unexpected. Many events typically come out of the blue. For example, you might have to start supporting a parent or a child, or some medical procedure needs to be covered out-of-pocket.

How Much a Nest Egg Is Enough to Retire Comfortably?

The answer is it all depends on your age, your goals, and your dreams.

The truth is that nobody can predict the future. If you want to retire in your 50s you will need to have a nest egg saved much bigger than if you want to retire in your 60s. And if you’re waiting to retire at 70, your number will be even smaller.

Look at your numbers, calculate your current cost of living and create a spending plan for the future. Then compare it to your retirement income based on different retirement age scenarios. It might take some time and hard work to get there. But knowing that you have enough money to live the life of your dream is incredibly satisfying.

Have you saved enough for a comfortable retirement?

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2022 Year-End Retirement Planning Checklist

by Maggie Leave a Comment

three women at the table-year-end retirement plan checklist

It is hard to believe that the new year 2023 is around the corner!

I do not know about you but I cannot wait! Financially, 2022 was a challenging year. According to Goldman Sachs, ‘2022 is likely to end up as the sixth-most volatile year since the Great Depression’. The volatile stock market and the daily reminders of high inflation and rising prices on everything will likely make you worried about the cost of your future retirement.

But the most important lesson I learned over the past years, including the global pandemic, is that there are rewards to being prepared. I truly believe that the year-end retirement planning checklist is a great way to look back at 2022 and make sure you are on the right path to achieve your retirement goals in 2023.

Below is a helpful list of 10 tasks to complete before 2022 comes to a close.

1. Create financial goals for the next year.

Do you know how much money you need to retire? What are you going to do about rising inflation? How is it going to affect your retirement income?

How much will it cost to help your parent’s long-term care needs, pay for your healthcare in retirement, or pay for the vacation you really want?

Maybe none of that applies to you today but you want to know how to project into the future. It is important that you know how much you will need to live the life you want in retirement.

What other financial goals do you have?

2. Set a target retirement age.

Retirement is the one common financial goal we all share. We all need to plan for the day when we can no longer work or are just ready to retire.

The target date is the year closest to the year you plan to retire. Age 65 used to be the magic number, the age at which most people retire. Yet that golden age has changed. Many people are working longer. Even though they may want to retire, it is not always possible because they do not have enough money to retire.

Take some time to set a realistic target retirement date. Based on your estimated retirement income and expenses, you can plan your own retirement strategy.

Looking at your target retirement date and retirement income, you can determine if you have enough money saved for the next 20 to 30 years. If it is not enough for a comfortable retirement, move the date and save more in your retirement funds.

Just remember that where you live and how much you can afford to spend in retirement will impact your retirement lifestyle.

How Do I Decide When Best to Retire?

3. Look at your spending.

The end of the year is a great time to look at your personal spending and see where your money is going. This year has been full of change and adjustment. With many people working remotely, there is a good chance your spending habits have changed as well.

How did you do this year? Have you tracked your spending against your budget? Did you get a full picture of your finances and know how much money you have saved (or not) in 2022?

If you have struggled this year, decide how to improve your financial situation for the next year. Are there debts you should be making a priority to pay off? Look at your budget and decide if there were parts that were difficult to stick to.

Look at your credit card and bank statements and see what expenses could be avoided this year. Then set up a budget for the next year and decide on how much money you need to save in 2023 to meet your retirement goals.

4. Get a clear picture of your spending in retirement.

Do you know how are you going to pay for your retirement years?

First, think about your current overall cost of living. Then, think about if you have enough income to sustain your current lifestyle in retirement?

Calculate how much is your nest egg.

When you are near retirement, it is important to know how much money you will need to live comfortably for the rest of your life.

If you still have no idea how much money you will need, look at your current expenses and then evaluate how they might change in the future.

When you retire, you do not need a lot of things that you did when you were working. Generally, the costs of commuting, take-out lunches, and business clothes will go down. However, you might start spending more money on travel, hobbies, and activities.

Calculating your nest egg is easy if you already have a budget and know how much you spend now. The next step is to get a clear picture of how it might change in the future based on your retirement lifestyle.

Retirement Budget in 5 Simple Steps

Another option to figure out how much money you need to retire is to replace 70 to 80 percent of your annual pre-retirement income. For example, if you earn $70,000 per year before retirement, you should expect to live off $49,000 to $56,000 per year.

5. Review the source of your retirement income.

In my year-end review, I always find time to look at our future retirement income.

I usually look at our current Social Security, retirement, and investment funds statements to get a clear picture of our potential retirement income. I wanted to make sure that we are on track to our retirement goals and have enough money to cover our living expenses when we stop working.

When you are working, you typically have a single employer and a single source of income – your salary. In retirement, everyone has different sources of income – Social Security, pension, part-time job, investments, and retirement savings (401k, IRA, Roth IRA, Roth 401k).

To make your assets last through the next 20 or 30 years, use the rule of thumb to withdraw 4 percent of your retirement money annually. For example, if you have $500,000 in retirement funds, you can spend roughly $20,000 ($500,000 x 0.04) per year when you retire. Add this number to your Social Security, pension, and other savings, and calculate if it is enough to support the retirement of your dreams.

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6. Check your progress on paying down debt.

The end of the year is a great time to sit down and check your progress on paying down debt.

Ideally, you should be entering the retirement debt-free, but in the real world that is not always achievable. So, it may be okay for you to retire before you pay off your big debt like a mortgage, cars, and student loans.

Just make sure you understand the implications of retiring with debt because big withdrawals from retirement funds could push you into a higher tax bracket.

Yet, if you have several years before retirement, try to reduce your debt so you will have more money available for your lifestyle in retirement.

Pay off all credit cards and personal loan debt.

When it comes to debt, plan to pay off high-interest rates debt first. Credit card APRs have increased this year with the average rate around 19 percent. A credit card debt has become the most expensive debt for many people.

By reducing the existing debt and limiting new debt you can minimize the amount of retirement income that you will spend on interest payments. For example, if your monthly retirement budget includes a $350 car payment and a $700 credit card payment, you will obviously be able to spend $1,050 a month less than someone without those bills.

If you pay off a credit card that charges 19 percent interest, it’s like earning 19 percent on a risk-free investment.

Your mortgage.

Once, you paid off your credit card debt, start planning on paying off your mortgage. If you have a low-interest rate, you can plan to pay off the mortgage early by making “extra” mortgage payments each month.

With a mortgage paid off before retirement, you will have the extra money you need to travel in style or spoil your grandkids for years to come. Just remember that taking large withdrawals from your retirement accounts to pay off your mortgage could throw you into a higher tax bracket.

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7. Review your savings progress.

typewriter - year-end retirement planning goals

Did you spend less money this year due to the fear of covid? Did you spend less money on eating out, vacations, or concerts? Did you buy less gas because you worked remotely?

If yes, stash those funds into retirement savings. If you are still working, try to boost your savings rate. It is never too late to increase the size of your nest egg. If you are in your early 50s, you still have close to 15 years of working to save for your retirement.

You should save at least 15 percent of your gross income in retirement accounts such as 401(k), IRA, Roth IRA, or Roth 401(k).

A key factor in any retirement plan is having enough savings to last for the next 20 to 30 years.

8. Check your readiness for unexpected expenses.

Another important key factor in any solid financial plan is having enough savings to fall back on during emergency. To be prepared, put it on your checklist to have two funds – a rainy-day fund and an emergency fund.

Typically, a rainy-day fund is smaller, up to $2,500 for smaller expenses. An emergency fund can be as much as 9 or 12 months of living expenses – $10,000 to $50,000 or more depending on your expenses.

Whichever way you build your financial cushion, be sure you do it. There is no better way to have peace of mind than knowing you have funds to cover expenses when you need them.

9. Review your asset allocation and simplify your portfolio.

As you are getting closer to retirement, it is important to have a clear and accurate picture of your complete investment portfolio.

If your portfolio is spread out among several investment companies, it will become difficult to keep track of all that information. Think about consolidating all your accounts in one place like Vanguard. So, you will get simplified reporting, low costs, and low fees.

The financial markets have fallen sharply this year. Take the opportunity to review your asset allocation and make sure your portfolio is diversified and invested for growth. You should have a mix of stocks, bonds, mutual funds, and other assets that fits your retirement goals.

It can be tempting to stay away from stocks to reduce the risk of losing money in your retirement funds. But stocks provide growth and investing for growth is important. If you retire at 65 and spend 20 years in retirement, you need to have enough growth in your portfolio to make money last that long.

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10. Keep will and trusts up to date.

Another important part of your year-end retirement checklist is the status of your will and/ or revocable living trust.

Keep them up to date and make sure you have suitable executors, trustees, and guardians in place. Additionally, you will want to make sure your list of beneficiaries is up to date as well. If you have welcomed a grandchild to the family do not forget to add his/her name to the list. Also, if there has been a change in the family such as a marriage, divorce, or death, make sure to update your beneficiary list.

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5 Best Ways to Withdraw Money from Retirement Savings

by Maggie 2 Comments

woman with laptop - best ways to withdraw from retirement savings

There is a lot of information on how to save for retirement but not much on how to withdraw money from your savings when you retire.

Your retirement savings and Social Security (and pension if you are lucky) are all the money you have in retirement. And these savings need to last and support your lifestyle during the next 20 or 30 years.

As a pre-retiree, I already know that I cannot withdraw whatever I want from my retirement funds and expect my savings to last for a long time. Life does not work that way. Without a withdrawal plan, Roman and I will run out of money fast, and then it will be too late to go back to work.

Retirement Savings Withdrawal Rules:

In general, retirement planning consists of two phases – the accumulation phase and the withdrawal phase. After decades of working hard and saving for retirement, you need to shift gears and learn how to spend what you have saved.

Traditionally people work and save 15 percent into their retirement funds and then retire on average at age 65 or older. When you retire, your earned income will disappear, and you will need to pay for the cost of living out of your savings and Social Security.

In addition to that, you need to figure out how to convert your retirement savings into a reliable stream of income that can support you through your 90s.

Unfortunately, you cannot keep your money in retirement accounts forever.

The federal government is going to force you to start taking money out at age 72 if you are not working anymore. If you are still working at age 72, you have to start taking money from your IRA and old 401(k) from your previous job. But you can delay taking withdrawals (RMDs) from your current 401(k) until you stop working.

A general rule to remember – keep the money in your 401(k) or IRA until you reach age 59 ½. If you withdraw any money before that age, you will be hit with a 10 percent penalty fee on top of the regular income tax.

In this post, I want to show you the 5 best ways to withdraw from your retirement savings so your money will last for a long time.

1. Follow the required minimum distribution (RMD) rules.

The IRS requires us to start taking a minimum distribution (RMD) from tax-deferred accounts when we turn 72 years old unless we are still working.

If you do not make it on time and fail to withdraw the required amount each year, you will owe IRS a large penalty fee. In addition to the penalty fee, you will still need to withdraw the required amount of money, and pay income tax on it.

The withdrawal amount depends on your age, life expectancy (the longer your life expectancy is, the less money you must take out), and your account balance.

There are two types of retirement accounts:

Tax-deferred – 401(k), IRA, Roth 401(k)
Tax-free – Roth IRA

The minute you start taking money out of 401(k) or IRA, you will have to pay taxes on your withdrawals. If you are in a high tax bracket, you will owe a good chunk of money to IRS. Although, if you are wealthy enough and do not need money from your retirement accounts, you still must withdraw them to follow the rules of RMD.

Keep in mind that many financial firms can help you calculate an RMD.

2. Minimize mandatory distributions.

One of the best ways to withdraw money from retirement accounts and lower your taxes is to minimize mandatory RMDs. Because when you start taking money out of tax-deferred accounts, you will face an increase in your taxes.

Remember – that was the deal you had signed up when you got a tax break on the money saved in a traditional 401(k) or IRA. It was deducted from your taxable income, and retirement is the time to pay it back.

In retirement, you would owe income tax on withdrawals.

need help poster on taxes-taxes on withdrawals in retirement

That means, preserving your tax-deferred accounts until an RMD kicks in is not a great idea.

Someone who is 70 years old will have an RMD of approximately 3.5 percent of the account value, but by the age of 75, an RMD will be 4.5 percent. And at the age of 80, you will require to withdraw at least 6 percent. These numbers are just an example to show the more money you have the more you have to withdraw.

Keep in mind that an RMD will be much higher to withdraw as you grow older unless you start withdrawing money when you retire. And as I mentioned above you might be pushed into a higher tax bracket.

The main thing to remember is that every year you will need to take an RMD from your tax-deferred accounts if you do not want to owe IRS a large penalty fee.

3. Consider a Roth IRA conversion.

One of the best ways to reduce your taxes in retirement is to convert some of your traditional 401(k) or IRA into Roth IRA money.

A Roth IRA conversation is a process of switching between retirement accounts.

You take money from a 401(k) tax-deferred account and roll it into Roth IRA. The Roth account is funded with after-tax money, so when you go with the conversion it will trigger the tax bill.

But you will pay taxes only on the converted money. Once you make the move, all the funds in the Roth account will grow tax-free.

The best part is that you are not required to take a minimum distribution on the Roth IRA money, so it will grow and accumulate longer.

So, the important thing to remember is that money in a Roth IRA account grows tax-free and can be withdrawn tax-free.

However, you will need to pay taxes on any amount converted from 401(k) or IRA to a Roth account.

Even though you must take money out and pay taxes on tax-deferred accounts, your Roth IRA money will stay intact, grow, and accumulate with years. It could be used as an emergency fund or passed on to your heirs.

As a financial goal, I plan to move 50 percent of all our tax-deferred accounts to a Roth IRA account before we turn 72. I am planning to do it gradually so it will help control RMD withdrawals and reduce our taxes in retirement. Besides, if we want to delay the start of our Social Security, we will have several years of low income, which can be a good time to complete the Roth IRA conversion.

4. Withdraw from accounts in the right order – taxable vs. tax-deferred.

The saying “it is not what you earn, but what you keep” is true when it comes to withdrawing money from your various accounts.

In retirement, we need to be smart about taking money out of our retirement funds, otherwise, the big chunk of it might be eaten by taxes.

Here is a helpful article from Fidelity Investments you might want to read:

Tax-Savvy Withdrawals in Retirement

As a general rule, it is better to sell investments held in taxable (investment) accounts first instead of taking money out of tax-deferred accounts.

The main reason is that the withdrawals from the traditional 401(k) and IRA accounts are taxed as ordinary income. And typically, ordinary income is taxed at a higher rate than the long-term capital gains from the taxable (investment) accounts.

On another hand, if you withdraw money from your taxable accounts before tax-deferred, it might increase an RMD rate and that reduces your tax efficiency.

This is one of the best ways to withdraw money for tax efficiency:

First – pull money from your taxable (investment) accounts
Second – withdraw money from your tax-deferred accounts – IRA and 401(k)
Lastly – take money out of tax-free accounts – Roth IRA

5. Figure out how to take distributions from multiple accounts.

Over their lifetime, many people accumulated multiple retirement accounts – traditional 401(k)s, IRAs, and Roth IRAs. Before an RMD rule kicks in, you need to figure out how much and in what order to withdraw money from all these retirement accounts.

The problem is you cannot tap into all your retirement accounts at once.

For example, if you own a few traditional 401(k) accounts you have to withdraw from each of them individually. The same rules apply to IRA and Roth IRA accounts. That means that you cannot make withdrawals from an IRA account to meet your RMD requirements for a 401(k) account.

On another hand, you cannot combine all these accounts into a single account so it will be easier to control your money and withdrawals.

The best way is to consolidate your multiple IRAs into a single account.

However, you cannot combine 401(k) and IRA accounts into a single account, but you can roll over 401(k) into IRA.

If you are still working and have several 401(k) accounts from your previous jobs, you should be able to merge the old 401(k) into your current employer’s 401(k) plan. However, if you cannot combine old and new 401(k) plans, you can rollover old 401(k) accounts into an IRA account.

I am still a few years away from the RMD rules, but I have already begun thinking about merging all our retirement accounts into a single account.

Roman and I have multiple retirement accounts with different financial institutions:

(2) 401(k) accounts, (1) Roth 401(k), (3) Traditional IRAs, and (2) Roth IRAs.

Personally, I feel that calculating and taking money out for multiple RMDs sounds very complicated. That is why I am planning to consolidate all accounts under one roof with 401(k) and IRA rollovers which can make my life much easier to manage RMDs and to keep track of our investments and taxes.

Final Thoughts

There is so much information on how to save and invest for retirement. But when it comes to the withdrawal strategy things start looking complicated. There are many strategies, ideas, and rules to remember when you start planning for retirement.

With the knowledge of how to withdraw from retirement savings, you can minimize your taxes and keep your retirement funds working for you longer.

However, it is a complicated matter, and finding an account or a financial advisor who will help you navigate everything will be the best decision.

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Your 2021 Year-End Retirement Planning Checklist

by Maggie Leave a Comment

woman with laptop - end of year retirement checklist

It is hard to believe that 2022 is around the corner! When it comes to finances, 2021 was a challenging year. Many people continued to work remotely, many faced unemployment, and many others were forced to early retirement.

The most important lesson I learned from the global pandemic is that it pays to be prepared. As 2021 comes to an end, I want you to make sure that you take some time and complete your year-end retirement planning checklist.

This is my list of 7 tasks to complete before this year comes to a close.

1. Look at your spending.

How did you do this year? Have you tracked your spending against your budget?

Did you get a full picture of your finances and know how much money you have saved (or not) in 2021?

Look at your credit card and bank statements and see what expenses could be avoided this year and plan to cut them in the next year.

Keep in mind that balancing your income with your spending is the key to saving more money. Make sure you have a budget set up for the next year and decide on how much money you need to save in 2022 to meet your retirement goals.

2. Look at your retirement planning goals.

Calculate how much is your nest egg.

When you are near retirement, it is important to know how much money you will need to live comfortably for the rest of your life.

If you still have no idea how much money you will need, look at your current expenses and then evaluate how they might change in the future.

When you retire, you do not need a lot of things that you did when you were working. Generally, the costs of commute, take-out lunches, and business clothes will go down. However, you might start spending more money on travel, hobbies, and activities.

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Review your savings and set up goals for 2022.

For many of us, conducting an end-of-year review of retirement savings is the best way to take steps on significant changes before the next year.

coins on the table - retirement saving goals checklist

The first step is to look at how your retirement saving has stacked up. Have you maximized your retirement plan contributions? Have you increased your retirement contributions if your income has gone up during the past year?

If you have not this year, make it a goal to increase your contributions to retirement plans such as 401(k), IRA, and Roth IRA next year.

The important thing to remember is that retirement plan contributions allow you to save a lot of money on current taxes and not to miss any employer contributions.

When you are a few years away from retirement, being short on retirement savings can be problematic. Many of us spend less money due to the pandemic and working from home. We all spend less on Starbucks coffee, commute to work, eating out, vacations, and more. Stash that money into retirement savings!

Make it a next year’s goal to reduce your current spending, so you can put more money into your retirement savings.

Check your progress on getting out of debt.

The end of the year is a great time to sit down and check your progress on paying down debt.

When you are working, you have years of earned income to pay a mortgage, credit card, student, or any other kind of loan. But once you retire, you will be living on a fixed income.

When you start living on a fixed income, it is hard to pay off debt if you need to pull big chunks of money from your savings. Although, big withdrawals from retirement funds could push you into a higher tax bracket.

Being debt-free gives you more freedom and money left in your pocket to enjoy your golden years than struggling to pay the mortgage or other debts.

To pay off all debt including a mortgage might not be realistic for everyone. However, the less debt you have, the better you are prepared financially for retirement.

3. Review your retirement income.

In my year-end review, I always find time to look at our future retirement income.

When we are working, we typically have a single employer and a single source of income – our salary. In retirement, everyone has different sources of income – Social Security, pension, part-time job, investments, and retirement savings (401k, IRA, Roth IRA, Roth 401k).

To make your assets last through the next 20 or 30 years, use the rule of thumb to withdraw 4 percent of your retirement money annually.

For example, if you have $500,000 in retirement funds, you can spend roughly $20,000 ($500,000 x 0.04) per year when you retire. Add this number to your Social Security, pension, and other savings, and calculate if it is enough to support the retirement of your dreams.

Helpful Articles:

4. Set a target retirement date.

When do you plan to retire? Is it in the next 3 to 5 years? We all need to plan for the day when we are ready to retire or can no longer work.

5. Think about the future medical cost.

Health care is expensive. Unfortunately, many baby boomers forget to include it in their financial plans. Medicare will cover most of your routine healthcare costs if you retire at age 65 or older. Unfortunately, it does not pay for all medical bills, and it does not pay for long-term care at all.

Underestimating health care expenses or how to pay for long-term care can be a big financial mistake.

laptop on the table - end-of year retirement checklist

Think about your future medical cost and find ways to protect your retirement savings. Consider buying long-term care insurance because it can help you pay for home health aides in your late years. If you buy long-term care insurance now, your premiums will be lower than if you wait several years.

We have not purchased any long-term care insurance yet, but looking at opening an HSA account. Many financial advisors recommend opening a health savings account (HSA).

The 2021 HSA contribution limits are:

$3,600 for individual coverage
$7,200 for family coverage

The money you can contribute to HSA is tax-deductible or pre-tax. And any increase in the value of your account is free from federal taxes. But it has to be used for qualified medical expenses if you do not want to pay additional taxes on your contributions.

You can put money into HSA every year until you enroll in Medicare benefits. After that, you are no longer allowed to contribute. However, money that you do not spend will be accumulating in this tax-free account until you need it in retirement.

6. Rebalance your portfolio.

Take the opportunity to review your asset allocation and make sure your portfolio is diversified and invested for growth. You should have a mix of stocks, bonds, mutual funds, and other assets that fits your retirement goals.

The important thing to remember is that a well-balanced portfolio will help you weather market downturns. Also, it will generate a retirement income to cover your living expenses when you are not working.

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7. Review your will and living trust.

Another important part of your year-end retirement checklist is the status of your will and/ or revocable living trust. Keep them up to date and make sure you have suitable executors, trustees, and guardians in place.

Additionally, you will want to make sure your list of beneficiaries is up to date as well. If you have welcomed a grandchild to the family do not forget to add his/her name to the list. Also, if there has been a change in the family such as a marriage, divorce, or death, make sure to update your beneficiary list.

Looking ahead to the new year

The world is still in the middle of the covid-19 pandemic, but there is an economic recovery. I am not sure what to expect of the upcoming year though I remain hopeful that things will start turning up eventually.

Our retirement goals for the new year should be simple – keep working and saving money for retirement. And for the rest of the world, my hopes are much like everyone else’s – that we get out of this global pandemic soon and get back to our normal life.

What is on your year-end retirement checklist? Have done any year-end review of your retirement goals?

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