Dear Carrie: I just retired and am trying to figure out how to maximize all of my resources—Social Security, a small pension, and my investments. Given RMDs, taxes, etc., it feels overwhelming! Can you help?—A Reader
Dear Reader: This is a great question because it’s an essential issue for every retiree. After decades of receiving a regular paycheck, suddenly you’re faced with having to figure out the best way to pull money from your different accounts—whether that’s a 401(k), an IRA, or a regular investment account. On top of that, you need to make decisions about Social Security and possibly a pension or annuity.
Don’t get me wrong. Retirement can be a wonderful time to enjoy the freedom you’ve worked so many years to achieve. But as you make the transition from being a saver to a spender, chances are you’ll have to manage your financial life even more carefully than in the past.
Assess All Your ResourcesAfter decades of working and saving, it’s pretty common to have more than just one investment account. Are you including everything? Contact your old employers if you’re not sure. If they’re no longer in business or you have difficulty contacting them, try the Pension Benefit Guaranty Corporation or the Missing Money website. Consider consolidating accounts to help simplify managing your investments.
Shore Up Your Cash ReservesMake sure you have enough cash or cash equivalents (savings accounts, money market accounts, or short-term CDs) to last at least one year. These days, cash may not earn much, but it’s important to have enough for emergencies. To avoid having to sell investments in a prolonged bear market, consider keeping one to four years’ worth of portfolio withdrawals in more liquid investments.
Consider Predictable Sources of IncomeStart by estimating how much you believe you’ll receive from Social Security and any employer pensions. It’s crucial to make smart decisions when claiming Social Security, as these benefits represent about one-third of the income for the average retiree.
If you don’t have a traditional pension plan, are unsure about having enough money, and would like to have more guaranteed income to cover your essential expenses, you may want to look into lifetime income options through an annuity. Annuities aren’t for everyone. There are lots of different types, and they can be difficult to understand, but they’re uniquely designed to help accumulate money on a tax-sheltered basis, provide guaranteed lifetime income, or both.
In its simplest form, an annuity is a contract between you and an insurance company. You pay for a promise or certain guarantees, such as the ability to receive income guaranteed for life (subject to the claims-paying ability of the insurer). You can often check out how much income certain annuities might generate with calculators.
Try a Total Return ApproachLiving off interest and dividends without touching growth or the original investment may be an option for a few retirees, but it’s not a likely solution for most people. An alternative is a total return approach in which your withdrawal consists of all sources (interest, dividends, and growth) and may or may not involve touching the original investment to make up what you need. This can provide you with more flexibility as well as create more income. You can use the 4 percent rule as a starting point on how much to withdraw in retirement.
Don’t Forget Taxes and RMDsStrategically withdrawing from traditional, Roth, and taxable accounts to lower capital gains taxes and keep your tax bracket low can help you pay less in taxes and stretch out your savings. Roth accounts, for example, can provide you with qualified tax-free withdrawals in retirement.
If you turned 70 1/2 before 2020, you may be subject to required minimum distributions (RMDs) from certain retirement accounts like traditional IRAs and 401(k)s under IRS rules. For 2020 and after, you may be subject to RMDs beginning at age 72. Failure to take mandatory withdrawals can be costly: a 50 percent penalty on top of income taxes!
New Help for a New EraIf this all sounds like a bit much to handle and you’re not a do-it-yourselfer, don’t worry. New options and services can help guide you through the process of withdrawing funds in the most cost-effective and tax-efficient way possible. This may also be an ideal time to seek out professional guidance, especially as you first establish your footing as a new retiree.
One final thought: As you navigate your retirement, your financial needs will likely evolve along with your priorities. So stay involved, flexible, and willing to make adjustments when necessary. This is your time to take in all that life has to offer. After decades of hard work, you deserve nothing less.