Planning for retirement is a significant part of our lives. We work hard, save diligently, and dream of the day when we can finally reap the rewards of our discipline. But how do you know when it’s the right time to start spending your retirement savings? Spending too early is a pitfall, but waiting too late to dive into your retirement savings could also have consequences! If you’re an older adult nearing retirement age, you’re in the right place! Here’s everything you need to know about spending your retirement savings.
The earliest age at which you can start collecting Social Security is 62. However, if you wait until you reach 70, your monthly benefits could be significantly higher. It’s important to note that the government typically requires you to start withdrawing funds from traditional IRAs and other retirement accounts by age 73. According to Merrill Lynch, the amount of these required minimum distributions varies from year to year and depends on both the age and value of your retirement accounts. Along with these factors, you should also take into account things like your health, financial needs, and lifestyle goals.
When it comes to withdrawing from your retirement savings, many experts refer to the “4% rule.” This guideline suggests that you withdraw 4% of your total investments during your first year of retirement, adjusting the amount in subsequent years to account for inflation. However, this is just a rough guideline. Your spending plan should reflect your lifestyle, health conditions, and other income sources. Some retirees might need less than 4%, while others might require more. Working with a financial advisor can help you create a personalized plan that ensures your savings last throughout your retirement.
It’s also important to consider longevity when planning your retirement spending. Most people live another 10 to 20 years after retiring. It’s essential to plan for the long term to ensure your savings will last as long as you need them. While most people don’t like to ponder their mortality, you should also take into consideration your health status. Do you have a family history of certain diseases? Did your parents enjoy longevity? While it’s impossible to determine your longevity in exact terms, you can actually get an accurate estimation by way of longevity calculators, like this free one.
If you feel behind in your retirement savings, don’t worry – you’re not alone. Data suggests that the typical American starts saving for retirement at age 31. If you’re starting now, there are strategies to catch up. For example, taking advantage of catch-up contributions in your retirement accounts can help boost your savings. Another common way to play catch-up with your retirement savings is to delay your Social Security benefits until you’re aged 70. That way, you can truly maximize your benefits.
Setting goals is important, especially when it comes to your finances! While you can always follow the 4% rule and make catch-up contributions, you still have to view your unique set of circumstances and do what’s best for you. For example, you may decide to work longer or even start a side hustle in order to support yourself before you retire fully. Create a budget and set clearly defined financial goals. How much can you withdraw per year? What will your day-to-day expenses look like once you’re retired? While you can always create goals on your own, it’s never a bad idea to consult with a professional financial advisor or retirement planner. There’s nothing more important than making sure you have a happy retirement!
Did you know there are tax implications when it comes to your retirement savings? There are different tax rules for different retirement accounts. Distributions from Roth IRAs are typically tax-free (according to State Farm). It’s important to understand tax implications and how they affect your various investments, so make sure you discuss them with a financial advisor and plan accordingly!
Deciding when to start spending your retirement savings is a personal decision that depends on various factors. Make sure you have a clear understanding of your financial situation and retirement goals. If you’re uncertain, always find a financial advisor who can help guide you through this important phase of life! And remember—there’s never really a “right” answer. However, by considering your unique situation and needs, you can make the right decision for yourself!
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Originally published November 06, 2023