After years of saving and investing, retirement is in sight. Before you stop working, a few decisions deserve careful attention, because they can determine whether your money outlasts you or the other way around.
Estimate what you will need
When retirement was decades away, your estimates were rough. Now you can be much more specific. Think through:
- Housing: Will you stay in your current home? When will the mortgage be paid off? Would downsizing or relocating make sense? Housing Decisions in Retirement covers the options.
- How long retirement may last: A healthy 65-year-old couple should plan for the possibility that one of them lives into their 90s. Planning for 25 to 30 years is reasonable for many people.
- Work: Will you work part time or consult? Even modest income early in retirement can let your savings grow longer.
- Lifestyle: A common guideline is to plan on 70% to 80% of your pre-retirement income, but travel, hobbies, or helping family can push that to 100% or more.
- Health care: Fidelity estimates that a 65-year-old retiring in 2026 will spend about $185,500 on health care in retirement, or $371,000 for a couple, not counting long-term care. Medicare doesn’t start until 65 and doesn’t cover everything.
- Inflation: Even moderate inflation adds up. At 4% a year, $400,000 would have the buying power of only about $150,000 after 25 years. This is a hypothetical illustration.
Line up your income sources
List everything that will provide income: Social Security, pensions, retirement accounts, taxable investments, rental income, annuities, and cash-value life insurance. Then decide how your portfolio should be invested. Moving everything to low-risk investments can feel safe, but it exposes you to the risk of losing purchasing power over a long retirement. Most retirees need some growth in their portfolio.
Decide how much to withdraw
A sustainable withdrawal rate is one of the most important numbers in your plan. Many planners start from a range of about 4% to 5% of your portfolio in the first year, adjusted for inflation after that, and then adjust based on your circumstances and markets.
For example, if you start with $400,000, earn an average of 5% a year, and increase your withdrawal by 4% a year for inflation, you could withdraw about $17,900 in the first year and make the money last 25 years. Withdraw more than that and you risk running short. This hypothetical example does not account for taxes or fees, and actual returns will vary.
Be smart about which accounts you tap first
The order in which you withdraw money can change how much tax you pay. Withdrawals from traditional IRAs, 401(k)s, and annuities are taxed as ordinary income, at federal rates from 10% to 37%. Long-term capital gains from selling taxable investments are taxed at a top rate of 20%, plus the 3.8% net investment income tax for higher earners. Roth withdrawals are generally tax-free.
Required minimum distributions from traditional IRAs and most workplace plans begin at age 73, or 75 if you were born in 1960 or later. Missing one triggers a penalty of 25% of the amount you should have taken, reduced to 10% if corrected promptly. Roth IRAs have no RMDs during your lifetime. Coordinating withdrawals, Roth conversions, and the timing of Social Security can keep you in a lower bracket over your whole retirement.
Make sure your estate plan keeps up
Update your will, power of attorney, and health care proxy, and confirm that the beneficiaries on your retirement accounts and life insurance match your wishes. Beneficiary designations override your will.
If estate taxes are a concern, tools such as a grantor retained annuity trust (GRAT) or a charitable remainder trust can help. A GRAT can move future growth to your children with little or no gift tax. A charitable remainder trust can provide you income for life and a charitable deduction now, with the remainder going to charity. New York residents should also understand the state’s estate tax, covered in Strategies to Minimize Estate Taxes in New York.
Retirement brings more financial decisions at once than any other stage of life. Working with a financial advisor, a tax professional, and an estate planning attorney can help you get them right.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
