Many of us worry about running out of money in retirement. That make sense since we don’t know how long we’ll live, what our future costs might be, and what kind of returns we can expect on our savings. (Dallas Texas CPAs: Make Your Money Last In Retirement, Part I)
But there are ways to boost the odds that your money will last as long as you do in retirement. Here are some ways to help your money last forever in retirement.
1. Minimize Your Fixed Expenses
When you want to make your money last longer, it is imperative that you minimize your must-have expenses. These are the things that you really can’t go without. I’m talking about food, shelter, transportation, and even things like debt payments and insurance.
Right-sizing your housing is an amazing way to cut back on fixed expenses. This might even mean staying in your (bigger) home and living like the Golden Girls in retirement. This will help save on utilities, and hopefully bring some fun and friendship into your daily life.
This will also give you the most flexibility if you do get hit with some financial adversity. Say some major medical expenses, home repairs, or even a recession.
2. Maximize your Social Security Benefits
Beginning your Social Security benefits at 62 is just too appealing to many future retirees. A check every month from the government for doing nothing? Can I get it now? Sign me up!
Starting Social Security too early will greatly reduce the benefit you get now as well as in the future. It also means smaller cost of living adjustments, later in life when you may desperately need them. Do you think you will need those extra pennies more at 62 or 102?
The longer you expect to live, the greater the odds that you will run out of money in retirement. My great grandfather lived to 99, I’m planning on a long retirement. Think of your Social Security benefits as longevity insurance, it is in income stream you can’t outlive.
3. Consider Some Guaranteed Income
Back in the day, people could retire well on pensions and Social Security. Both were expected to be nice income streams paying out for the rest of your life. Today, it is beneficial to have at least some guaranteed income in retirement. Ideally, you would have enough to cover your necessities, like housing and food.
Talk with a fee-only financial planner about setting up a guaranteed income stream with part of your retirement savings. This may be with the Rich Person Roth, designed to provide tax-free income for life. Or more commonly, some type of guaranteed annuity income.
Avoid getting sold some big annuity, with sky-high fees that you can’t get out of. This should just be a small portion of your overall net worth, giving you a little extra peace of mind from some guarantees on your income stream in retirement.
4. Have a Retirement Spending Plan
We all hate budgeting, right? A spending plan is like a budget, but hopefully a little more exciting. This is where we set aside money for fun stuff like travel, or shopping, or going out with friends. Budgeting is where some financial know-it-all tells you that you are going to die poor after buying one cup of coffee at Starbucks.
Having a robust spending plan will help you establish what you want to be able to afford in retirement. From there, a fabulous financial planner can help you figure out what type of nest egg will be needed to support your dream retirement.
Not having a plan for retirement income, or even just a spending plan, at the beginning of your retirement can greatly increase the risk of running out of money as you age. The overspending of many current retirees has been hidden by the bull market of the past ten years. Not to be negative, but the times won’t always be as good as they are today.
As a basic rule of thumb, 4% is considered by many to be a good starting point for choosing a withdrawal rate in retirement. For example, if you wanted $300,000 of income in retirement, you would need around $7,500,000 in retirement assets to generate the desired income.
To put that another way, if you saved a million dollars for retirement, you could expect to generate around $40,000 per year of income from the accounts. Plus Social Security. Would you be happy living on $40,000 per year in retirement? Guessing that is a big fat NOOOOOO! for most of you.
5. Don’t Ignore Tax Planning
Remember, it isn’t what you make but what you keep. Tax planning doesn’t end when you stop working. In many cases, tax planning in retirement may get even more important and complicated.
With the 4% rule, we are talking about needing a million dollars to generate just $40,000 of income. We are not even talking taxes here. So $40,000 from a 401(k) or IRA is worth less (after taxes), that the same withdrawal from a brokerage account, which is worth even less than similar tax-free income from a ROTH IRA.
Required minimum distributions, healthcare expenses, Medicare premiums, Social Security Taxation. Even planning on which retirement accounts to pull money from- should you use the ROTH IRA first or last? Working with a proactive CPA or Certified Financial Planner can help answer all of your retirement tax planning questions, and help you keep more of your hard-earned money.
Call Williams & Kunkel CPA today in Flower Mound at 972-446-1040 to have a chat and find out how you can save money on your taxes as a real estate professional.