Saving during your retirement years is tough, and when you reach retirement age, there’s the relief that the most challenging part is over. However, you can never be more wrong. There’s one more challenge you’ll have to face – making sure that your retirement savings last as long as possible.
Regardless of how large your nest egg is, it won’t matter if you don’t manage it properly. If you withdraw too much, you could run out of money in a few years.
While everyone’s situation and withdrawal plans can’t be the same, there are some rules to keep in mind when determining how much you can safely withdraw from your retirement account.
- Be flexible
The 4% rule, which is one of the most popular retirement withdrawal guidelines, suggests that you should withdraw 4% of your total savings in your first year in retirement; you can then adjust your withdrawal in subsequent years to account for inflation.
There’s also the issue of spending volatility. According to JPMorgan Chase, 56% of American households experience spending volatility in the first year in retirement. You may experience higher or lower waves of spending in your first year. For instance, you can spend more than average if you travel or engage in new or expensive hobbies.
Your expenses may also shoot up if you develop complicated health issues as you grow older. While it’s difficult to predict how much you will spend each year in retirement, it is essential to be flexible with your retirement withdrawal plans. If you develop a rigid plan, you may be thrown off balance and end up spending more.
- Don’t miss Required Minimum Distributions (RMD)
At the age of 72, you’ll start taking RMD from your 401(k) account. The amount you can withdraw will be mostly dependent on your 401(k) balance, and the IRS usually calculates it.
If you don’t withdraw your RMD on time, you will be hit with a tax penalty (50% of the amount you are supposed to withdraw). For instance, if your RMD is $30,000 per year and you skip it, you’ll pay a $15,000 penalty.
The required minimum distribution can throw you off your retirement withdrawal plans if you plan to work at age 72, as you’ll still be required regardless to withdraw the RMD. However, you may qualify for an exemption if you have your 401(k) account through your current employer.
- Don’t forget taxes on your withdrawals
The 401(k) account is a tax-deferred account, which means that you won’t need to pay taxes when making the contributions, but you will pay the taxes when you start taking withdrawals. So it’s essential to account for taxes as you calculate your withdrawals.
The amount of taxes you’ll pay depends on the state you live and the amount you wish to withdraw. If you live in the same state and withdraw the same amount as you are earning now, your taxes may not be too different. However, if you move to a new state or withdraw more or less than you do now, the taxes you’ll have to pay could change significantly.
Ensure that you consider how taxes will affect your withdrawals before you retire. If you are moving to a new state, find out the retirement income taxes in that state. There’s a possibility that you may get out of paying taxes altogether. However, if that isn’t the case, consider how the taxes will affect your spending and include taxes in your retirement budget.
Planning your retirement withdrawal is a vital step to ensure your money lasts as long as possible. And you can achieve just that following the tips above.