A small business owner looks over her retirement savings and thinks about the future.
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With $1.4 million in your IRA at age 65, you have a robust nest egg that could potentially fund a secure retirement of 25 years or more. However, making sure that money lasts will require prudent planning. You’ll need to assess your income needs, balance investment risk and return, secure supplemental insured income streams, account for required minimum distributions (RMDs) and their tax impact, and thoughtfully tune withdrawal rates for sustainability. But you don’t have to go it alone. A financial advisor can help you plan for retirement and manage your nest egg.
One way to increase the chances that your savings will endure an extended retirement is to use a safe withdrawal rate. The 4% rule, for instance, suggests limiting annual withdrawals to about 4% of total savings in your first year of retirement and then adjusting withdrawals in subsequent years for inflation.
For example, if you retire this year with $1.4 million in an IRA, you would withdraw 4% or $56,000. Your withdrawal next year would account for inflation – say 2.5% – meaning you would withdraw $57,400. Conservative analyses indicate that using this rule will allow your savings to last for 30 years or more and provide for increasing income to accommodate inflation.
Though the 4% rule is a commonly referenced rule of thumb, critics contend that it’s overly simplistic and doesn’t account for evolving income needs. Your specific situation may warrant a different plan. The keys are thoughtfully balancing withdrawal rates, investment returns, taxes, inflation and your life expectancy. Investing appropriately to achieve solid returns while managing risk is also vital. A financial advisor can help you balance these different variables and estimate how much you can afford to withdraw from your savings.
A woman calculates how much money she can afford to withdraw from her $1.4 million IRA each year and not run out of money.
Thoroughly assessing the financial landscape of your life, as well as retirement lifestyle goals can help ensure your $1.4 million IRA adequately supports your needs over the long term. To kick off this assessment, ask yourself:
What are my basic and discretionary spending estimates?
Your answers to these questions can help inform how you approach withdrawal rates, investments, insurance and contingency reserves.
Now put some effort into budgeting your expected living expenses and accounting for any other sources of income. Social Security payments, pension benefits, annuity payments, part-time work and investment interest can all supplement your IRA withdrawals.
After conservatively estimating these other streams of income, you may plan to use them to cover as much of your living expenses as possible. You can then use IRA withdrawals to cover any leftover costs. You may also want to build in buffers to account for market volatility and rising costs of goods and services in the future. Lastly, you’ll want to regularly review your expenses and income needs and adjust your plan accordingly.
A recently retired couple walks on the beach and talks about their financial plan for retirement.
Balancing investment risk across a long retirement while also addressing longevity risk is critical. You can smooth market volatility through broad diversification and holding fixed-income assets like bonds, cash and annuities in addition to equities.
You can potentially mitigate longevity risk by maintaining flexibility in your spending and withdrawal plans. Aim to be able to reduce withdrawals during extended market declines. To address other uncertainties, review your insurance needs for health, property, liability and long-term care coverage. Depending on your health, it may be particularly important to identify Medicare gaps and secure supplementary policies.
As you can see, there’s a lot to consider when planning for retirement but a financial advisor can help you navigate the process.
RMDs also play an important part in retirement planning. These mandatory withdrawals are dictated by the IRS starting at age 73. On a $1.4 million IRA, RMDs would likely start at nearly $53,000 annually. Failing to take your RMDs can trigger a 25% tax penalty on the amount you were supposed to withdraw, so don’t neglect this obligation.
RMDs can push you into a higher income tax bracket and significantly increase your obligation to the IRS. RMDs are taxed as ordinary income, so ensure your tax planning addresses their impact. For example, a $56,000 RMD could create a $4,736 federal tax bill in 2024 after taking the standard deduction.
Strategically using Roth conversions can reduce the size of your RMDs, or eliminate them altogether, giving you more tax flexibility in retirement. However, you’ll have to pay taxes on the money you convert, which will increase your tax liability in the year a conversion is completed. A financial advisor can help you execute a Roth conversion and even manage your IRA for you.
With $1.4 million in your IRA at age 65, sustainable lifetime withdrawals are feasible if you plan well, control risk and stick to prudent withdrawal rates. Plan to pay your expected costs with other income streams first before tapping IRA funds. Model the impact of portfolio volatility, required distributions and taxes over time, adjusting asset allocations and spending downward when markets decline. Don’t forget to account for health costs and insurance needs, as well.
Social Security benefits are an important component of income planning for most people. Estimate your future benefit now with SmartAsset’s Social Security calculator.
Consider meeting with a financial advisor to review your evolving retirement income plan and withdrawal strategy. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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