Now that you've retired, you've learned that retirement planning is an ongoing process. You've also learned that how you spend your money is as important as how you saved it. As your own personal situation changes, your retirement needs will change as well. We recommend revisiting at different stages of your life.
- Understand the Risks to Your Retirement Savings
- Guidelines for Making Withdrawals
- Making Tax-Smart Withdrawals
- What Are Required Minimum Distributions?
- A Smart Asset Allocation Strategy Is Still Important
- Where to Keep Retirement Assets
- Other Considerations
While you may have saved a great deal for retirement, there are a number of things that you should learn about to ensure your retirement strategy remains on track.
Retirees are living longer. Today, there is a 23% chance that at least one member of a 65-year-old couple will live to age 95. And with improving health care, life spans will continue to increase.
- Market volatility. As capital markets move, the value of your investments can fluctuate. Many experts recommend that you invest with both short- and long-term goals in mind. To address short-term income needs, invest a portion of your portfolio in more stable securities, such as bonds and cash equivalents, that carry less volatility over shorter time periods.
- Inflation. Inflation has averaged approximately 3% annually over the past 80 years. At that pace, a lunch that costs about $8 today could set you back more than $14 in 20 years. This increase in the costs of goods and services will erode the purchasing power of the assets you’ve set aside to meet these expenses. To help ensure your assets continue to grow at a rate sufficient to last throughout retirement, you should consider investing a significant portion of your portfolio in stocks.
Once you have a basic understanding of the risks, your sources of income, and your expected expenses, you can consider how and when to withdraw your assets.
Determine a realistic withdrawal amount. Withdrawing from retirement assets each year can be influenced by a number of factors, including:
- Life expectancy
- Health concerns
- Desire to leave money to beneficiaries
Many financial experts now recommend that you plan to accumulate about 30 years' worth of retirement savings, managing your withdrawals takes on greater importance. You should consider withdrawing about 4% of your assets during your first year of retirement, increasing that amount by approximately 3% annually for inflation.
- For example, if you withdrew $40,000 during your first year of retirement, you should expect to withdraw $41,200 during your second year ($40,000 x 1.03) and $42,436 during your third year ($41,200 x 1.03). Decide when to draw down your assets. You may choose to redeem securities monthly or annually. Either way, you may want to set up a money market account and “pay” yourself on a monthly basis.
A number of factors should play a role when deciding which investments to sell to generate income. First consider securities that have performed best since the last time your portfolio was rebalanced. This will help keep the overall asset allocation of your portfolio in balance and reduce overexposure to one or more asset classes.
A tax-smart withdrawal strategy is also critical to your retirement planning, helping you save money this year and in the years to come while creating new avenues for investment growth and helping your savings last as long as possible.
Generally, allowing tax-deferred investments to grow as long as possible is smart, so consider withdrawing from taxable accounts first. Although you’ll pay capital gains tax, typically this tax rate is more favorable than the ordinary income tax rate you’ll pay on withdrawals from a tax-deferred plan.
Next, tap into tax-deferred savings such as Traditional and Rollover IRAs. Use assets from a Roth IRA last, particularly if you hope to pass those assets along to your heirs. Although distributions are potentially tax-free, the Roth IRA offers some significant estate planning benefits.
If you decide that you want to withdrawal periodically from your Traditional or Roth IRA, T. Rowe Price offers the ability to set up systematic withdrawals from your accounts. You can set this service up by logging into your account, calling 1-888-421-0563, or completing and returning the IRA Distribution Request form. If you're interested in learning more about taking or calculating your RMD, see below.
Even if you don’t need the money, the Internal Revenue Service requires that you begin withdrawing a minimum amount of money from most retirement accounts during the year in which you reach age 70 ½, and during every year thereafter. This is known as a required minimum distribution, or RMD. You must include and report the RMD amount each year as part of your earned income. You must take RMDs from the following accounts:
- Traditional and Rollover IRAs
- SEP-IRAs, SIMPLE IRAs, and SAR-SEPs
- Employer plans, including 401(k), 403(b), 457, profit sharing, and money purchase pension plans. Contact the plan sponsor directly to start your RMDs.
- Owners of Roth IRAs are not required to withdraw RMDs. However, RMD rules apply for non-spouse beneficiaries who have inherited account assets.
To simplify RMD planning, consider rolling over assets from your employer plan
account(s) into an IRA. For information about this strategy, call a T. Rowe Price Retirement Specialist, available weekdays between 8 a.m. and 9 p.m. ET at 1-888-421-0563.
Have to take an RMD, but don’t need the money? If you don't think you'll need to spend your RMD, there are several ways you can reinvest the money. To learn more about creating an effective RMD strategy, call 1-888-421-0563.
More than ever, it’s important to maintain a diversified portfolio. Portfolio allocation is essential to balance the impact of market volatility and inflation on retirement savings. Allocating your portfolio among asset classes such as stocks, bonds, and short-term investments can help you manage short-term market volatility while still providing your investments with growth potential. Of course, no asset allocation can assure a profit or protect against loss in a declining market.
Although shorter-term investments, such as bonds and cash equivalents, offer some protection against market risk, there is also less potential for growth. As a result, stocks should continue to play a key role in your portfolio, with the potential for greater returns helping to insulate the portfolio from inflation and longevity risks.
Once you retire, you should consider keeping your assets in an IRA, where they can still grow tax-deferred. The same holds true for any assets you’ve accumulated in an employer-sponsored plan.
T. Rowe Price offers Advisory Planning Services for investors who are saving for, nearing, or living in retirement, helping you create and manage an effective long-term investment strategy.
The importance of an estate plan cannot be overstated. By thinking ahead, you can help ensure that your heirs’ tax obligations are minimized and that the hard work you’ve put in to building your assets doesn’t go to waste.
Nursing home and home health care costs can eat into your estate if you’re not adequately protected. Consider buying long-term care or other supplemental insurance to cover expenses not included in Medicare. The best time to purchase a policy is usually in your late 50s to early 60s. For more information on this topic, contact the National Association of Insurance Commissioners at naic.org.