Retirement finance tips to make your savings last
No matter how much you love your job, retirement holds the wonderful promise of freedom from your current work schedule. You can fill those former workdays with everything from a hobby to charity work or even starting your own small business. Besides rethinking your time, you should take a new approach to managing your retirement money. Here are tips to help you plan your income during retirement.
Estimate your financial needs
Begin by coming up with annual estimates for three different spending categories.
The first is for essentials such as:
- debt repayments
- health care costs
The second is for discretionary expenses:
- financial gifts to your family (for example, helping grandchildren with education expenses)
The third category is for contingencies - expenses that you may never have or may become your largest expense, depending on your situation. Contingent expenses may include:
- extraordinary health care costs
- paying for home or long-term care
- increased taxes resulting from future tax law changes
Recent studies show that individuals may require up to 100% of their pre-retirement income (after taxes and saving) in retirement depending upon their situation. Review your total financial needs across all three categories and compare your situation to this retirement income guideline.
Determine where your retirement income will come from
Start with the money you're required by law to begin withdrawing annually from retirement accounts such as traditional IRAs, 401(k)s and simplified employee pension plans (SEPs) starting the year you turn 70 ½. Then consider other income sources such as social security, part-time work, pensions and annuities.
If you require additional income in retirement, consider selling long-term assets you hold inside taxable accounts. Any profits will often be taxed at your lower long-term capital gain rates. This strategy also leaves more money inside your tax-deferred accounts to grow for your longer-term needs. If you withdraw money from a Roth IRA, you will generally pay no tax.
What and when to sell
In general, it pays to sell longer-term investments that have gone up in value. Not only do you lock in those profits, you'll automatically be doing some rebalancing so that you don't have too much money invested in any one security or fund.
Review, rebalance, and repeat
Go through these same steps at least once a year, or even every few months, to stay on track. Your goal is to cover your ongoing expenses while preserving enough capital so that it can provide the income you need in the future to support your lifestyle.
Making your money last takes discipline. Try not to spend more than 3% to 5% of your nest egg - the amount you had saved by the time you retired - each year. This will help ensure you have the money you need down the road, even if the markets go down in the first few years of your retirement.
With proper planning, you could have a long and rewarding retirement ahead of you. Decide on your budget and spending plan now, so you can relax and enjoy the years to come.
What's next? How much do you need for retirement?
Brokerage IRAs (non-FDIC insured) are available through Merrill Edge. Bank IRAs (FDIC insured) are available through Bank of America, N.A.
Merrill Edge is the marketing name for two businesses: Merrill Edge Advisory Center, which offers team-based advice and guidance brokerage services; and a self-directed online investing platform. Both are made available through Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S).
MLPF&S is a registered broker-dealer, Member SIPC and a wholly owned subsidiary of Bank of America Corporation.
Banking products are provided by Bank of America, N.A., Member FDIC.
Investment products offered through MLPF&S:
Investing involves risks, including the loss of principal invested.
Neither Bank of America, N.A. nor any of its subsidiaries are tax or legal advisors. It is suggested that you consult your personal tax or legal advisor before making tax or legal-related investment decisions.