The good news: We’re all living longer. The bad news: We’re all going to have to come up with a way to pay our living expenses for our longer lives. How do you make sure your retirement income lasts as long as you do?
There’s a fine line between spending enough, but not too much, according to the Minnesota Society of Certified Public Accountants (MNCPA). Careful budgeting and planning helped you develop your retirement nest egg. Continued budgeting and planning can help you enjoy your retirement just like you planned.
How much can I spend?
You’ve worked diligently to build your 401(k) plan over the years, and now it’s time to start drawing on it. There is no limit on what you can withdraw from your 401(k), but limiting the withdrawal rate is the best way to make the money last.
The first step is to design a lifestyle that you are looking to live in retirement. This will require coordination with the other people in your life to discuss the various options.
The next step is to calculate all of your sources of inflows available to you in retirement (pensions, investment assets) and all of your required outflows (expenses, liabilities). Don’t forget that if you withdraw money from your 401(k) before you reach age 59 1/2, you could be subject to a 10 percent penalty from the IRS. All of the money that you take out of your 401(k) is also taxable as ordinary income.
The next step is to see if the numbers work.
Are the projected inflows sufficient to cover the outflows? If so, then you are on your way.
If not, then you are back to step one and the desired lifestyle will have to be adjusted to meet your specific situation. In order to make the numbers work, you’ll probably need to revamp the budget you created when you were still working. What has changed? Maybe you’re about to pay off your mortgage. Perhaps you need to remove some business expenses, such as dry cleaning, lunches at restaurants and downtown parking, and replace them with new expenses you foresee.
Your financial planner can be very helpful in this effort.
Ongoing cash and investment management are important
You got to where you are by creating a budget and sticking to it. Don’t stop now. Once you establish your new budget, you will have to be diligent. Be ready to alter your plans as conditions change.
Some financial planning experts advocate covering your expenses solely with your interest and investment income to ensure you don’t outlive your money. When you are examining different scenarios for the long term, don’t forget about inflation. Free online tools and calculators can assist you in calculating alternatives for how long you might live, inflation, market changes and other variable factors. Examining these potential changes can help you see how spending decisions now can help you down the road.
A CPA can help
Once you’ve started drawing on your retirement funds, it’s very important to continue to keep a close eye on your investments. Does your portfolio need to be rebalanced? Make sure the structure of your portfolio will continue to cover your needs over time.
For more retirement planning advice, consult your CPA.