With $1.4 million in your IRA at age 65, you’ll have a solid nest egg that can potentially fund a secure retirement of 25 years or more. Making that money last, however, requires some careful planning. You’ll need to assess your income needs, balance investment risk and return, secure additional assured income streams, consider required minimum distributions (RMDs) and their tax impact, and carefully calibrate 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.
Pension Financing Primer
One way to increase the chances that your savings will survive an extended retirement is to use a safe withdrawal rate. For example, the 4% rule suggests limiting annual withdrawals to about 4% of total savings in your first year of retirement and then adjusting withdrawals for inflation in subsequent years.
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 analysis suggests that using this rule will help your savings last 30 years or more and provide rising income to offset inflation.
While the 4% rule is a widely used rule of thumb, critics argue that it is too simplistic and fails to take into account changing income needs. Your specific situation may warrant a different plan. The keys are to carefully balance withdrawal rates, investment returns, taxes, inflation and your life expectancy. Investing properly 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.
Know your situation
By thoroughly assessing your life’s financial landscape and your retirement goals, you can ensure that your $1.4 million IRA will adequately support your needs over the long term. To begin this assessment, ask yourself the following questions:
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What are my basic and discretionary spending estimates?
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What major expenses might I have to make?
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What other income streams do I have?
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How risk averse am I?
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Do I have an estate plan?
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How do RMDs and taxes affect me?
Your answers to these questions can help you determine your approach to withdrawal rates, investments, insurance, and emergency reserves.
Predicting retirement needs
Now, put some effort into budgeting your expected living expenses and factor in other sources of income. Social Security payments, retirement benefits, annuity payments, part-time work, and investment interest can all supplement your IRA withdrawals.
Once you have conservatively estimated these other income streams, you can plan to use them to cover as much of your living expenses as possible. You can then use IRA withdrawals to cover any remaining expenses. You can also build up buffers to account for market volatility and rising costs of goods and services in the future. Finally, you will want to review your expenses and income needs regularly and adjust your plan accordingly.
Risk management
It is crucial to balance investment risk with a long retirement while addressing longevity risk. You can smooth out market volatility by diversifying broadly and holding fixed income assets such as bonds, cash and annuities alongside stocks.
You can reduce the risk of longevity by maintaining flexibility in your spending and withdrawal plans. Try to reduce withdrawals during prolonged market downturns. To address other uncertainties, review your insurance needs for health, property, liability, and long-term care coverage. Depending on your health, it may be especially important to identify Medicare gaps and secure additional policies.
As you can see, there are many things to consider when planning your retirement. A financial advisor can help you with this.
Accountability for RMDs
RMDs also play an important role in planning for your retirement. These mandatory withdrawals are mandated by the IRS beginning at age 73. On a $1.4 million IRA, RMDs would likely start at nearly $53,000 per year. Failure to take your RMDs could result in a 25% tax penalty on the amount you should have withdrawn, so don’t neglect this obligation.
RMDs can push you into a higher income tax bracket and significantly increase your liability to the IRS. RMDs are taxed as ordinary income, so make sure your tax planning takes their impact into account. For example, an RMD of $56,000 could result in a federal tax bill of $4,736 in 2024 after taking the standard deduction.
Strategic use of Roth conversions can reduce the size of your RMDs or eliminate them altogether, giving you more tax flexibility during retirement. However, you will still have to pay taxes on the money you convert, increasing your tax bill in the year the conversion is completed. A financial advisor can help you complete a Roth conversion and even manage your IRA for you.
Conclusion
With $1.4 million in your IRA at age 65, sustainable lifetime withdrawals are achievable if you plan well, manage risk, and stick to prudent withdrawal rates. Plan to pay your expected expenses with other income streams first before dipping into IRA funds. Model the impact of portfolio volatility, required distributions, and taxes over time, and adjust asset allocations and expenses downward when markets decline. Don’t forget to factor in healthcare costs and insurance needs, too.
Tips for retirement planning
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Social Security benefits are an important part of income planning for most people. Estimate your future benefits now with SmartAsset’s Social Security calculator.
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Consider meeting with a financial advisor to discuss your evolving retirement income plan and withdrawal strategy. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can schedule a free introductory meeting with your advisors to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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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 subject to big swings like the stock market. The tradeoff is that the value of liquid assets 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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Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and provides marketing automation solutions so you can spend more time on conversions. Learn more about SmartAsset AMP.
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