A small business owner reviews her retirement savings and thinks about the future.
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With $1.4 million in your IRA at age 65, you’ll have a robust nest egg that could potentially fund a secure retirement for 25 years or more. However, ensuring that the money lasts requires sensible planning. You must 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 tailor withdrawal rates for sustainability. But you don’t have to do it alone. A financial advisor can help you plan for retirement and manage your savings.
One way to increase the odds 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 take inflation into account – for example 2.5% – meaning you would withdraw €57,400. Conservative analyzes indicate that using this rule will make your savings last thirty years or more and increase your income to match inflation.
While the 4% rule is an oft-cited rule of thumb, critics argue that it is too simplistic and does not take into account changing income needs. Your specific situation may warrant a different plan. The keys are a careful balance between withdrawal rates, investment returns, taxes, inflation and your life expectancy. Investing correctly to earn solid returns while managing risks is also critical. 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 without running out of money.
By thoroughly assessing your life’s financial landscape, as well as your retirement lifestyle goals, you can ensure that your $1.4 million IRA will adequately support your long-term needs. To start this assessment, ask yourself the following questions:
What are my basic and discretionary spending estimates?
What major expenses may I have to make?
What other income streams do I have?
How risk averse am I?
Do I have an estate plan?
How do RMDs and taxes affect me?
Your answers to these questions can help you determine how to approach withdrawal rates, investments, insurance, and contingency reserves.
Now put some effort into budgeting your expected living costs and take into account any other sources of income. Social Security benefits, retirement benefits, annuity payments, part-time work, and investment interest can all supplement your IRA withdrawals.
After 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 costs. You may also want to build in buffers to account for market volatility and rising costs of goods and services in the future. Finally, you’ll want to regularly assess your spending and income needs and adjust your plan accordingly.
A recently retired couple walks on the beach and talks about their financial plan for retirement.
It is critical to align investment risk with a long retirement while addressing longevity risk. You can mitigate market volatility through broad diversification and holding fixed-income assets such as bonds, cash and annuities in addition to stocks.
You may be able to limit longevity risk by maintaining flexibility in your spending and withdrawal plans. Aim to be able to reduce drawdowns during extended market downturns. To address other uncertainties, you should review your insurance needs for health, property, liability, and long-term care coverage. Depending on your health, it may be particularly important to identify gaps in health care and secure additional 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 role 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 almost $53,000 per year. Failure to take your RMDs could result in a 25% tax penalty on the amount you should have withdrawn. So do not ignore 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 create a federal tax bill of $4,736 in 2024 after subtracting the standard deduction.
Using Roth conversions strategically can reduce the size of your RMDs or eliminate them altogether, giving you more tax flexibility in retirement. However, you must pay taxes on the money you convert, which increases your tax liability in the year the conversion is completed. A financial advisor can help you complete a Roth conversion and even manage your IRA for you.
With $1.4 million in an IRA at age 65, sustainable lifetime withdrawals are achievable if you plan well, manage risks, and stick to a sensible withdrawal rate. Plan to pay your expected costs with other income streams first before tapping into IRA funds. Model the impact of portfolio volatility, required distributions, and taxes over time, adjusting asset allocation and expenses downward when markets decline. Don’t forget to take health and insurance needs into account.
Social Security benefits are an important part of income planning for most people. Calculate 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 does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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