Living on Your Retirement Savings

You’ve worked and saved, and now you’re ready to retire. Do you have a plan for managing your money during retirement? If you simply withdraw money from your savings or investment portfolio whenever you need it, you might spend more than you can afford in your early retirement years and shortchange your later years. Worst case, your money could run out. With a plan to guide you, you can be more comfortable about your finances after your regular paychecks stop.

Compare Income and Expenses
Before you retire, you’ll want to review your expenses and develop a basic budget. Compare your annual budgeted expenses to the income you expect to receive from Social Security and other sources (e.g., pension benefits, rental income, part-time work, annuities). Any income shortfall will have to come from your savings and investments.

Make a Withdrawal Plan
You’ll be starting from a strong financial position if your savings and investment portfolio are large enough that you can realistically expect them to generate sufficient income — interest and dividends — to cover the shortfall. When you live on your investment income and don’t spend principal, there’s no risk of outliving your nest egg.

As desirable as that may be, the low interest rates of recent years have made it especially difficult for retirees to successfully implement the “never spend principal” strategy. You may decide you will dip into principal from time to time. Setting some limits on those withdrawals can help you stay on track.

Think About Taxes
To the extent possible, aim to protect tax benefits for as long as possible by taking money from taxable accounts before withdrawing from 401(k)s, other qualified plans, or individual retirement accounts (IRAs). Here’s another tax tip: If you are going to sell appreciated investments in a taxable portfolio, you can minimize capital gains taxes by selling high-basis, long-term (holding period of longer than one year) investments first.

After you reach age 70½, you’ll generally have to begin withdrawing a minimum amount — called the “required minimum distribution” — from your tax-favored retirement accounts each year, even if you don’t need the money. A Roth IRA, however, can be left intact.