Money Sense: Do You Have A Retirement Spending Plan?

Saving and investing are just the first steps in retirement planning—creating a strategy to draw down that money is the next challenge. These tips from Bank of America can help.

You have worked hard, saved and invested— all with the goal of having enough to live the retirement life you want. As the day approaches, you may be thinking, “Now what?” How much of your savings can you afford to spend if you want that money to last as long as you live? Which accounts should you consider drawing from first: your 401(k), IRA or your taxable accounts?

You may have heard broad guidelines about the “right” amount to withdraw each year and the optimal order for tapping your accounts. While these rules of thumb contain kernels of truth, they generally gloss over the fact that everybody’s retirement is different— and much too important to be guided by a formula. “You need to come up with a plan for drawing down your income that is based on your own unique priorities and goals,” says Ben Storey, director, Retirement Research & Insights, Bank of America.

As you consider how you will create a retirement income, start with these questions:

1. How much can I spend each year?

According to one oft-quoted rule of thumb, retirees should tap 4% of their savings annually. But that rough guideline does not consider variables such as the age at which you retire and how your income needs will change. “The younger you are when you retire, the lower the percentage you will be able to spend each year if you want your savings to last,” Storey says.

Your withdrawal rate is in some ways a reflection of your confidence that your investments will continue to grow. If you are comfortable investing more aggressively, you might decide to take a little more income each year. If you prefer less risk, you might opt for a lower withdrawal rate. It is important to remember that investing involves risk. There is the potential for losing money when investing in securities.

Other factors may come into play. Some years you might withdraw more for a long-cherished goal like travel. Or you might have healthcare needs that dictate a higher spending rate. Your plans should be flexible enough to accommodate a variety of needs.

2. What’s the order in which I should tap into my retirement accounts?

The conventional wisdom goes that you should withdraw from your taxable accounts first, then tax-deferred, then tax-free. That is because the money you take from a taxable account (such as a brokerage account) is likely to be taxed at the rate for capital gains or qualified dividends, which varies depending on your tax bracket. It is generally a lower rate than what you would pay on ordinary income from 401(k) plans, traditional IRAs and other tax-deferred savings. “Tapping taxable accounts first gives the other accounts the potential to continue growing, shielded from current taxes,” Storey says. 

Even if you are not ready to start withdrawing funds from your traditional IRAs and qualified retirement plans, the government generally requires you to do so once you reach age 73. The amounts of these required minimum distributions, or RMDs, will vary from year to year, depending on your retirement account value and your age. Failing to take an RMD, or taking too little, can result in costly additional taxes. An exception may apply if you are still working. Review your employer’s plan highlights and talk with your tax advisor about your situation. Roth IRAs and, as of 2024, Roth 401(k)s do not have RMDs, so you can keep money in your account for your lifetime. While these guidelines offer a starting point, Storey says, “it is helpful to have some flexibility in the way your income might be taxed.” For example, if you fall in a higher-than-usual tax bracket one year—you sold a business at a profit, say—you might like to have the option to draw federal (and potentially state and local) tax-free income from a Roth account.

3. When should I claim Social Security benefits?

You can begin receiving Social Security retirement benefits as early as age 62, but waiting to claim until your full retirement age (66 or 67, depending on the year you were born) or even age 70 will give you a larger monthly payment, and future survivor benefits for your spouse may be greater. But, Storey notes, “after considering all of their options, some people might decide not to wait.” If you have a health condition that could limit your life span, for instance, it could make sense to start collecting Social Security income immediately, after carefully considering how spousal survivor benefits may be impacted. 

As you work out a retirement income plan, “it is important to work with your financial advisor and your tax advisor to know all your options,” Storey says. “You can get a general idea from rules of thumb, but you are different from anyone else, and your personal situation needs to be factored into any thoughtful decision.”

For more information, contact
Merrill Financial Advisor
S. Wesley Carpenter in the
Fairhope, AL, office
at 251.990.2361
or wesley_carpenter@ml.com.