Just because you're retired doesn't mean you can retire from money management

Even if you planned carefully for your retirement years, you can't just put your personal finances on autopilot the moment you retire. You'll still need to manage your income, your investments, and your expenses. They may need minor tweaks now and then or—if your situation changes in a major way—a major overhaul. Here's some advice on managing your money in retirement.

Key Takeaways

  • Retirement can last a long time, and you may need to make some changes to your financial plans in the years ahead.
  • You may still have important decisions to make with regard to your income, investments, and expenses.
  • If your expenses begin to exceed your income, you can fill the gap in several ways.
  • Be mindful of required minimum distributions, an imposed figure by the IRS that forces you to withdraw funds from your IRAs starting at age 73.
  • Some investors target a withdrawal rate of 4% of their total portfolio every year to ensure their current needs are being met while they still hold onto capital for the future.

Managing Your Income in Retirement

If you're fortunate, you'll have several income streams in retirement. They might include a pension from a former employer, income from your retirement accounts and other investments, Social Security benefits, and possibly a paycheck from part- or full-time work.

Your 401(k) and Similar Plans

Defined contribution plans, such as a 401(k) or 403(b) plan, have different sets of rules. Typically, you can start making penalty-free withdrawals as early as age 59½, although there are some exceptions, such as disability, that allow for earlier withdrawals.

At age 73, you must begin taking required minimum distributions (RMDs) using an Internal Revenue Service formula based on your age. So, if you need to, you can draw income from your plan anytime between age 59½ and your early 70s, at which point you have no choice but to start withdrawals.

The CARES Act, passed in 2020, eliminated the penalty on early withdrawals for that year. The Consolidated Appropriations Act, 2021 allows impacted individuals to make a qualified disaster withdrawal up to $100,000 without worrying about an early withdrawal penalty.

In deciding how much money to take from your retirement plans to supplement your other income, you'll also want to consider your safe withdrawal rate. That's how much income you can safely draw from your accounts each year without the undue risk of depleting them before you die. For many years a guideline known as the Four Percent Rule was in vogue. It suggested that you could safely withdraw 4% each year (plus an adjustment for inflation) from a diversified investment portfolio with little risk that you'd outlive your money. More recently some experts have questioned the rule, maintaining that 2% or 3% is a more realistic figure, while others set the withdrawal rate even higher than 4%.

There are many unpredictable variables here, such as the return on investments and rate of inflation over the several decades you may be retired. And a lot depends on how much money you have and how comfortable you are with risk. But, for the sake of argument, suppose you have an investment portfolio worth $100,000. At a 4% withdrawal rate, you could expect it to provide $4,000 a year in income. A $500,000 portfolio would provide $20,000; a $1 million one, $40,000.

Your Pension

If you have a traditional, defined-benefit pension from a former employer or labor union, you can find out when it's set to start paying out income by consulting the Summary Plan Description (SPD) or similar document, which the plan's administrator is required to provide you.

Many plans begin payments at age 65, but some allow you to start collecting sooner. One important decision you may need to make—if you haven't made it already—is whether to take your benefits as a single lump sum or in a series of regular monthly payments.

Your Social Security Benefits

It's possible to start collecting Social Security benefits before you retire (as long as you're at least 62) or retire first and collect Social Security benefits later. If you're retired but not yet collecting Social Security, you'll need to decide when you want your benefits to begin.

While you can start collecting as early as age 62, if you do, your monthly benefits will be permanently reduced. Conversely, if you delay collecting, your monthly benefits will be increased. At age 70, however, your benefits max out, so there's no further incentive to delay and you might as well sign up.

When you should activate Social Security largely depends on how much you need the money. If you can get along fine without payments until age 70, and expect to still have many years of life ahead of you, you might want to wait. If you need them sooner than that, you might plan to collect some time between age 62 and 70. If you can, try to wait until you reach full or "normal" retirement age, as Social Security defines it. Another issue: whether you have a spouse who will be collecting spousal Social Security benefits based on your earnings record. Your spouse can't collect until you do and it pays for them to wait until their full retirement age to be paid the full 50% of your full retirement age benefit.

Your Other Investment and Savings Accounts

You can also draw income from your non-retirement accounts at any age and without any RMDs to concern yourself with. It's wise to time these withdrawals to coordinate with your other income sources.

Your Job Income, If You Work

If you're planning to do paid work in retirement, you'll want to be aware of how that can affect your Social Security benefits. Specifically, if you haven't reached full retirement age and earn more than a certain amount ($19,560 in 2022, $21,240 in 2023), Social Security will reduce your monthly benefit by $1 for every $2 you earn over that annual limit. In the year you reach full retirement age, your benefits will be reduced by $1 for every $3 you earn over a different limit ($51,960 in 2022, $56,520 in 2023). However, this money isn't permanently lost; when you reach full retirement age, Social Security will recalculate your benefit and increase it to make up for the money it withheld earlier.

Managing Your Investments in Retirement

Aside from any decisions you may need to make about drawing on your investments for income, you'll also want to keep an eye on how your money is invested and perhaps make some changes along the way.

Retirees often transition to more conservative, less risky asset allocations as they get older, putting more emphasis on preserving their wealth than growing it. One common rule of thumb, for example, suggests that people subtract their age from 110 to determine the percentage of their money to keep in stocks. Following that guideline, a 65-year old retiree might aim for an asset allocation that's 45% stocks and 55% bonds, the latter being considered less risky. By age 75, the retiree might switch to 35% stocks and 65% bonds, and so forth.

There are also mutual funds and other investments that will do this for you. Target-date funds, for example, base their allocations on the year you plan to retire, gradually ratcheting down the risk as you get older.

If you're adjusting your asset allocation on your own, make sure to consider the tax consequences. You can move money from one investment to another within an IRA or other qualified retirement account without triggering any tax liability. Switching investments outside of a retirement account, however, will subject you to capital gains tax.

Many of us have little idea of where all our money goes—or the expenses we could easily cut back on if we need to.

Managing Your Expenses in Retirement

If you find that your retirement income isn't adequate to cover your retirement expenses, you can try to increase your income, reduce your expenses, or some combination of the two. Expenses may be where you have the most control.

Because housing costs are a major budget item for most people, that can be a good place to start. For example, how would you feel about moving to another area with a lower cost of living? Or, staying in your current area but moving to a smaller, less expensive home—otherwise known as downsizing?

You may also be able to reduce your insurance costs. If your children are grown and self-supporting you may not need life insurance or as much of it. If you have two cars but could easily get by with one, you can save on auto insurance as well as maintenance and repair costs.

Beyond those major categories, it could be worth taking a rainy afternoon to go through your credit card and checking account statements to look for expense items you can trim. Most of us aren't aware of where all the money goes unless we have the evidence right in front of us.

What Is the 25 Times Rules for Retirement?

A very broad rule of thumb for retirement savings is to have 25 times your planned annual spending saved before you retire. Because unspent savings can accumulate and grow, this does not mean you will be limited to only having 25 years' worth of savings. Instead, retirees should be mindful to only withdraw what they need and keep the rest in investment vehicles that can continue to grow.

What Is the 4.7% Rule for Retirement?

Most retirees aim to withdraw between 3% and 4% of their investment savings each year to cover living expenses. A general rule for retirees is they can withdraw up to 4.7% each year for 30 years before their retirement savings will be gone (subject to several assumptions). This broad stipulation creates a roadmap for those in retirement to try to not drawdown too much of their account each year to ensure enough savings is available in the future.

Can I Still Contribute to Retirement Accounts When I'm Retired?

Yes, retirees can still contribute to retirement accounts such as traditional or Roth IRAs. There used to be an age restriction to which individuals could contribute to traditional IRAs, but that limit has since been struck down. Now, individuals may contribute to their IRAs regardless of age, though there are restrictions on how much they can contribute (potentially based on earned income).

The Bottom Line

After a long career, many individuals look forward to retirement. However, there are many financial complications that are associated with no longer working. Retirees must be mindful of how much they drawdown each year and must still be mindful of tax-advantaged investment vehicles. Retirees may be subject to required minimum distributions, and they must be very mindful of what expenses they incur.

Article Sources
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  2. U.S. Congress. "H.R.2617 - Consolidated Appropriations Act, 2023." Division T: Section 107.

  3. Internal Revenue Service. "IRS: Seniors, Retirees Not Required To Take Distributions From Retirement Accounts This Year Under New Law."

  4. U.S. Congress. "H.R.133 - Consolidated Appropriations Act, 2021." Title III: Section 302.

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  11. U.S. Securities and Exchange Commission. "Target Date Retirement Funds."

  12. Financial Industry Regulatory Authority. "Asset Allocation and Diversification."

  13. Internal Revenue Service. "Traditional and Roth IRAs."

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