In the movie, “Fiddler on the Roof,” someone tells Tevye that money is a curse. He responds by saying:
“May I be smitten and never recover.”
We all want enough money to live well in retirement. But how much does it take? And how much is enough?
Smart savings
I ask Carl Richards this question because he hosts a podcast about financial planning and raises this very question in one of his episodes. His response? It depends on your goals. Define what you want to do first, then calculate how much it costs to do those things.
This type of reverse engineering can be helpful for many people, but there are at least two big unknowns that make it difficult to apply:
- How will inflation affect your nest egg?
- What unforecasted emergency funds for health care will you need?
The traditional advice from financial planners based on an established J P Morgan study is that retirees likely need to have saved about 6 times their annual spending by the time they retire. Then, in retirement, spending should not exceed what used to be the 4% rule for annual withdrawals, which has now been updated to up to 4.7% for annual withdrawals based on new data by Bill Bengen in his book, “A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.”
Of course, individual situations vary, but these general guides at least allow for a starting point to assess and decide how much to save for retirement and then how much to spend during retirement. After all, as my friend Randy Bronson likes to say “nobody wants to run out of money before they run out of time.”
Smart spending
OK, so you’ve saved for retirement and now are ready to spend for retirement. What are some “do’s” and “don’ts” that others have found helpful? These come from not only financial planners, but also real people trying to “live long and prosper,” as Star Trek character Mr. Spock would say.
According to the Gallup poll service, more than 65 million Americans have Individual Retirement Accounts (IRA). For those who have already retired, Gallup reports that 94% who have an IRA (or its equivalent) “have enough to live comfortably now” while 70% of those without an IRA or equivalent retirement savings plan say they have enough to live comfortably now.
IRAs and 401(k)s began to proliferate in the 1980s, allowing many of today’s Boomers to save consistently for retirement. Now, for many, required minimum distributions (RMDs) or withdrawals from these plans are necessary to avoid big tax penalties.
While many investment plans calculate RMDs automatically for savers, it is still necessary for individuals to decide when to take them. According to Barron’s financial service, about 20% of those who must take RMDs had failed to do so near the end of 2023. If that happens today, the retiree would incur a 25% tax penalty.
“Because I have variable expenses throughout the year, I take my RMDs in January or February so I can be done with it,” Jack Fisher tells me. “Then, I put it in a Fidelity cash management account that is both versatile and offers competitive interest rates for daily balances.”
Others I spoke to prefer to stagger their withdrawals throughout the year to take stock market fluctuations into account. This approach helps them budget and plan better.
Ignoring traditional advice about limiting stock investments to less than 40% for older people, Clint Davis puts a higher percentage of his savings into stock index funds. This approach lets him spread his risk, maximize his returns, and pay a lower administrative fee.
“I’m in good health and expect to live another 25-30 years so I don’t want to be too conservative,” he tells me. With this type of time horizon, I can handle the normal ups and downs of the stock market and hopefully stay ahead of inflation.”
Like others, Davis is following standard advice to divide his investments into three buckets:
- A cash account for regular expenses.
- An investment account for financial growth.
- An emergency account for unforecasted expenses.
This man also reduced his tax liability from his RMDs by making Qualified Charitable Distributions (QCD) to his church and a nonprofit organization that he supports. IRS Guidelines for qualifying distributions must meet certain conditions. QCDs can significantly reduce taxes if contributions are made directly from an IRA.
“I think it’s difficult for many of us who have been savers to shift gears and now become spenders after retiring,” Marriner Rigby says. “I’m part of the Greatest Generation. It’s almost like we have microchips in our heads that say ‘Don’t spend what you have. Save it for a rainy day.’ But at my age, I think my rainy days are behind me and I have plenty of sunny days ahead.”
Rigby lives in an assisted living center and likes to support the staff there whenever he can with small monetary tokens of appreciation.
“I’ve created accounts for my kids and grandkids already and they know their limits,” Rigby says, emphasizing the careful limits he follows to not overextend himself. Others he knows have given so much to family members “they are in a bind themselves. In some cases, residents had to switch to reduced plans or, in a few cases, they’ve even had to transfer to other facilities with fewer amenities.”
As reflected here, some older adults give financial help they cannot afford to family members or even friends — paying for adult children’s expenses, cosigning loans, or gifting large amounts of money to them. While generous, this can jeopardize their own long-term security.
Cautions with credit
Living off revolving credit can jeopardize financial security in retirement. Maintaining credit card balances or giving personal loans eat into retirement income quickly. According to an AARP survey, 52% of older adults carry a balance from month to month with an average of $7,484 for those age 60 or older.
Making minimum payments at high interest rates instead of eliminating credit card debt not only reduces financial flexibility but also increases mental health issues, according to a University of Michigan survey.
Going back to work after retiring is necessary for some and preferred by others. But this step is not always a step back for those who have few hobbies and enjoy the career they had. Paul Sommers, retired and moved from Idaho Falls to St. George but soon went back to work as a commercial truck inspector.
“I was bored,“ he said. “I didn’t know what else to do so I went back to work.”
Others have found that working full-time or even part time for some number of years has not only given them something to do, but also helped them supplement their savings with current income.
Surveys by Money Digest and T. Rowe Price suggest that about 20 to 25% of Americans “unretire” soon after formally retiring. These analyses find that about half these “unretirees” who return to work do so for financial reasons, while about 40% are looking for something personally fulfilling.
Like personal financial planning at any age, creating a budget and tracking expenses enable older people to know where they are spending their money and running down savings faster than planned. While there are a variety of subscription based budgeting apps, there are other options free of charge that include good features.
Starting a budget and tracking expenses, planning for RMDs, utilizing QCDs, reducing credit card debt, and continuing to manage investments can help us enjoy retirement more and be better prepared for unforeseen expenses that may occur. Of course, seeking the advice of a trusted financial professional can also greatly assist in protecting and growing your nest egg and enjoying life in retirement.