For most adults, they start putting away retirement savings as an adult. Especially if you want to retire early, an excellent savings account is essential. However, many seniors find themselves wondering the same thing: how long will my savings last after I stop working? Read on to find out what impacts retirement savings the most…
Withdrawing And Spending
Of course, the most crucial factor in how long retirement savings will last is how often one withdrawals from their account. Just like everyone else, retirees need a budget that accounts for all their expenses. In fact, a budget is even more critical as a retiree, as you often have less money than ever coming in. Make sure to account for everything from groceries to hobbies in the monthly budget. Moreover, where one lives has a massive impact on a monthly budget, so be sure to do some research before the time to retire comes.
For those already using their retirement savings, use the “4% method” to figure out how much to spend. Financial experts do not recommend using more than 4% a year, as doing so means a savings account will empty in less than 30 years.
Inflation
One of the biggest influences on savings is inflation. While inflation may not seem like a big deal from year to year, when looking at decade long trends, one can see how much it will suck from a retirement savings account. Resources state that for the past 100 years, the average inflation rate in the U.S. was 3.22%. So, don’t forget that finances will increase from year to year. Expect a yearly budget of $50,000 to about $51,000 the year following, then up to $53,000, and so on.
Taxes
Many budget for their groceries and hobbies every year, but forget to budget for taxes. And retirees are no different! Planning for tax costs can get complicated, since people will pay different rates depending on the size of their retirement account. Usual IRAs and a lot of 401(k) accounts go into the pre-tax retirement accounts. While any withdrawals are considered taxable in these accounts, the contributed money won’t be in the taxable income for the first year of the deposit. Some withdrawals might be taxable, however, so be sure to speak to your account liaison.
Most of the other accounts that don’t fall under the first category, and have a rate of only 15% for most dividends and capital income. With a taxable account, all the dividend and interest income along with capital income will have to be paid for every year. Congratulations in case you’re a lucky one with the after-tax retirement account, meaning Roth IRA! Then it means the owner of the account already paid for all the contributed finances. All the withdrawals are tax-free, and the rate is 0%!
Income
Retirement doesn’t always mean being a couch potato! Having even an itty bit of income will help build a cozy home for you in your retirement years and help keep the lights on. Passive income like real estate or investing is a very nice option for retirees, as these often don’t require long hours away from home. Every little bit helps, so if you can handle a side hustle in your retirement years, try it out!
Planning your retirement and don’t know what to do? You don’t have to struggle alone! Consider contacting a financial advisor that will walk you through the entire process.
Sources: The Motley Fool, Finance101