How to Have Enough Money for Retirement

Did you know that we are living longer, more active lives?  While you might not feel it in the morning, but today’s 70-year-old male has a high probability to will live well into their 80’s – maybe even your early 90’s.

If this is the case then having enough money for retirement is going to a big challenge.  Here is why.  If you are like most people, then you probably expect to retire sometime in your 60’s.  However, living a longer, more active life means that you will be retired for 20 or even 30 years.

As such, you need to have a plan to make sure you have enough money for retirement.  Basically ‘age proofing’ your retirement plans so that you can live comfortably for as long as possible.  With that in mind, here are some tips you should consider.

  • Multiply it by 20

What is the it?  Your final pre-retirement salary, or the average of your final 10-years of working if your income is inconsistent.  As such, you will need to take this number and multiply it by 20 to figure out how much money you will need to live comfortably.

Now, this does not mean that you will need to have all the money in an account from day one.  Instead, you want to identify potential income sources that will get you close to this amount.

Granted, the math will never be precise.  I mean who can predict the future?  But know how much you will get from your pension, social security, and other savings will help you know if you need to take alternative measures, such as a reverse mortgage.   Which you can read about in a free guide here: https://reverse.mortgage/advantages-disadvantages

Now, if you are nowhere near the age of retirement, but are reading this article then you will want to multiply your salary by 20 plus half your age.  So, if you are 40, then you want to multiply your salary by 40 as this will help you to adjust for the effect of inflation over time.

  • Plan for Getting Sick

It’s inevitable, we will all get old and a big part of getting old is dealing with the accumulated ailments of an active life.  Unfortunately, the cost of healthcare in the U.S. is not going down and if you think just visiting the doctor is expensive, the check out the costs of spending time in a hospital or a nursing home.

While Medicare currently cannot reject any treatment based upon cost moves to reform the health insurance system in the U.S. might change this.  As such, retirees need to have a plan to cover healthcare expenses.

This might include Health Savings Accounts, long-term care insurance, or some other option.  If not, then they will risk either running out of money or having to declare bankruptcy to offset the cost of healthcare.

  • Retirement Doesn’t Always Mean That You Stop Working

Traditionally retirement meant that you would stop working altogether.  But for today’s seniors ‘retirement’ means transitioning to another stage of their career.  Maybe it’s volunteering or serving as a mentor.  While for others retirement is the transition to some form of informal work including taking on a part-time job or working as a freelancer.

No matter how you cut it retirement means an end to the 9-to-5 work day and transitioning to something more flexible.  The advantage of this approach is that today’s retirees can supplement their savings.  Even if it is only for five years, this means that can allow the balances in their accounts to grow before they start marking withdrawals.

  • Rule of Three

 Think of it as the three-legged stool for retirement planning: 1) managing withdrawals, 2) making adjustments, 3) have an emergency fund.   Without any of these legs, your retirement savings plan is sure to buckle under pressure.

Let’s start by looking at managing withdrawals.  It used to be that the 4% rule was considered the gold standard for managing withdrawals from your retirement account.  However, as we are living longer lives, this rule may no longer be relevant.  Instead, you want to plan withdrawals based on combination of your current needs and how this will fit into your long-term goals.

This leads us to the second leg – making adjustments.  Even the best economists are unable to accurately predict what will happen 20 years from now.  As such, you need to be able to make adjustments as you go.  Keep in mind your long-term goals, but adjust to make sure you are on a path that will get you there.

Lastly, is the idea of having an emergency fund.  Accidents do happen and you need to have a special account which can only be broken in case of fire.  Even if the account only has $1,000 in it, this will offset the blow of an unplanned event.

Little Know Facts About Retirement Distributions

You’ve been religiously contributing to your retirement funds for years. Your employer 401K may be your largest investment account. Understanding what you can do and should do with it are huge factors in your successful use of the retirement funds.

I retired in 2010. Here are a few things that surprised me when deciding how to take my distributions.

Background

My company retirement funds were divided into two plans. When I first started, the company made all the contributions and it was all in company stock. Later, when they switched to a combination profit sharing/401k plan, the company shares just rolled into the profit sharing part. From then until my retirement date the company just contributed funds, and matching funds to the 401k.

Because of various lawsuits, the company had been selling stock in the first plan and replacing it with ‘diversified’ funds for about a decade – so that our retirement plan was not concentrated in company stock. Even during the 2008/2009 recession stock was redeemed and the proceeds placed into the ‘diversified’ funds. The stock price at the time was ¼ of the value it had been in 2007. I hated that I had no control over these sales. I wanted that stock in my control so I could manage it the way I thought best for my personal situation.

When you retire, you can choose what to do with your retirement account. Options include rolling your company profit sharing or 401K over to a traditional IRA (or a Roth if you were fortunate enough to have a Roth 401K), leaving it with the company plan sponsor or taking a lump sum distribution. However, if you take that lump sum distribution you probably will owe a lot in income tax the year you take it. There is one scenario where a lump sum can be beneficial though.

The Net Unrealized Appreciation (NUA) rule scenario.

There is a special tax rule (or was when I took distributions) called NUA which lets you avoid paying earned income tax rates on the net unrealized appreciation of the stock since it was placed in the plan for you. To benefit from this rule I had to take the stock as a lump sum distribution (not roll it over into an IRA). I will have to pay long term capital gains on the stock when I sell it. The capital gains can be significant and costly, but usually are cheaper than letting the stock appreciate in the account and paying income taxes on the appreciated value. For instance, my company stock was valued at about $6 a share, but now is worth over $115 a share. After talking it over with my accountant, we decided using this option would save me tax money in the long run – plus it let me put the stock into a taxable brokerage account that I control. An added bonus, if the tax laws don’t change, is that if I still have the stock in my brokerage account when it passes to my beneficiaries, the cost basis rises to the then current market value. Consult an accountant if you have company stock or other company securities in your retirement plan, to see what works best for your situation.

You may not be able to do a trustee to trustee rollover.

Since I have IRAs and have changed custodians on them, I am familiar with trustee to trustee rollovers – where I never touch the money or see a check. This is the easiest way to avoid a tax bite when changing custodians on your IRA.

I thought this is what I would do when I rolled over what the company called the ‘diversified’ fund of my Employee Stock Ownership plan (the money they got from selling my company stock) to an IRA, but it is not what did happen. My company insisted on sending me a check, which I then had to send along to the custodian of the new IRA I set up to handle the funds. This took a lot of coordination, done by me, to ensure that the check was made out correctly so the custodian could accept it. As a side note, I then had to decide what to invest the ‘diversified’ fund money in and set up some automatic transactions to make that happen over time.

Don’t plan on moving investments ‘in kind’.

I assumed I would be able to just transfer shares of the mutual funds in my 401K to another custodian when I took the funds out of the company plan and put them into an IRA. But my company’s 401K custodian insisted on cashing out the shares and sending along a check. The share class was institutional and institutional shares apparently can’t be held within an individual IRA. Back in 2010 our asset allocation called for international components and the 401k fund was filling a lot of that allocation. If you recall, international funds were doing very poorly back then. I ended up having to sell and invest again in another international fund.

You may have to start paying plan sponsor fees.

If you plan to just leave your investment with the company’s plan sponsor, not only will you be restricted to their choice of investments, but they also may start charging you the plan sponsor fee on your account. My company pays that fee if you are an employee. Not so much if you are retired! The sponsor would have started charging me one percent of the profit sharing balance each year.

Rolling the funds to an IRA with a low cost institution worked for me. I don’t pay any fee on my IRA at all.

If you are within a few years of retiring (or moving your money from your current plan sponsor to an IRA), talk to folks who have been there in your company to see what they have encountered. Ask to see the materials that the company sends to folks eligible for retirement to see what considerations might be a surprise to you.

Did you have surprises or unanticipated complexities when taking control of your retirement plan assets? If so, please share in the comments!