Making your savings last through retirement can be complex in practice, but it really all comes down to your income vs. spending. In other words, it means understanding how much your portfolio can generate in a more risk-averse time in your life, against how much it costs each year to maintain your lifestyle. Retiring at 60 can create some problems, as that’s earlier than you can claim Social Security and utilize Medicare. With $1.5 million in your IRA, you’ll want to carefully plan your withdrawals to account for the future, as well as any growth you may garner as you’re withdrawing in retirement.
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What Kind of Income Can Your Portfolio Generate?
You could move parts of your IRA into depository, cash assets like a high-yield savings account or certificates of deposit (CDs). This would keep your money extremely safe, but your returns may only keep up with inflation. Although today’s best savings rates are quite high around 4.5%-5%, they won’t always be that high over the coming decades. At a standard 4% withdrawal rate, that would give you $60,000 in portfolio income for 25 years, with your money growing at perhaps the same or a lower rate.
Income Investing With Bonds & Dividends
Income investing means putting your IRA into assets like bonds and dividend stocks. These generate regular payments without selling the underlying asset, making them a popular choice for retirees looking to make their portfolios last. Throughout 2023, bonds paid an average of around 4% to 5%, according to the St. Louis Fed. At the middle of that range, they could give you around $67,500 per year in income, without delving into your principal.
Income Using an Annuity
Like bonds and dividends, annuities are a popular choice among retirees looking for security in their income. With an annuity, you buy a contract from a life insurance company that guarantees you a fixed monthly payment for life based on the purchase price and other factors. According to Schwab’s fixed income annuity calculator, a single life, $1.5 million fixed-income annuity purchased at age 60 could pay around $8,000 per month, or $96,000 per year, for your lifetime.
Mixed Asset Investing
Finally, you can invest in mixed assets, like index funds and bond portfolios. This would let you balance growth and security as you see fit, but with more volatility. In this scenario, you also need to sell assets to generate income.
According to Vanguard, a fairly risk-averse portfolio of 70% bonds and 30% stocks has generated an average annual return of 8.1% from 1926-2021. Using this type of portfolio, you’d likely have enough to match or exceed the income options above. However, be prepared to have more tax situations to account for with this, as well as nonliquid assets and more overall risk.
What Will You Collect From Social Security?
We also need to include Social Security benefits in your planning. Since an IRA balance of $1.5 million may mean you’ve had strong incomes over your life, let’s say you receive $2,000 starting at age 62. That comes out to $24,000 a year in Social Security benefits. That could be a substantial boon to an already fairly bright retirement savings picture.
While we estimate your Social Security benefit in this article, you don’t have to. The SSA will give you your Social Security statement so you can know how much to plan for as you approach age 62 and beyond. Consider consulting with a financial advisor as you plan for retirement and account for Social Security benefits and when to take them.
Spending and Taxes
So, with this person’s current savings, they have several options to make their portfolio last for the rest of their life. Including Social Security, a bond portfolio alone could generate enough income to satisfy your plans for retirement. The question is whether this is enough for you to live a comfortable life, as everyone’s individual plans for retirement are entirely unique.
Your Lifestyle and Inflation
First you’ll want to understand what your lifestyle costs. For instance, do you enjoy expensive travel, or are you happiest when left alone with your hobbies? How much does your home, consumer spending, bills and personal needs and weekend entertainment cost? It could be helpful to sit down with a financial advisor to plan your monthly budget in retirement, because that will determine what kind of portfolio income you need to generate.
At the same time, remember that where you live will have an effect on how inflation affects you. While nationwide, inflation averages around 2%-4% annually, if you live in an expensive city and/or if you rent your home, that number can be much higher. Your portfolio returns and withdrawal rates will need to reflect that.
Required Minimum Distributions (RMDs)
Starting at age 73, you will have to start taking RMDs from your pre-tax retirement accounts, like an IRA. Particularly for households that have a pure-income plan, this can be disruptive.
The younger you are and the more you have in savings, the higher this RMD will be. In your case, for example, if you have $1.5 million in your IRA at age 73 you would need to withdraw at least $56,603 per year to avoid penalties, according to Schwab’s RMD calculator.
As a pre-tax portfolio, your IRA will generate income taxes on everything you take out of it. This can be managed, broadly, in one of three ways.
First, you can plan on paying those taxes. Anticipate your income tax in your annual budget and adjust your spendable income down by that amount. Second, you can roll your IRA into a Roth IRA. You would need to pay income taxes on the entire rolled over amount in a single tax year, reducing your savings considerably, but it would eliminate federal taxes entirely on your retirement income. Of course, you’ll need to be prepared to pay that massive amount of taxes in the meantime, so this isn’t always the right move for everyone.
Insurance and Healthcare
Finally, as you plan your budget and spending, don’t forget to account for insurance costs and health care needs.
In addition to current insurance that you pay, such as homeowner’s or renter’s policies, in retirement you will likely need long-term care insurance and Medicare gap coverage. Combined, you should expect this to add a few hundred dollars per month to your bills. As you age, you will also likely have higher health care needs. This will mean more spending which, again, will add to your budget and costs.
Planning for this spending, and making sure that you fit your lifestyle and investments around it, is the key to making sure your IRA lasts for your entire life.
IRA Management Tips
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- What should you do with your IRA in retirement? If you’re like most people, you’ve spent your working life thinking relatively little about this account. Check our SmartAsset’s guide to IRAs in retirement to learn more.
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