Life expectancy. How long you’ll live may be the single most important retirement planning issue. After all, about 1 in 6 American men do not live to age 65, and if you die before retiring, the entire exercise is arguably moot. The number of years you will spend retired also figures in when estimating how much savings you need. Social Security estimates a typical 65-year-old man will live another 18 years. Women can expect another 21 years.
Taxes. Most retirees pay fewer income taxes after they stop working, but there are strategies for tax reduction that make taxes even less of an issue. For instance, while annuity payments and withdrawals from tax-deferred accounts such as IRAs and 401(k)s are taxable, you can reduce your taxable income by saving in a Roth IRA, which allows tax-free withdrawals. You may be able to convert IRA and 401(k) funds to a Roth, as well.
Inflation. Rising prices erode the purchasing power of your income in retirement. Social Security payments increase to account for this, and you can also mitigate inflation’s impact by increasing withdrawals from retirement accounts using the 4% guideline.
Required Minimum Distributions (RMDs). Once you reach age 73, you’ll have to start withdrawing from tax-deferred retirement accounts according to a schedule set by the IRS. Most retirees already withdraw more than the RMD amount, so this is not an issue for them. However, if you want to avoid RMDs you can do so by saving in a Roth account, which is not subject to RMD rules.
Long-term care. Many retirees eventually need some form of long-term care. Depending on the type and length of care, this can be a small amount, or more than you can easily pay. You can also consider long-term care insurance to hedge this risk.
Delaying retirement. Working longer is one of the most powerful ways to improve your retirement finances. Your Social Security benefit will increase by about 8% every year you wait to claim it, until you reach age 70. Similarly, the longer you let your retirement accounts grow tax-free before beginning withdrawals, the larger your safe withdrawal amount. Consider consulting with a financial advisor to weigh your options.
Review. Regularly pull out your retirement budget and see where it needs to be updated or adjusted. Variations in inflation, investment returns, healthcare costs and other factors may mean you need to make changes in how you spend or where you get your income.