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T. Rowe Price Has Identified Two Types of Retirees. Which Type Are You?


T. Rowe Price has identified two types of retirees and launched a retirement tool to serve their financial needs. The global investment management firm divides retirees into two categories: savers and spenders. Let’s break down how they are defined, which actionable steps you can take to boost your savings and what you can do to spend your retirement money wisely.

Whether you’re a saver or a spender, a financial advisor can help you align your savings and investments with your financial needs and goals.

T. Rowe Price recently said it launched a retirement tool to help retirees understand their financial habits.

“Getting a better understanding of a retirees’ preferences when it comes to their retirement savings – whether they want to spend it or save it – can help financial professionals communicate more effectively and provide more applicable financial solutions to their clients,” said Stuart Ritter, retirement insights leader at T. Rowe Price, in a press release.

The global investment firm, which managed almost $1.31 trillion in assets as of April 2023, divides retirees into two types—savers and spenders.

Savers are defined as those who adjust their spending to maintain and grow their balances. And spenders are retirees who draw down their balances to maintain spending.

T. Rowe Price’s Savings and Spending Survey reveals that 70% of retirees identified as savers, while only 30% classified themselves as spenders. And almost 60% of retirees said “they want to maintain and even grow their assets in retirement.”

If you’re wondering how you fit into one of these categories, the investment firm emphasizes that no two retirees are alike. And the key to your retirement success depends on how well you understand your savings and spending habits.

Longevity, healthcare costs and inflation are some of the factors that will impact your retirement. And depending on your savings and spending preferences, you’ll have to combine different retirement solutions to pay for your financial needs and goals.

Below we break down the common steps to boost your retirement savings, as well as the safest ways to spend your retirement money.

4 Common Steps to Boost Your Retirement Savings

SmartAsset: Retirement Strategies for Savers and Spenders

If you consider yourself a retirement saver, these four steps will help you maintain and grow your account balances:

Maximize the company match for your retirement plan. A 2021 study from Vanguard says that roughly one-third (34%) of Americans with 401(k) plans are saving below their employee matches.

Some companies match employee 401(k) plan contributions up to a percentage of each paycheck. This means that if you are contributing 3% of a $1,500 paycheck, you’ll be saving $45 each pay period. And if your employer offers a 3% match, you’ll double your contribution to $90 per check.

In 2023, contribution limits for individuals are $22,500, and $30,000 if you’re 50 or older. For 2022, you could have contributed up to $20,500 ($27,000 if you are age 50 and older). And matching employer-employee contributions can go up to $61,000 ($67,500 with the catch-up for those age 50 and older).

Note that the IRS may also allow you to double your contribution limit, depending on the catch-up options for your retirement plan as a teacher, government employee, healthcare or nonprofit worker.

Claim a saver’s tax credit. The federal government created the Saver’s Credit (originally the Retirement Savings Contributions Credit) in the early 2000s. It’s already possible to deduct contributions that you make to a traditional IRA, but this credit provides an even greater incentive. In particular, it is designed to help low- and moderate-income individuals save for retirement.

The Saver’s Credit is worth a percentage of your contributions; the percentage is either 10%, 20% or 50%. Which percentage tier you fall into depends on your filing status and adjusted gross income (AGI). The credit is worth up to $1,000 ($2,000 if filing jointly).

For instance, if you’re a single filer and your income qualifies you for the 50% credit tier and you contribute $1,000 to an IRA, you will be eligible to claim a credit of $500. You can achieve the maximum credit by contributing $2,000, which will get you a credit of $1,000. (That’s the maximum credit, so contributions of more than $2,000 will still get you a $1,000 credit). The math is generally quite simple for the Saver’s Credit. You don’t need additional worksheets or calculators, as with some other credits.

Increase your savings with a backdoor Roth IRA. A backdoor Roth IRA permits account holders to work around income tax limits by converting what was originally a traditional IRA into a Roth IRA. For people with a modified adjusted gross income above certain levels, there are limits on direct Roth IRA contributions. Individuals making more than $153,000 in tax year 2023 (up from $144,000 in 2022) are barred from contributing to a Roth IRA, where retirement savings grow tax-free.

However, workers who exceed this income threshold have been permitted to convert their pre-tax contributions into a Roth IRA. After they pay income taxes on the initial contributions and gains, their retirement savings grow tax-free and are no longer subject to required minimum distributions (RMDs).

Boost your retirement savings with an HSA. Health savings accounts allow you to put money aside to pay for unexpected medical expenses. Contributions are tax-deductible as long as the money is used for qualified medical expenses. And unused funds could continue growing indefinitely.

If you use your HSA for expenses outside of healthcare, you may have to pay income taxes and an additional 20% penalty. But once you’re over 65, the penalty is waived and you’re taxed at a regular rate.

This could benefit retirees as an additional source of income to pay for long-term medical bills and unrelated expenses.

3 Withdrawal Strategies to Fund Your Retirement

SmartAsset: Retirement Strategies for Savers and Spenders

How you spend your savings can make or break your retirement. Here are three withdrawal strategies based on Morningstar research to ensure that you won’t outlast your retirement:

Follow the 4% rule, but don’t adjust for inflation. Retirees following this rule usually withdraw 4% of their savings in the first year of retirement and then adjust subsequent withdrawals each following year for inflation.

As an example, if you saved $750,000 for retirement, you would withdraw $30,000 in the first year. And then you would increase your withdrawal for the following year based on the inflation rate. So if that rate is 3%, you would take out $30,900 on your second year ($30,000 + $900).

Vanguard says that this rule ignores market conditions that could put retirees at risk of running out of money in down markets while underspending in up markets.

The 4% rule aims to provide you with a long-term steady income that is adjusted for inflation, but financial experts say that you may be able to prolong your savings even further by cutting those inflation increases and setting a lower withdrawal rate.

This can be tricky since you will have to stay within your financial means while not compromising your quality of life.

Use your required minimum distribution to guide withdrawals. Your required minimum distribution (RMD) is the amount of money that you have to withdraw from a retirement plan like an IRA at age 72 (70.5 if you were born before July 1, 1949).

Your RMD is calculated by dividing your retirement account balance by your current life expectancy factor, which measures your anticipated length of life.

So if your IRA balance was $200,000 at the end of 2021 and you turned age 74, your RMD for the year is $8,403.36 ($200,000/23.8).

This withdrawal method is comparable with the 4% rule when it gets applied to all of your retirement savings. So if your total savings add up to $750,000 at age 74, then you would withdraw $31,512.61 for the year ($750,000/23.8).

Following the RMD approach, retirees would take a bigger percentage of their portfolios as they get older. But whereas the 4% rule adjusts for inflation, this strategy is based on the IRS’s expected longevity tables.

Like with all retirement strategies, you may want to adjust your withdrawal rate based on what you need to maintain your quality of life.

Set guardrails for your withdrawals. This method was developed by financial planner Jonathan Guyton and computer scientist William Klinger, and it bases your withdrawals on market performance.

The guardrail approach offers retirees more flexibility when their portfolio values change. So your withdrawal rate falls when the market falls and goes up when the market goes up.

The method adjusts your withdrawal amount by placing upper and lower limits that are referred to as guardrails. These are intended to keep withdrawals within an established range so that retirees can reduce overspending during down markets and underspending during up markets.

This means that when the market is performing well and your withdrawal percentage falls below 20% of its initial withdrawal level, then you will get an adjustment for inflation and a 10% raise. However, when the market falls and your withdrawal rate is over 20% higher than its initial level, you will take a 10% cut.

As an example, let’s say your portfolio is valued at $750,000 and your initial withdrawal rate is 4% or $30,000. If your portfolio goes up in your second year by 25% or $187,500 to a total of $937,500, then your withdrawal would get an inflation adjustment and a 10% increase. So if the inflation rate is 3% or $900, and with a 10% hike on your initial withdrawal ($30,000 + $3,000), you would take out a total of $33,900.

Conversely, if your portfolio falls in your second year by 25% or $187,500 to $562,500, then you would take a 10% cut. So your initial withdrawal of $30,000 would fall to $27,000 that year.

This sliding withdrawal rate aims to reflect market changes. And while Morningstar points out that Guyton and Klinger don’t impose cutback rules after market declines in the last 15 years of retirement, you may consider working with a financial advisor to figure out the appropriate guardrails for your withdrawal rate.

Bottom Line

SmartAsset: Retirement Strategies for Savers and Spenders

Whether you’re a saver or a spender, a smart retirement plan will ensure that you have enough money to pay for your lifestyle and last a lifetime. The key to your retirement success will depend largely on different financial factors, including longevity, healthcare costs and inflation. Your ability to make smart adjustments for your finances will also play a major role.

Retirement Tools and Tips for Savers and Spenders

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