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 announced in March 2022 that it has 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 manages almost $1.6 trillion in assets since January 2022, 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
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, then you’ll double your contribution to $90 per check.
In 2022, you can contribute 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. Low- and middle-income taxpayers can qualify for a saver’s credit, which offers a maximum credit of $1,000 ($2,000 for joint filers), depending on your adjusted gross income (AGI).
The saver’s credit incentivizes eligible taxpayers to save for retirement by allowing them to claim up to 50% of their retirement plan contribution.
Individuals can qualify with an AGI under $34,000 in 2022 ($68,000 for joint filers and $51,000 for heads of household).
Increase your savings with a backdoor Roth IRA. If you’re a single taxpayer making over $144,000 in 2022, or a joint tax filer making over $214,000, then you’re income is too high to contribute to a Roth IRA. However, you can get around those income tax limits with a backdoor Roth IRA.
Here’s how it works: A Backdoor Roth IRA allows high-income earners to convert pre-tax contributions into a Roth IRA. They can do this by first contributing to a traditional IRA and then convert that account into a Roth IRA.
In 2022, the IRS has established a contribution limit up to $6,000 ($7,000 if you are age 50 and older) for traditional and Roth IRAs.
Roth IRAs are particularly advantageous because retirees don’t have to pay taxes when making withdrawals.
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.
In 2022, contribution limits are set at $3,650 for individuals and $7,300 for families. If you are age 55 and older, you can contribute an additional $1,000.
3 Withdrawal Strategies to Fund Your Retirement
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.
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
- A financial advisor can help put your retirement plan into action. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s retirement calculator can help you estimate how much you’ll have saved by the time you’re ready to retire.
- Retirement experts say that you should secure enough guaranteed income to pay for fixed expenses. Here are five ways to boost and supplement your retirement income.
- This asset posts high yields with relatively low risk. Here are the advantages and disadvantages for adding stable value funds to your retirement plan.
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