4 Strategies for Making Your Money Last

RMD guidelines

• In plain English: What would the IRS do?
• The gist: If you have money in a tax-deferred retirement account such as an IRA or 401(k), the IRS will leave it alone only for so long. Eventually — it starts with the year you turn 73, for most people — you’ll have to withdraw a certain amount of money. That withdrawal is what’s known as a required minimum distribution (RMD). The RMD approach uses the IRS formula for what you must withdraw from these tax-deferred accounts as a guideline for what you can withdraw from all your retirement accounts, whether they’re subject to RMDs or not. Think of the IRS as the smart kid in the seat next to you in math class, and you’re copying her answers.

But you don’t have to cheat. That formula, built on your age and your account’s value, is drawn from what’s known as a Uniform Lifetime Table, which you can find at irs.gov in IRS Publication 590-B.

• Behind the strategy: The IRS tables are designed to clear out your account based on your life expectancy. The formula for age 73 translates into withdrawing 3.8 percent of your account balance at that age (that’s $19,000 out of a $500,000 account), and the percentage gradually increases each passing year — for example, reaching 5.6 percent at age 83.

“It’s a conservative spending number, but that can give you a guideline,” says Wade Pfau, author of Retirement Planning Guidebook and a professor at the American College of Financial Services. “If I’m spending this percentage of what’s left in my portfolio, based on the RMD table, then I should be in pretty good shape. If you’re spending a lot higher than the RMD rate for your age, that’s potentially dangerous.”

• Drawbacks: This isn’t the plan if you’re hoping for a retirement splurge. It can also be tricky to figure out what you should be withdrawing before turning 73. Using the IRS’s math, you should be withdrawing 2.9 percent at 65. That’s considerably less than what most people want to spend in their first year of retirement; people tend to spend more in the early years of retirement and less later on, unless they have large expenses for medical or daily care later in life.

The withdrawal amount can also vary a lot based on market performance. “You’re guaranteed never to run out of money, but you still might be poorer than expected,” says Anthony Webb, a senior research fellow at the New School.

• Consider it if …: You don’t mind a frugal lifestyle if it means you’ll have enough money to stay afloat for the long haul.

Annuitization

• In plain English: Let someone else handle your retirement paycheck.
• The gist: Buying an income annuity is like hiring someone to serve as your retirement “boss,” doling out a monthly paycheck. You hand over a large lump sum to an insurance company, or sometimes a charity, which guarantees to pay you a certain amount of monthly income no matter how long you live. One big plus: Often, the monthly income from an annuity may be larger than the amount you can safely withdraw from your retirement investments using the other strategies. For example, a 65-year-old male spending $100,000 on an immediate annuity, at current prices, might get back $7,600 in year one, or 7.6 percent of the price — a lot more than the withdrawal percentages in the previous strategies described.
• Behind the strategy: Some of the benefits are psychological: Research has found that people who have a company pension are happier than those who rely on pulling cash from retirement accounts. It’s comforting to have money automatically deposited into your account on a predictable timetable; you may have retired from a job but not from the security of a check deposited in your account like clockwork.

Don’t forget that Social Security is an annuity too; the longer you wait to begin taking it, likely the better off you will be financially, given that payment levels increase up to 8 percent for each year you delay beyond full retirement age. “The act of postponing claiming Social Security is economically equivalent to purchasing an annuity,” Webb says. Unless you’re in poor health, his usual recommendation is to use your 401(k) money upon retirement to delay claiming Social Security until 68 to 70.

Most academics recommending annuities prefer the plain-vanilla immediate or deferred versions, not the more complex (and expensive) versions such as variable annuities or indexed annuities. Two kinds of income annuities provide extra tax benefits.

Charitable gift annuity. In return for a lump sum, you donate to a nonprofit organization, you receive a fixed amount for the rest of your life. If you itemize, a portion of your contribution is deductible. Alternatively, a new law lets people make a tax-free transfer of up to $50,000 from an IRA to buy a charitable gift annuity — money that can also count toward an RMD.

Qualified longevity annuity contract (QLAC). This is a type of annuity sometimes referred to as longevity insurance; payments don’t start until you reach a much older age. “You buy it for the same reason as purchasing a household insurance policy,” Webb says. “It’s insurance against the small but financially catastrophic ‘risk’ of living to age 95 to 100.” A key benefit is that the delayed onset of annuity payments translates into much higher monthly income. For example, a 65-year-old man who invests $200,000 in a New York Life QLAC could receive about $9,400 per month starting at age 85, or more than $112,000 per year. A 65-year-old woman could receive $7,400 per month, or nearly $89,000. You can take up to $200,000 from a tax-deferred IRA or 401(k) to buy a QLAC, which removes the money from the amount used to calculate your RMDs.

• Drawbacks: Unlike Social Security, most annuities aren’t adjusted for inflation. You also lose access to your lump sum, so if you don’t have a nest egg to cover emergency expenses, you could be in trouble. Oh, and you may die before receiving many payments — or any, in the case of a QLAC.
• Consider it if …: You care more about guaranteed income than leaving money in an estate, and you’re willing to hand over a lump sum to an insurer. Charitable gift annuities are good if you’d like to make a gift to a nonprofit while you’re alive, but still need retirement income. QLACs can help if you have high balances in tax-deferred retirement savings and face big tax bills once you start taking RMDs. 

Pete Ryan

More Tips for Making Money Last

Interviews by Laura Petrecca

Be boring.

Make investing as boring as possible. Boring works really well. The less often that people check and adjust their portfolios, the better they tend to perform. Just dumping money into a target-date fund in your 401(k) or IRA every month — and then leaving it alone — is a great investment strategy.

— Mike Piper, author of Investing Made Simple: Index Fund Investing and ETF Investing Explained in 100 Pages or Less and other financial books

Rehearse retirement.

A past client and her spouse were a year away from retirement. To ensure they were comfortable with their post-retirement spending plan, they started splitting their take-home pay between two checking accounts. Into Account #1 went the money they needed for nonnegotiable fixed expenses such as mortgage, utilities and insurance premiums. Account #2 received whatever was left over, after a deduction to savings that mimicked their expected decreased cash flow in retirement. They did their everyday spending out of Account #2; when that pot of money was done, so was their spending. It was a great way to test-drive their retirement plans and make sure they were realistic.

— Lisa Whitley, personal finance coach at MoneyByLisa in Washington, D.C.

Cut the allowance.

Parents may have been helping their children throughout their lives, so they often have a hard time stopping once their children are adults. The problem is that supporting your kids can ruin even the best retirement plan. In my personal life, I’ve witnessed many grown adults move back home with their retired parents and constantly request assistance. That retired couple should be downsizing for their health and lifestyle benefit, but are not able to because they can’t stop helping their grown children.

—Tim Mazanec, financial adviser with Allworth Financial in Waltham, Massachusetts

Pay it all down.

Don’t carry debt or a mortgage into retirement. Not having these things to worry about reduces your stress and keeps your retirement expenses much lower. What better way to make savings last a lifetime than by not needing as much each month to cover your expenses? I’ve seen this with many clients in my practice.

— Peter G. Bobolia, financial planner at Family First Financial Planning in Stuart, Florida