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Spending Your Savings Wisely in Retirement

When it comes to your retirement, there really are some million-dollar questions, like:

  • How much money will you likely have to live on each year when you retire?
  • How can you make your money last through retirement?
  • Are you doing enough now to reach your retirement goals, or should you be saving more?

The first step is to estimate your projected savings at your desired retirement age. If you have a Wells Fargo Institutional Retirement and Trust retirement plan, sign on to your account and check out the Retirement Income Estimator. If you have other sources of retirement income, add them to the estimate for a more accurate picture. You can also see what your monthly income in retirement might look like with or without Social Security estimates. The estimate will help you determine if you're on track to have enough to replace about 80% of your income in retirement, which is what many experts recommend.

4% rule of thumb

Research has shown that retirees who withdraw 4% or less of their retirement savings each year stand a greater chance that their money will last through retirement than those who withdraw a larger amount. Therefore, for planning purposes, many financial experts suggest you estimate what you would have if you withdrew 4% of your retirement account balance each year of retirement. Here's an example:

Depending on your balance, that amount may not be enough to live on each year. It's not a magic number but a useful planning guideline to help you determine if you are close to meeting your goals.

Does order matter?

If you have more than one source of retirement income, the order in which you start to withdraw your savings may make a difference. Here are three key considerations when developing your strategy.

  • Social Security. Social Security benefits increase about 8% each year you delay initiating benefits beyond what's considered your full retirement age (up to age 70). Just remember, even if you delay receiving your Social Security benefits, you likely will want to sign up for Medicare at age 65, or your coverage could be delayed or cost you more. When you sign up, keep in mind if you continue to work and/or make withdrawals from your traditional retirement accounts any earnings over $25,000 individually or $34,000 for a married couple results in taxation of your Social Security benefits.
  • Required Minimum Distributions (RMD). If you have a traditional IRA, 401(k), 403(b), or 457 plan, you generally must follow the IRS schedule for withdrawing money from those accounts starting April 1 following the year you turn 70 ½. If you're still working at that age, or own 5% or more of your company, you may be able to delay RMDs.
  • Taxable accounts. Generally speaking it's better to take withdrawals from taxable accounts before you start tapping into any tax-favored accounts, except in the situation of taking an RMD. If you have investments in a taxable account that are worth less now than when you bought them, you may be able to sell them and take advantage of a tax deduction.

Ways to make up for lost time 

If you've calculated your projected savings and feel like you haven't saved enough to live comfortably, consider your options — such as working a little longer, making catch-up contributions (if you're age 50 or older), or scaling back your retirement lifestyle. There may be adjustments you can make that help you reach your goals.