How to Stretch Your IRA for Life

With $1.4 million in your IRA at age 65, you have a robust nest egg that could fund a secure retirement for 25 years or more. However, making sure the money lasts will require careful planning. You’ll need to assess your income needs, balance investment risk and return, secure additional income streams, consider required minimum distributions (RMDs) and their tax impact, and carefully adjust withdrawal rates for sustainability. But you don’t have to go alone. A financial advisor can help you plan for your retirement and manage your nest egg.

Pension Funding Handbook

One way to increase the chances that your savings will last you into an extended retirement is to use a safe withdrawal rate. The 4% rule, for example, suggests limiting annual withdrawals to about 4% of your total savings in the first year of retirement and then adjusting withdrawals in subsequent years for inflation.

For example, if you retire this year with $1.4 million in an IRA, you’ll withdraw 4% or $56,000. Your withdrawal next year would account for inflation — say 2.5% — meaning you’d withdraw $57,400. Conservative analysis indicates that using this rule will allow your savings to last 30 years or more and ensure your income grows to adjust for inflation.

Although the 4% rule is a commonly referenced rule of thumb, critics argue that it is too simplistic and does not take into account evolving income needs. Your specific situation may warrant a different plan. The keys are careful balancing of withdrawal rates, investment returns, taxes, inflation and life expectancy. Proper investment to achieve solid returns while managing risk is also vital. A financial advisor can help you balance these different variables and estimate how much you can afford to withdraw from your savings.

Know your situation

Thoroughly evaluating your life’s financial landscape as well as your retirement lifestyle goals can help ensure that your $1.4 million IRA adequately supports your long-term needs. To begin this assessment, ask yourself:

• What are my base and discretionary spending estimates?

• What big expenses might I need to incur?

• What other streams of income do I have?

• How much of an adversary am I at risk?

• Do I have an estate plan?

• How will RMDs and taxes affect me?

Your answers to these questions can help inform how you approach withdrawal rates, investments, insurance, and contingency reserves.

Forecasting retirement needs

Now put some effort into budgeting for your expected living expenses and accounting for any other sources of income. Social Security payments, retirement benefits, annuity payments, part-time work, and investment interest can supplement your IRA withdrawals.

The story continues

After you conservatively estimate these other income streams, you can plan to use them to cover as much of your living expenses as possible. You can then use your IRA withdrawals to cover the remaining costs. You may also want to create buffers to account for market volatility and rising costs for goods and services in the future. Finally, you’ll want to regularly review your spending and income needs and adjust your plan accordingly.

Risk management

Balancing investment risk over a long retirement, addressing longevity risk is critical. You can mitigate market volatility by being broadly diversified and holding fixed income assets such as bonds, cash and annuities in addition to stocks.

You can potentially mitigate longevity risk by maintaining flexibility in your spending and retirement plans. Look to be able to reduce withdrawals during prolonged market declines. To address other uncertainties, review your insurance needs for health, property, liability and long-term care coverage. Depending on your health, it may be especially important to identify Medicare gaps and secure additional policies.

As you can see, there’s a lot to consider when planning for retirement, but a financial advisor can help you navigate the process.

Accounting for RMDs

RMDs also play an important role in retirement planning. These mandatory withdrawals are dictated by the IRS beginning at age 73. On a $1.4 million IRA, RMDs would likely start at close to $53,000 annually. Not taking your RMDs can trigger a 25% tax penalty on the amount you were supposed to withdraw, so don’t neglect this obligation.

RMDs can push you into a higher income tax bracket and significantly increase your liability to the IRS. RMDs are taxed as ordinary income, so make sure your tax planning addresses their impact. For example, an RMD of $56,000 could create a federal tax bill of $4,736 in 2024 after taking the standard deduction.

Strategic use of Roth conversions can reduce the size of your RMDs or eliminate them altogether, giving you more tax flexibility in retirement. However, you will have to pay taxes on the converted money, which will increase your tax liability in the year the conversion is completed. A financial advisor can help you execute a Roth conversion and even manage your IRA for you.

Conclusion

With $1.4 million in IRAs at age 65, sustainable lifetime withdrawals are doable if you plan well, control risk, and stick to prudent withdrawal rates. Plan to pay your expected expenses with other income streams first before using your IRA funds. Model the impact of portfolio volatility, required distributions and taxes over time, adjusting asset allocations and expenses downward when markets decline. Don’t forget to consider health costs and insurance needs, too.

Retirement Planning Tips

• Social Security benefits are an important part of income planning for most people. Estimate your future benefit now with SmartAsset’s Social Security calculator.

• Consider meeting with a financial advisor to review your evolving retirement income plan and withdrawal strategy. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid—in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and provides marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

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