We recently published an article that sought to answer an interesting question: Just how far could $1 million go in retirement? Since then, we’ve received an influx of personalized questions, many of which related to running out of money in retirement.
How big you build your nest egg — the sum of money and assets saved or invested specifically for retirement — will impact how long your money lasts in retirement. We know this, right? But other factors matter, too. Your expenses and the impact of taxes on your retirement distributions also influence the big picture.
How Do Expenses in Retirement Matter?
No matter how much you have saved, your expenses have the largest impact on your nest egg longevity.
Below, see how long $1 million will last in two situations: The first, with expenses of $100k per year and the second, with expenses of $75k per year. By spending $25k less per year, the money is projected to last an additional 12 years.
The good news: As people age, their spending patterns change. According to an analysis of Bureau of Labor Department data, US households under age 55 spend almost $58,000/year, on average, on a wide variety of expenses. However, by 65+ — the age range when most people are retired — there is a significant drop in overall spending (see below).
Why Do Taxes in Retirement Matter?
Nowadays, a lot of retirement savings are accumulated in accounts like 401k’s and IRA’s. People often forget that because we’ve been able to tax deduct our contributions to these retirement accounts each year, the IRS has a partnership in our IRA/401k. Meaning every time you take a distribution from those accounts in retirement, part of it will go to the IRS.
Currently, we are analyzing a strategy of doing periodic Roth conversions annually, in an effort to determine if this can help cut overall tax in retirement. Here is a financial data card you can use to locate your tax bracket, determine the largest Roth conversion possible, all while avoiding a tax bracket change.
Taxes and expenses are not the only things that can derail your retirement. You also have to think about:
- Inflation
- Market Returns
- Social Security
- Health Insurance Costs
- Longevity
If you would like to learn more about making your money last in retirement, please schedule a complimentary consultation.
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