Getting Close to Retirement? Things to Think About.

Getting close to retirement? Tips to help make sure you’re on track.

Once you’ve built a retirement nest egg, you’ll need a strategy for use your savings in retirement. Here are some things to keep in mind.

Choose investments that fit your stage of life

As you move towards retirement and have less time to recover from unexpected losses, you’ll want to assume less risk. As you shift from protecting your savings to maximizing your income in retirement, it’s good to review your risk tolerance and, where necessary, rebalance asset classes. Because most people live 20 or more years in retirement, continue to invest in strategies that will accumulate returns that exceed inflation over time. You’ll also want to consider how long you’ll need your retirement assets for financial support.

Modify your spending habits

Using your savings in retirement requires careful consideration of your spending habits and how you may be misspending, or wasting, money. It’s possible to live on less and be content.

Withdrawals from your savings

In order to let your tax-deferred accounts grow as long as possible, financial experts recommend to withdraw from your taxable accounts first. There is a common formula to withdraw 4% annually from your savings and adjust as necessary due to health or medical costs.

Make the best of your tax situation

If you find yourself in need of money to pay for expenses, it may be helpful to look at ways to combine withdrawals from a Roth retirement plan. As qualified withdrawals from a Roth are tax-fee, think about taking some distributions from your Roth, and some from a tax-deferred 401(k) plan. Doing so might keep you from crossing a tax bracket. You might also want to contact a tax advisor to review your situation and help you determine the best solution for your specific situation.

Gifting money to heirs

If you choose to leave money to your heirs, it’s important to know how the money will be taxed. Distributions from an inherited 401(k) plan are taxed at the recipient’s current income tax rate. This can be as high as 35%. Or beneficiaries may be able to take money from an inherited Roth IRA, which is income tax free. Additionally, money that is inherited from an account that is taxable will benefit from what’s called a step-up in basis. This typically reduces the total amount of capital gains taxes that are due at the time of the sale. You may want to think about drawing down your 401(k) plan first, if you determine that you want to leave your heirs the maximum amount of money.

RMD withdrawals

Once you reach the age for required minimum distributions (RMDs), your options for withdrawals become more limited. A good idea is to begin taking annual distributions that are based on IRS life expectancy tables from 401(k) plans, or traditional individual retirement accounts (IRAs) by April 1 of the year after you’ve turned 701/2. If you don’t do this, it’s possible that you’ll face a 50% penalty on the amount that was to be withdrawn, but wasn’t. Traditional 401(k) plans and IRAs have RMDs. Roth IRAs and Roth 401(k)s plans don’t have RMDs during the account holder’s lifetime.

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