Retirement is an exciting time for many. After years of working hard, you can finally rest and reap the rewards of your labor.
Although retirement is worth celebrating, it’s also a scary time for many because it is a major financial transition. Here’s what you should know before tapping into your retirement savings.
How Much Income You Need
The first step? Knowing how much income you need. A general rule of thumb is to plan on needing between 70-100% of your pre-retirement income annually during retirement. This, however, depends on your individual circumstances.
Some of your expenses in retirement will fall while others will rise. To get an approximate idea of how much income you need, you should determine the following:
- The amount required to cover basic needs and expenses
- The amount desired to live comfortably according to your preferences
Your non-negotiable basic needs include:
- Medical care
Your preferential desires include:
You likely will not be able to adjust your non-negotiable needs, but you can adjust the amount of income devoted to preferential wants.
Predictable Sources of Income
Before tapping into your retirement savings, you should know your predictable sources of income, like Social Security and pensions. You can begin collecting Social Security benefits at age 62, but you may want to wait. The longer you wait to start receiving benefits, the more you will receive each month.
How Social Security Works
The Social Security Administration distributes benefits based on a formula that considers your 35 highest-earning working years. This means that if you had some years of low income or no income at all, your benefit amount would likely be lower.
To get an idea of your Social Security retirement benefits, you can visitSSA.gov and create an online account. Once you create an online account, you will receive a statement that contains estimates of your retirement benefits.
Tax-Deferred and Tax-Free Accounts
Before tapping into your retirement savings, you should know whether your accounts are tax-deferred or tax-free.
If you have tax-deferred accounts, your withdrawals will be taxed according to your current income tax rate. Qualified withdrawals from Roth accounts, on the other hand, are tax-free.
If you have both types of accounts, you should tap into your tax-deferred accounts first. This allows the Roth accounts to continue to grow free of taxes.
If you have employer-sponsored retirement savings, your accounts will be subject to RMDs, or required minimum distributions. These are rules that state your minimum distributions must begin once you turn 72.
Seek Professional Financial Advice
Seeking professional financial advice can help you identify what you should know before tapping into your retirement savings.
Financial advisors can help you determine the right ways to tap into your assets and take advantage of your savings. They can also help you understand your tax situation and any other assets you may have that you could use for income.
Financial professionals can help you understand the full capacity of your options in light of your situation. If you’re considering tapping into your retirement savings, contact DeBlanc & Murphy today.