Decisions about retirement withdrawals can have big consequences for your financial future. A 24/7 Wall St. reader is currently grappling with this issue and sent us a question asking for advice. The reader has more than $4 million in retirement savings, but wants to know how much they can safely take out of that account. He’s hoping he can afford to travel and enjoy life, but wants to make sure he doesn’t run short.
Let’s take a look at the numbers to see how much is reasonable for him to spend — and how others can make these decisions themselves when faced with these choices.
Always start by looking at the math
Taking a close look at the numbers is the first key thing to do when deciding how much to withdraw from savings — and how much to devote to travel. Here’s how the reader described his situation:
- He’s 61 and already retired, but his wife who earns $150,000 plans to work for another five years.
- He has $1.7 million in his 401(k). His wife has $1.2 million and contributes another $22,500 annually.
- They have $320,000 in Roth IRAs, $400,000 in post-tax mutual funds, and $850,000 in cash and CDs
- Their child has four more years left of college, $140,000 in a 529 account, and $60K in annual college expenses
- He’ll be claiming Social Security at 62 and receive $32,000 and his wife will do the same
- Their household spending, not including discretionary costs, comes in at $85,000 to $90,000.
If you do the math, this means he has around $3.22 million in retirement accounts, and another $1.25 million in other investments, although he needs around another $100K to cover college loan-free for their child so that will likely come out of savings. However, with his wife working and contributing to the 401(k) for another five years, her 401(k) account is likely going to grow over time as she won’t be able to access her funds until 59 1/2 without penalty.
The good news is that his wife’s current income should cover most if not all of their expenses for the coming five years. And, when she does retire and both spouses claim benefits, their Social Security checks alone will cover around 2/3 of their fixed household spending — even before they touch their savings.
All of this means they should have plenty of money for travel and to enjoy life.
Exactly how much can they withdraw from their retirement funds?
Until his wife retires, he’ll be able to access funds only from his own 401(k) with a balance of $1.7 million. If he withdraws 3.7% of that, it would provide $62,900. He likely won’t even need that much since his wife’s $150K income will cover the bulk of their costs. He can keep his withdrawals lower than the recommended amount unless he decides to help pay for college with distributions from his retirement plans.
Once his wife retires, they’ll likely have even more than the $3.22 million he currently has, even after accounting for his withdrawals. That’s because his wife’s account will have five more years of growth and another $22,500 in annual account contributions. Even if they just had their $3.22 million current balance, though, it would provide $119,140 in annual income to live on — not including Social Security benefits.
With Social Security, they’d be looking at $181,140. That’s double what they need to cover household expenses and should give them a big cushion to spend on things they enjoy — without even touching taxable accounts.
Of course, they will have to cover necessities first, like health insurance since they are both planning to retire before Medicare age. They may also want to look into the logistics of putting off claiming Social Security to maximize their benefits since each month they delay until 70 would increase their checks — and they can certainly afford to wait a bit longer given their savings.
With so many issues to think about, talking to a financial advisor is likely going to be the best course of action. Their advisor can help them to come up with a strategic plan to decide how to minimize taxes on retirement incomes, which accounts to withdraw money from first, how best to fund the rest of college, how much they can withdraw, and what their optimum Social Security claiming age would be.
With professional help, they can make the most of the great financial situation they are in and live it up as retires.
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