Your IRA will play a big role in your retirement.
And if you don’t have an IRA… well I bet you have a 401(k). And when you retire you will probably roll that 401(k) into… you guessed it, an IRA.
One of the main problems that you will face when you retire is figuring out how to replace your income. Since your paycheck will no longer be coming in, you’ve got to come up with something to pay the bills. Your IRA will play a role in addressing this challenge.
And one of the biggest challenges you will face is making sure that you don’t run out of money in retirement.
And let’s be honest about this. It’s not that you will necessarily run out of money. The real issue is that if your nest egg starts to dwindle you will start cutting back on your lifestyle in retirement.
This may mean:
- Not taking the trips you always dreamed about
- Giving less gifts to the grand kids on birthdays and Christmas
- Not giving to a cause you believe in
- Getting a part time job that you didn’t really want because you are too afraid to touch what is left of your nest egg
- Not having the time on your hands to do what you wanted to do in retirement (because of that part time job)
So overcoming this “income challenge” is ultimately about making sure you can live the lifestyle that is important to you in retirement.
What if there were a way to overcome this challenge? What if there were some simple actions you could take that would improve your retirement?
Well, I’m here to tell you that a well thought out retirement income plan will help you overcome the “income challenge.”
And here are some ways you can use your IRA in a smart way to help your retirement income planning.
3 Retirement Income Strategies For Your IRA
Now stop, think about it for a moment, and answer this question:
“Where are most of my retirement savings located right now?”
Have you thought about that question?
If your answer was, “In my 401(k)” or “In my TSP plan” or “In my IRA” then congratulations! You are like many retirees that have the bulk of their savings in these tax deferred plans.
So, let’s talk about 3 ways you can strategically use your IRA to build on your retirement income.
1. Delay Social Security
The first thing you can do with your IRA is use it for a well thought out, smart plan that allows you to delay your Social Security benefits.
It turns out that more and more people are wising up to the fact that they can maximize their retirement income by delaying their Social Security benefits.
It’s true. If you draw your benefits early at 62 you may be taking a 25% reduction in your Social Security monthly check.
And if you delay all the way up to age 70, you could increase your monthly Social Security check by 32% above what you would have gotten from drawing at age 66.
These are big numbers.
But the question arises, “How do I afford to delay drawing Social Security?”
I give some options in that link above. One of the options was to use a portion of your savings as income while you delay your Social Security.
Put A Portion Of Your IRA In A Bank Account
You could simply have these savings in a cash account at an FDIC insured bank. And you could draw off that account under a well thought out plan that will last from age 62 until you decide to begin drawing your Social Security benefits.
Sure, you’re not going to get a high rate of return on your cash at the bank (at least not in this current interest rate environment), but you’ll know the money will be there for the short time period needed.
If you’re only going to delay for a short time period, say 4 years from age 62 to 66, you’re probably better off keeping the money in the bank and withdrawing as needed to cover expenses.
Or Put A Portion Of Your IRA In An Immediate Annuity
If you go out for a long period, say 8 years from age 62 to 70, you may want to look at something more long-term like an immediate annuity that will pay out for a certain time period.
Your IRA (or a portion of it) could be used to cover your expenses during this time period while you are not drawing Social Security.
Sure, it’s better to let your IRA continue to grow tax deferred as long as possible before withdrawing (age 70 ½ is when you must start taking withdrawals).
But if you have a plan in place to maximize your lifetime benefits that you will receive from Social Security, it may make perfectly good sense for you to begin making IRA withdrawals earlier than 70 ½.
(Don’t withdrawal from your IRA before age 59 ½. You could pay unnecessary penalties that could completely offset the benefits you would get from delaying Social Security. If you don’t know what’s so special about the age 59 ½, it is one of the 6 most important retirement ages.)
2. Use Your IRA To Purchase An Annuity
Social Security really is like an annuity. It pays you an income that will last the rest of your life.
But Social Security is usually not enough to cover all of a retiree’s expenses.
This means a retiree must withdraw funds from savings to cover the rest of their necessary expenses. This in turn brings us back to the risk of running out of savings in retirement.
An annuity can fix that problem.
You can use a portion of your IRA to purchase an annuity that will pay you an income for the rest of your (and your spouse’s if you like) life.
“But wait,” you say! “I don’t want the evil insurance company to get all my money if I die before it’s all been paid out.”
I’m glad you said that. Because I couldn’t agree more.
When it comes to annuities, there are so many different options. You could get one that quits paying if you kick the bucket the next day after purchasing one. (That would stink!)
But the smarter strategy is to get an annuity that will payout for your life AND a certain period. So if you get an annuity and kick the bucket the next day, you at least know that the “evil insurance company” has to continue paying out to your beneficiaries for a specific time.
Even better, you can get an immediate annuity with an installment refund. You will receive income from this for the rest of your life, but should you die before all your original proceeds are used up, the insurance company must keep paying until the full installment you gave them has been paid back out.
That way the insurance company doesn’t keep a dime of your money AND you get the benefit of lifetime income.
Essentially, I’ve been describing a Single Premium Immediate Annuity to you (also called SPIA).
These annuities are so consumer friendly, with the lowest commissions to insurance agents, it’s not even funny.
They are pure transfer of risk products.
What’s the risk?
That you are going live longer than your money will live. In the financial planning world we call this “longevity risk.”
There are also other types of annuities you can use to plan for your retirement income. All of which you could purchase with proceeds from your IRA.
Since Single Premium Immediate Annuities (SPIA’s) begin paying immediately, they may solve one issue, your need for immediate lifetime income that begins now.
But they may not solve for income that you need later after inflation has caused prices to increase, and hence your need for greater income down the road.
So there are annuities that solve for this problem as well.
Using a smart retirement income strategy, you can use a portion of your IRA to purchase an annuity to plan for this.
Emphasis placed on “smart” retirement income strategy.
3. Use The “RMD Strategy”
A couple of things about this strategy…
RMD stands for Required Minimum Distribution.
When you reach age 70 ½ you must (i.e. you are “Required”) begin taking distributions from your IRA.
The IRS has a table they use to calculate how much your required minimum distribution is. It is based on your age.
As you get older you must take out a greater percentage.
But there’s another factor the IRS also considers:
It’s the value of your IRA.
Why is this so important, and how can you use it as a smart retirement income strategy with your IRA?
First, as you get older you have less years ahead of you. That’s why it makes sense that as you get older you can take out a greater percentage of your portfolio. Each year that passes is one less year your portfolio has to last you.
Secondly, the value of your portfolio needs to play a role in determining how much money to pull off it.
For example, if your portfolio has taken a big hit with a market crash, it’s a good idea to cut back on the amount of money you pull off it to cover your expenses.
When your portfolio is down and you pull money out of it, you are essentially selling securities at low prices. You take the cash to cover your expenses. And when your portfolio rebounds it has less shares of stock, ETF’s, mutual funds, etc. to take advantage of the rebound.
What if your withdrawal strategy took into consideration the fact that your portfolio may have just had a big downturn?
The RMD strategy does that.
One way to implement this strategy is to take the value of your portfolio at year end, December 31st. Then pull a percentage off it that is based on your life expectancy.
The IRS uses a similar method to calculate your required minimum distributions. You could do this too, even before you reach age 70 ½.
As you get older, your withdrawal percentage goes up since you have one less year ahead of you. But if the market has caused your portfolio to decline, the percentage you withdraw from it will be based on the lower portfolio value.
In short, it gives you a good guideline that will reduce your withdrawals when your portfolio is depressed. Thus making your savings last longer.
If you are struggling to determine what a safe amount to pull off your portfolio is, the RMD strategy can be used to help you reach a number you feel comfortable with.
You can even use Social Security’s life expectancy tables.
I’ll go over an example with you. (This is not how the IRS calculates your RMD! This is a strategy you could voluntarily do to help your assets to last throughout retirement.)
If you are a 65 year old man, based on the Social Security life table you can expect to live 17.57 more years.
Divide 100 by 17.57 and you get 5.69. So 5.69% would be your percentage to voluntarily withdrawal from your IRA in the year you are 65.
Do this same thing again when you are 66 to determine your withdrawal percentage for that year. The percentage will go up each year. But the actual dollar amount you withdraw will be based on your portfolio’s value.
This helps preserve your portfolio’s value during times when it has suffered a serious setback due to market forces.
This strategy gives you a good guideline for a withdrawal amount that takes into consideration your portfolio’s value.
One last thing to say about this:
If you don’t need the extra income, then by all means it probably makes sense for you to let your IRA continue to grow tax deferred until the IRS requires you to make withdrawals at age 70 ½.
Hope this helps you with some retirement income strategies. How you choose to take your income in retirement will affect the quality of your retirement.
It can be the difference between achieving the lifestyle you want for retirement vs. having to cut back on the important things that you’ve always wanted to do.
If you know anyone that could benefit from some of these retirement income strategies, please forward this article to them. Or click the Facebook icon on the left of the screen to share with your friends.
We can all make a bigger impact together in getting the word out than I could ever do on my own.
Best of luck!