Q. My retirement plan is like this: $400,000 in a 401(k), $190,000 in a Roth, annual Social Security of $21,000. How much can I afford to take from investments? I’m 65 and retiring this year and I spend about $85,000 a year after taxes.
A. Without knowing more about your financial situation, we can only give you some guidelines.
We’ll also make some assumptions — you’re in the 15 percent tax bracket, you have a flat 4 percent rate of return without volatility, and no inflation — to give you an answer, however simplified.
You have probably already figured out that your assets are insufficient to provide your income needs from interest only, said Gregory Chebuske, an Accredited Investment Fiduciary with U.S. Financial Services in Fairfield.
That means a combination of interest and principal must be distributed to meet your after-tax expense of $64,000, Chebuske said.
“You can spend down the Roth IRA first to reduce your tax burden and allow for more potential growth,” he said. “Your annual after-tax income of $64,000 needed to subsidize your Social Security and meet your expenses will last you to age 75.”
Chebuske said the industry rule of thumb to avoid running out of money in retirement is taking 4 percent a year.
This was created by using historical data on stock and bond returns, he said.
Your retirement savings will give you this: 401(k): $400,000 x .04 (rate of return) x .15 (tax) = $13,600 and the Roth: $190,000 x .04 = $7,600. That’s $21,200 net annually, he said.
“This does allow for a 2 percent per year increase in income to offset inflation and does take volatility into consideration,” he said.
In order to extend this income past age 75, you would need to get a return of more than 4 percent, decrease your expenses or do both.
He recommends you work with a fee-based financial advisor who specializes in retirement income planning to develop an overall income plan, along with an investment policy statement that would help to determine your risk tolerance and other items.
“By doing so you may achieve a higher degree of accuracy, flexibility, and income, while reducing the risk of outliving your money,” he said.
Another option would be to work longer so you can both save more and shorten the number of years your savings will need to sustain you.
And if you need more help, consider a free money makeover with NJMoneyHelp.com.
Email your questions to moc.p1508331053leHye1508331053noMJN1508331053@ksA1508331053.