There are a few figures you should know if you're in or on the cusp of retirement. For example, knowing how much to expect from Social Security can help you come up with a post-retirement budget. And, knowing when you have to start withdrawing your retirement funds can save you costly penalties. With these in mind, here are five retirement numbers our experts think you could benefit from knowing.
Dan Caplinger: One key number that any retiree and near-retiree should know is how much they'll receive in monthly Social Security benefits. In general, the greater your income during your career, the more you'll receive from Social Security. However, the formula that the Social Security Administration uses to determine monthly benefits gets quite complicated, because it treats low-income, middle-income, and high-income earners somewhat differently.
Fortunately, the SSA provides your expected Social Security benefits on an annual statement that's available to you at any time online. These statements used to get mailed to workers every year, but to cut costs, the SSA now only sends them by mail every five years.
The figures that the SSA provides in your Social Security statement are based on assumptions about future earnings, but as you approach retirement, more of the information about your past career gets integrated into the calculation, making it less subject to change and therefore a more accurate prediction of what you'll receive. By looking at the various scenarios the SSA lays out, including the impact of taking benefits early versus waiting until full retirement age, you can figure out your best strategy for claiming Social Security when it will do you the most good.
John Maxfield: If there's one number that all retirees should know, it's 4%. This is the amount of your original retirement savings that you can spend each year and still have enough to see you through your golden years.
Let's say, for example, that you've saved $1 million. According to the "4% rule," you could spend $40,000 every year in retirement without having to worry about depleting your funds.
This is a great rule for two reasons. First, it's designed to work irrespective of what the market does. To this end, the dataset that was used to generate the rule covered both the Great Depression and the steep downturns in the early to mid-1970s.
Second, the rule can be inverted to gauge how much a person will need to save for retirement. For instance, if you find that it will cost you $50,000 a year to live after you stop working, you multiply this number by 25 (100 divided by 4) to get your retirement number. In this case, it'd be $1.25 million.
Matt Frankel: One important number to know is when you have to start using the money in your retirement accounts, known as required minimum distributions, or RMDs. Roth IRAs don't have any RMD requirement, but traditional IRAs, 401(k)s, and similar retirement accounts do.
For traditional IRA(s), you are required to begin taking distributions by April 1 of the year following the year in which you turn 70 ½ years old. For employer-sponsored plans like a 401(k), your required distributions must also begin at that time, or by April 1 in the year after you retire -- whichever comes last.
The amount you'll have to withdraw depends on your age and account balance, and is determined by actuarial "withdrawal periods" provided by the IRS. For example, using the current worksheet, if you're turning 75 this year and had $1 million in your account on Dec. 31, 2014, you're required to withdraw at least $43,668 by Dec. 31, 2015. You may withdraw the money in increments throughout the year, as long as the total is more than the minimum.
There are a couple of things to keep in mind. First, the penalty for ignoring your RMD requirement is stiff -- 50% of the amount you failed to withdraw. Also, during your first year of RMDs (in the year following your 70 ½ birthday), you could be required to take two RMDs, one for the year you turn 70 ½, which you must take by April 1, and one for the current year by Dec. 31. Remember that withdrawals from these accounts are taxable, so think about the tax consequences before you wait until the last minute to start taking RMDs.
Selena Maranjian: A key number all retirees should know is the inflation rate, which measures the purchasing power of their limited dollars. The income you retire with at age 65 might seem sufficient for a comfortable life, but imagine that inflation averages about 3% annually, as it has done over many decades, for the next 20 years. If your income is fixed at $60,000, by age 85 it will have the purchasing power of roughly $32,600. Yikes.
Fortunately, Social Security benefits do receive cost-of-living adjustments, or COLAs, that are designed to offset the effect of inflation. (The COLA for 2015 was 1.7%.) But Social Security benefits, averaging $1,334 per month and $16,000 per year as of May, are likely to be only a part of your retirement income. If you're on a fixed pension or receive fixed annuity payments, you may find it harder to stretch those dollars as the years go by.
The inflation rate is out of our control, but it's helpful to be aware of it. If you're buying an annuity, consider paying up for inflation adjustments. For investments, consider dividend payers whose payouts are likely to increase over time. If you note that the inflation rate has been quite high for a few years, be aware that your dollars may not buy as much and that you might need to tighten your belt. If inflation is low -- as it has been in recent years -- you can breathe easier for a while.
Note, too, that even if the overall inflation rate is high or low, the inflation rate that you actually experience might be different -- if, for example, you don't drive and live in a temperate area where you don't spend much on gas or oil. If you have a lot of healthcare expenses and healthcare prices are rising briskly, expect to be financially pressured.
Jason Hall: This isn't one that's fun to learn, but it's incredibly important if you're married or have a partner: You both need to understand how your income would be affected if the other person were to die.
The reality is, there are often misconceptions about many retirement plans, pensions, and Social Security benefits, and the reality is, there's a good chance that if your partner were to die, you would see a big cut in household income from sources like Social Security and pension benefits that may end -- or at the very least get cut significantly.
This is a situation where ignorance is not bliss, especially if there are steps you can take while you're younger and in good health to mitigate the potential impacts. This is especially true for women, who tend to outlive husbands by five or more years on average, and who also tend to have lower income in retirement than men do.
At the end of the day, even if it means you have to live more frugally while you're both alive, it's an easy decision to make if it means you or your spouse won't end up alone and in financial strife because of a partner's death.
Don't make assumptions. Validate all your sources of retirement income, and know what will happen to them at your death. Your partner deserves to know, and so do you.
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