One of the things we consistently get questions about is why we’re taking the two-phase approach, especially with well-funded retirement accounts already in place, instead of starting to tap those funds now, and already being able to retire. We don’t think it’s a good idea to see taxable and tax-advantaged funds as one big pool of money. And we definitely don’t think it makes sense to apply the 4% rule to your total balance to figure out what you can spend in your early retirement years, before you can access your tax-advantaged funds without penalty. (We don’t think you should be using the 4% rule at all, actually, but that’s another post.) Or even that it’s a fine idea to plan on level spending over your lifetime. Tax rules can and do change, which could spoil your early withdrawal plans. The problem is that relying too heavily on your tax-advantaged funds for early retirement makes it easy to accidentally spend some of the money older you needs later. And by the time you realize that you should have saved that money for later instead of converting it or withdrawing it early, you’ll have a much harder time earning more income than you would have in your 30s/40s/50s. But as for SEPPs and the Roth conversion plan, we see a few other important downsides worth noting, in addition to all that stuff above about selling out future you: Forced to sell when you’d rather not: With a SEPP, you must withdraw equal amounts each year, even if your investments are tanking and you’d rather not sell shares. If you’re reliant on a Roth conversion for your cash flow, you might be forced into the same situation, even though there are no tax rules forcing you to sell shares in a down year.
Whether retirement is right around the corner or decades away, it never hurts to start thinking about the future. Here are a few retirement rules that can make your senior years less stressful and more rewarding. All you need to do is follow them.
1. You need a plan
Going into retirement blindly could mean setting yourself up for disappointment, especially if your savings can’t support your goals. That’s why it’s crucial to sit down and think about what retirement looks like for you. Though you may not have every detail mapped out (especially if retirement is years away), it’s never too early to ask yourself some key questions. Where will you live, for example? Do you see yourself working in some capacity when you’re older? And how will you spend the majority of your free time?
Oddly enough, it’s estimated that close to 60% of Americans don’t budget for leisure activities in the course of their retirement planning. But given the amount of downtime you’ll potentially have on your hands, it’s important to think about these things now — while you still have an opportunity to save more money to meet your personal objectives.
2. You’ll need more than Social Security income
Many workers assume that once they retire, their Social Security payments will be enough to cover the bills. But most people can’t live on Social Security alone. In fact, your monthly benefits are only designed to replace roughly 40% of your pre-retirement income. Even if you’re willing to adopt a more frugal lifestyle in retirement, you’ll still most likely need a minimum of 70% of your former income to stay afloat financially. And if you don’t want to cut corners during your senior years, you’ll need considerably more.
In fact, you may be surprised to learn that nearly 50% of senior households wind up spending more money, not less, during their first few years of retirement. Being realistic about what Social Security will and will not cover can help you set a more accurate savings goal to work toward.
3. You need a solid investment mix
For years, retirees have relied on the 4% rule to guide their savings utilization. The rule states that if you begin by withdrawing 4% of your savings during your first year of retirement, and then adjust future withdrawals for inflation, your savings should last a good…