First, here are some definitions of “the die is cast:” the future is determined; events will proceed in an irreversible manner; the point of no return is passed. So it is with the amount of money retirees spend after the first couple of years of retirement. Based upon my years working with retirees, once your level of retirement spending is set, there’s little chance of reducing it in the future. Withdraw too much, and you’re setting yourself up for financial problems later on. In one instance, a couple was spending far too much and they committed to cutting their spending way down. After a year of what they felt was a painful curtailment of their lifestyle, it turned out that they reduced expenses for the year by just $50. The die had been cast for them. For whatever reason, it’s almost impossible to cut back until the money runs out and then, previously affluent retirees may risk being consigned to public housing and SNAP benefits, formerly called food stamps. Here are very general rules of thumb for the annual amount of your total retirement savings that you can prudently withdraw, assuming you diversify your savings between stocks and bonds:
In your 60s: 4% to 5%
In your 70s: 6%
In your 80s: 7%
Withdraw much more than that and you’re gambling on your financial wellbeing.
Smart Money Tips
- Getting a tax refund is bad news. The average federal income tax refund is about $2,300. Perhaps that’s a nice surprise, but it constitutes an interest-free loan to the U.S. government. If you underpay your taxes, does Uncle Sam give you a tax-free loan? No way. Getting a tax refund is bad news, particularly when you can generally avoid it. The trick is to claim the number of withholding exemptions that will result in total withholdings that are close to what you’re going to owe. Or, if you’re retired, reduce the amount you pay in estimated taxes or the amount of income taxes withheld from any pension payments, Social Security, or IRA distributions you receive. You will want to check a couple of times a year to make sure you’re paying in enough taxes since your tax situation can change. Once you do away with your tax refund, what should you do with the extra income you’ll enjoy throughout the year? I’m glad you asked. It’s up to you, of course, but I’d recommend that you don’t take your increased take home pay home. Instead, put it away for the future either by increasing your retirement plan contributions at work or having the extra money transferred automatically to an IRA or investment account.
- A big mortgage is no badge of honor. I heard a couple of financial commentators urge listeners to take out a bigger mortgage. Tax preparers are often guilty as well, suggesting that a big mortgage is a big tax saver. But you have to lay out a lot more money to pay your mortgage than the taxes you save. You would think that past recessions and slumps in home values would have taught homeowners with large mortgages an enduring lesson about the importance of reducing debt, not maintaining it or, worse, adding to it. Always be skeptical of those who urge you to do things that don’t make a lot of sense.
Food for Thought
The pessimist sees the difficulty in every opportunity; the optimist sees the opportunity in every difficulty.
-L. P. Jacks
Money Can Be Funny
The United States is the only country where it takes more brains to figure your tax than to earn the money to pay it.
-Edward J. Gurney
Word of the Week
lipogram (LIP-oh-gram) – A composition where the writer purposefully omits a certain letter.
Origin: From the Greek lipogrammatos meaning “lacking a letter.” Lip- comes from leipen = ”to leave out” and gramma =”letter.”
In 2002, Andy West wrote a lipogram novel called ‘Lost and Found’ that has no letter ‘e’ in it.