Which spending strategies best identify with your preferences?
Whether you’ve just entered retirement now or planning for the future, you’ll need to use a guideline or some sort of spending strategy to determine how much you can spend every month.
You know the old saying: “If you don’t know where you’re going, any road will get you there?” That quote applies here. Having a plan of action in place will give you direction and purpose.
An aimless approach can lead to less-than-stellar results. Whether you’re precisely where you should be on your retirement savings or need to get the wheels rolling, these 5 essential tips for retirement savings will put more money in your pocket.
…Continue reading to get the best advice on spending strategies!
What exactly ARE spending strategies and how much should I save?
A spending strategy is a rule to determine how much you should be withdrawing from your accounts after you retire, so you don’t run out of money. Two main types of strategy involve taking out either a fixed amount or a fixed percentage from your account every month.
An ideal approach might be a hybrid of the two. The amount of money you should save for retirement is different depending on a lot of different factors, including your CURRENT lifestyle, your lifestyle in retirement, your health, and any other obligations you might have.
Experts recommend that your monthly income in retirement should be between 70% and 80% of your last job’s income.
…Now let’s take a look at a few spending strategies you can implement into your own life!
1. 401(k) or 403(b) company match
If your workplace offered you a retirement plan and a company match, we suggest you contribute as well up to the amount that the company puts in.
For the most significant retirement benefit, contribute up to the maximum amount allowed by law to your retirement savings plans. Begin doing this now for the most effective financial use.
Here’s an example of how this works: Let’s say Tom earns $50,000 a year. His company contributes up to 5% of his salary, matching every dollar he puts into his workplace retirement account.
By investing at least $2,500 into his 401(k), he automatically gets a $2,500 bonus from his employer and substantial tax benefits. If Tom doesn’t add his 5% into the pool, he practically misses out on some free money.
2. Take advantage of getting older
If you’re over the age of 50, the tax system CAN be your best friend. The retirement plan contribution limits get raised, giving an older investor a chance to extend their retirement savings.
You’re allowed to increase contributions to both traditional and Roth IRAs up to $7,500. Furthermore, the government rewards you with the opportunity to contribute an additional $6,500 to the employer-sponsored retirement plan.
By this, we’re talking about your 401(k), 403(b), for a maximum amount of $30,000. These numbers change each year. But we highly suggest you take advantage of this spending strategy!
…To learn some good tips about your financial future, we suggest reading The Truth About Your Future, a great personal finance book you can get from Amazon.
3. Claim double retirement plan contributions
There is a little-known retirement savings opportunity that will allow some healthcare workers, teachers, public sector workers, and nonprofit organization employees the chance to contribute twice as much as usual to their retirement plans because of specific catch-up provisions.
These provisions apply to certain people who have retirement plans, including 457(b) and 403(b). These workers can add $22,500, which is the maximum amount for 2023, to 403(b) or 457 retirement plan accounts.
If you’re interested in this spending strategy, more details are provided for you on the Internal Revenue Service’s website. It’s worth checking out!
4. Backdoor Roth IRA to increase your savings?
In 2023, the AGI phase-out contribution range for Roth IRAs for married couples filing jointly is $228,000 and for single taxpayers and heads of households, it’s $153,000.
If you currently have an income that’s too high and makes you ineligible to contribute to a Roth IRA, there IS another way. Here’s what you need to do: contribute to a traditional IRA.
There’s no income ceiling for contributions to a non-deductible traditional IRA, but there IS a limit to what you can contribute.
The IRS caps the contribution limit to $6,500 this year or $7,500 if you’re 50 years old or over, or the taxpayer’s total taxable compensation if it was less than the stated amounts.
After the funds clear, you can convert the traditional IRA to a Roth IRA. This way, the funds can compound for the future and be withdrawn tax-free, as long as you meet the withdrawal guidelines.
5. File for Uncle Sam’s Retirement Savings Credit
If you’re a lower or middle-income taxpayer, you can claim a tax credit for up to 50% of your retirement plan contribution. Suppose you are married and are also filing jointly with an adjusted gross income of below $73,000 and contribute to a qualified retirement plan.
In that case, you might even be eligible for a tax credit. The income limit for the heads of household is $54,750 for 2023, and for single filers and married people filing separately, it’s $36,500 for 2023.
The maximum credit for 2023 is $2,000 for married couples filing jointly and $1,000 for single filers, applied against the maximum contribution amounts: $4,000 for married couples filing jointly and $2,000 for single filers.
Who should be using these spending strategies?
Anyone who plans on withdrawing from their savings and retirement investments should have a spending strategy in place. Some people will want a system that will let them spend more early in retirement when they are likely to be more healthy and active.
Although, spending more at the start of your retirement means you run a greater risk of having less to spend later on or running out of money altogether. A spending strategy can help you determine the suitable trade-off amounts for you.
Failing to choose a spending strategy might mean making significant cutbacks later due to living longer or experiencing poor account performance.
What do experts say?
The experts who are into all the number crunching and estimating returns recommend that retirees follow a decision-rule method. This method assumes the withdrawn money comes from a diversified portfolio of investments that will fluctuate up and down over 30 years.
The investment combination contains a stock allocation of 50% to 70%. The famous 4% rule is a decision-rule method of withdrawal. On the other hand, other experts who are more conservative will recommend that retirees follow what is called the actuarial method.
In this method, as you age, the draw rate will go up. This method is often paired with a lower-risk portfolio with less stock market exposure. When you’re more conservative, investment returns might have less upside potential but should be a bit more stable.
As account values fluctuate, retirees spend more in the years with higher returns and less in the years with lower returns.
So what’s the takeaway on these spending strategies?
It would take an impressive amount of spreadsheets to factor in all of the variables that can go into ideally evaluating your spending strategy in retirement. Retirement planners can help you account for these issues with multiple income sources and varied tax treatments.
The vital points to think about are regarding your attitude on spending flexibility, tolerance for swings in investment returns, chosen spending patterns, length of retirement period, and desire to leave money to others after your passing.
Something else you should consider in retirement… Where will you live? Reading this article might help you answer that question: 8 Best States to Retire With Under $1 Million Saved.